Some Bullish Signs for Your Portfolio as we Close Out 2010

The direction of the stock market in 2011 could well be determined in the next few months, as I noted last week.

At the time, I suggested you tune in to Tuesday’s economic reports for the next read on the economy‘s pulse. With these reports hitting the tape, let’s see what the economy is telling us:

Manufacturing heats up
A monthly survey of business activity in Chicago (PMI) is flashing green. The index came in at 62.5, nicely ahead of forecasts of 60.0. (Any reading above 50.0 signals expansion in the factory sector). And the numbers behind the big number look even better. A gauge of new orders rose from 65.0 in October to 67.2 in November, and inventories fell sequentially from 54.9 to 48.4. That sub-50 reading means that inventories may be getting too lean, so we may be on the cusp of another inventory rebuilding cycle. It also means that economists are likely to raise their PMI forecasts for the next few months.

Investors may want to see this level sustained for a few more months before calling it a trend. The index had been similarly robust back in July before pulling back in August.

A less-stressed consumer
The holiday season may be the reason that consumers are in a better mood. The Conference Board’s index of consumer confidence rose to 54.1 in November — a five-month high. Yet we’ve got a long way to go. This figure has historically been closer to 100 (which was established as the index’s base reading back in 1985) and we can likely conclude that consumers remain under duress and fearful, though just a bit less than a few months ago. So there’s no reason to rush out and load up on retail or other consumer stocks, but we can at least conclude that the consumer is less likely to go into a deep freeze as they did in 2008 and early 2009. [“These 3 Stocks Should Rally Nicely in the Next Year”]

Housing looks for a bottom
If consumers were looking for something to cheer about, they should look at housing prices. Rock-bottom interest rates and ever-falling housing prices have set up a once-in-a-generation buying opportunity for those with good credit and a strong stomach. [I recently called housing the “surprise sector for stocks next year”]

To jump in to housing, you’d have to believe that we’re near a bottom in terms of prices. Judging by a just-released reading, we haven’t hit bottom just yet. The S&P Case-Shiller housing price index fell -0.7% sequentially in September across 20 major metropolitan areas. Cleveland and Minneapolis were especially hard hit, while only Washington D.C. and Las Vegas were able to show any month-to-month improvement. Compared with a year ago, housing prices are still a few percentage points higher, but most economists expect year-over-year comparisons to turn negative in coming months as well as we come up against the anniversary of last winter and spring’s tax-credit fueled price spike.

As noted, borrowing costs are quite low and should stay that way for a while thanks to the Federal Reserve’s current Quantitative Easing program. Rising employment in 2011, coupled with 30-year mortgages below 4.5% could be what this sector finally needs to get going. But any real improvement will be slow, as we’ll need to absorb the massive supply of foreclosed homes before supply and demand come anywhere close to parity.

Action to Take –> The key takeaway from Tuesday’s economic data points: industrial activity is showing hopeful signs, while the consumer is a bit less morose than before. Yet that housing sector sure is unhealthy. If and when housing prices and housing sales have truly hit bottom, economists will begin to speak of an eventual rebound, which could be fodder for market bulls. But we’re not there yet…