This "bear" market won't last

The springtime rally that sent stocks higher, driven by sunny optimism as well as hope, has faded into memory. Fear and anxiety have followed in its wake.

Now, doomsayers are fighting for attention with ever more grandiose predictions. The eurozone is apparently beyond saving, according to currency traders. As well as the Economic Cycle Research Institute, a forecasting group popular among traders, announced Friday that not just had U.S. economy fallen into a new recession, there was nothing anyone can do regarding it.

It's no surprise then that stocks have been falling out of the sky such as doves filled with birdshot. The Russell 2000 ($RUT.X) is down almost 30%, whilst the Standard & Poor's 500 Index ($INX) is down 20% from its high. The latter reached bear-market-level losses on Tuesday for the first time since the 2009 market lows. (It then turned up sharply, that chart experts would interpret as a sign of strength.)

The evidence suggests the sell-off has reached an extreme. All this negativity as well as fear is unsustainable. And that sets the stage for a powerful fourth-quarter rally. Here's why, along with a few value-rich recommendations to take advantage.

Back in late April, I warned that things such as the energy cost spike driven by the Arab Spring, supply-chain woes driven by Japan's earthquake and tsunami, the rise in inflation as well as the looming end of the Fed's $600 billion "QE2" stimulus effort had been economic head winds the marketplace had but to discount.

The fallout from this, along with Europe's bailout of Portugal, sent stocks lower in Will and June. Then, the Democrats and the Republicans did the unthinkable: They played political games with the debt ceiling, lost America's AAA credit rating and delivered a massive blow to consumer, business and investor confidence.

We've been bouncing along the bottom even since, preoccupied now with the European debt problem and the program to save Greece -- a country with an economy small than Arizona's. Whilst the marketplace has been obsessed with things such as the German parliament's vote to enhance Europe's bailout fund (that passed without a hitch), the economy has been quietly gaining strength.

The easy truth is that the basics are starting to turn positive once again.

I've been banging on the table over the last few weeks that a lot of the latest decline in stock costs was caused by a deficiency of confidence, certainly not a downturn in real output. Indeed, the economy managed to grow by 1.3% in the 2nd quarter despite all of the head winds. And by all indications, we are regarding to see growth accelerate.

That's because confidence is an ethereal thing, driven by the vagaries of human emotion. Low confidence doesn't necessarily mean the economy is headed for recession. And it can be fast reversed as the economic outlook improves.

I think that's what's happening now as the real economy -- driven by things such as manufacturing activity as well as corporate profits -- dusts itself off and gets back to work.

Drags from earlier in the year have fully faded. Japanese car production jumping 1.7% in August, the first increase in 11 months. With rebels in control of Tripoli and Col. Moammar Gadhafi in hiding, Libya's second-largest oil refinery has restarted production. Manufacturer price inflation is falling. As well as the Fed has simply kicked off a $400 billion stimulus effort dubbed "Surgery Twist" that is targeting long-term interest rates and mortgage rates.

Now, we've got the wind at our backs. Commercial commodities like copper as well as crude oil are dropping rapidly -- easing inflationary pressures and boosting business profit margins as well as consumer spending power. Real interest rates are deeply damaging. Central banks are extremely accommodative. And talk of fiscal stimulus has returned to Capitol Hill.

We can already see the turn happening. Initial weekly jobless claims dropped below 400,000 last week for the first time because April. The Chicago Purchasing Managers Index showed new order activity jumping the many because June. Consumer sentiment is rebounding. Construction spending jumped 1.4% in August for the first year-over-year increase since the recession started. Factory activity spooled back up in September, with the Institute of Supply Management Index rising to 51.6 (versus a consensus estimate of 50.5 and 50.6 the month before).

In China, The September Production PMI rose to a four-month high of 51.2, whilst the Services PMI jumped to 59.3 versus 57.6 the month before. In Europe, the September Production PMI came in slightly before expectations at 48.5. As well as in Japan, the Tankan survey of business sentiment and spending plans improved, returning to pre-earthquake levels. (For the PMI indexes, readings over 50 indicate month-to-month growth.)


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