May 12, 2009 - The stock market, as measured by the Dow Jones Industrial Average, sharply rebounded from its low of 6440 in March of this year. Currently, as this is written, the notable index is hovering around 8400. That's an increase of 30%. Not bad for 2 months of trading. While the average is made up of only 30 stocks, those 30 stocks are some of the best.

Of course, no one knows. But there are some important indicators that can help investors.

The first is employment. Without employment, people can't buy goods and services. The consumer contributes about 2/3 of all economic activity in the U.S. Without healthy employment, most manufacturers can't sell their products (unless they're necessities like food and drugs). Same with service providers (unless they're medical related or other necessities). Unemployment is still growing. Not a good sign.

On the other hand, the stock market doesn't focus on today. It looks ahead, anticipating better (or worse) days. The fact that the rate of unemployment is slowing is giving some investors the hope that the worst is over, that employers have cut back about as much as they need to to adjust for current economic conditions. If employment begins to pick up, that will be the first real sign of economic recovery. If that's soon, then the market is about right where it should be. If it takes several more months, then the market is definitely ahead of itself.

Earnings. All powerful earnings. The best indicator that a business is doing well. This last quarter wasn't as awful as some feared, but it wasn't very positive. And most CEO's weren't too cheery about the future either. There's no question earnings right now are bad and will most likely stay that way for at least the next quarter or two.

Investors are looking to the end of this year and beginning of 2010 as possible bright spots. By that time, the economy will most likely have stabilized, if not improved, mostly due to companies downsizing to the current reality. If they have guessed correctly, those firms should post decent earnings, even though sales will be lower but their costs will have been cut. If this scenario is true, the stock market is reflecting that positive outlook now. If earnings don't start to improve by the fourth quarter, the market will definitely not hold these levels.

Housing. Housing data is good and bad. There are parts of the country where housing prices were higher in April. Most were not. In fact, they continue to go lower, especially in pockets with high unemployment or heavy foreclosures. New home sales aren't going very well either. Look out for many more foreclosed properties soon as the FNMA and FHLMC moratorium on foreclosures comes to an end. This new wave of homes will keep prices low, at least for a while.

On the positive side, home sales at the entry level are going strong. First time buyers, a key element for all home sales, are coming back as mortgage payments are the same or lower than rental rates. Furthermore, home speculators are strong in the same market as they look to buy homes at great prices, fix them up, then rent them. I don't think there are any flippers left. They've all flopped. If entry level homes sell well, it means families looking to move up can finally sell their first homes and begin shopping for larger ones.

Investors have bid up many of the home builder stocks, at several multiples from their lows. Beazer Homes got down to 24 cents. Now it's $2.78 and was above $3 last week. Toll Brothers was $13.50 in early March and now trades close to $20. Clearly some believe the worst is over for homebuilders. But if unemployment stays high, don't expect these stocks to continue to improve.

It's a vicious circle with housing and employment. Because housing is such a large employer as well as contributor to complementary industries' employment, it is key to more employment. However, with all employment low, people don't buy as many houses or are forced out of the ones they own. Employment in general will need to improve before housing sees more demand. When it does, homebuilders will need to hire more workers, increasing the pool for more home buyers.

As always, there are arguments for better days ahead or the economy getting worse. Investors need to watch the data and buy prudently, as they always must. There will be no bell that rings indicating that all's clear and investing is safe. That never happens. But when employment begins to gain, earnings increase, and demand for housing improves, the market will have plenty of good reasons to go higher.

- Ted Allrich