On Monday, the Dow closed up 76 points, only its fourth up day in the last ten trading days. The intraday action was volatile, however, with a range greater than 200 points peak to trough.

The volatility catalyst was a report from the Institute for Supply Management that indicated manufacturing activity grew in October at the fastest pace since April 2006. The 55.7 reading, if annualized, would imply GDP growth of 4.5%. Manufacturing activity improved worldwide, as well, suggesting that this is a synchronized global upturn. Things did not get better in Russia, however, and we think that country remains a short sale candidate. In other words, we are bullish on BIC not BRIC.
 
Financial stocks were up more than 2.5% at their session high, but then pulled back after a Federal Reserve official testified that "significant stress and weaknesses" remain in the financial system and that banks will suffer even more heavy losses going forward.

But let’s not dwell on the dark side.

Jim Paulsen, who is the chief investment strategist for Wells Capital Management, a $355 billion family of funds owned by Wells Fargo, does not expect this recovery to be any different than previous recoveries. In other words, he does not anticipate a ‘new normal.’ Quite the contrary. Paulsen, bless his heart, thinks we are in the early stages of a normal economic recovery and the early stages of a normal stock market recovery.
 
Paulsen argues that because so many large U.S. companies downsized and right sized to survive the Great Depression II that never came, operating leverage is now at a 45 year high and pricing power has recovered in a normal manner. He expects new all time highs in S&P profits over the next few years as the recovery gains momentum.
 
He also notes a great deal of skepticism about this rally, which a persistent barrage of good news is not dispelling. That means the Wall of Worry is intact and that is bullish for the market. If Paulsen is correct, we should see a hint of that hidden earnings power demonstrated in Q4, when earnings are forecast to rise 60% year over year.
 
By the way, the average recovery in stocks after a recessionary plunge shows an increasing participation by high beta stocks (tech, commodities and small caps) for a full 18 months from the low point in the S&P 500. That period is best for active trading and investing. If this is a 'normal' recovery, then the market could be expected to rally with significant momentum through October 2010.
 
In the short term, we expect the market to find support around the 990 level in the S&P 500 and then rally from there into December. Expectations for retailing are very low, so good news from the consumer sector might come early this holiday season.