It’s Hard To Imagine A Significant Stock Market Correction

Stocks mostly fell Friday as the market rally is showing signs of losing steam. Indeed investors seemed cautious on back-to-back bad news from consumer confidence falling to 65.7 from 66.0 in July and initial unemployment claims for last week were 570,000.

The Dow ended the day at 9,544, down 36 points; the Nasdaq (^IXIC) finished at 2,029, up just over a point; and the S&P 500 (^GSPC) stood at 1,029, down 2 points.

Advances and declines were about evenly matched on the NYSE and Amex while declines lead advances 5 to 3 on the Nasdaq.

The Russell 2000 (^RUT) , a composite index of the 2,000 leading small-cap stocks as defined by Russell Investments, closed at 58X, down 2 points.

Small-cap leaders trading over 1 million shares include Helios BioSciences (HLCS), up 20%; Echelon Corporation (ELON), down 22%; Curis (CRIS), up 20%; and Glu Mobile (GLUU), up 20%

The New York Times article is titled “AIG (AIG) Rises, and Many Ask Why”. After all, the company is 80% owned by the government, owes around $180 billion, is cash-flow negative and would be in even worse shape were it not for accounting changes that help it keep toxic mortgage assets unfairly valued.

And to top it off, the company is actively seeking buyers for its best business units, which will impair its ability to earn its way back to health.

Why would anyone buy this stock? Simple. This is the Cash for Clunker Stock Rally. The worse your balance sheet is, the higher your stock price will go. AIG’s stock price has quadrupled in a month. Indeed, yesterday it was the most active stock with 149 million shares traded; six times more than the next highest traded stocks on the NYSE (those would be HIG and NOK at about 23.5 million each). And AIG’s volume yesterday was nearly five times its 50-day average volume. That’s simply amazing.

But it goes to show you with cheap money and a government guarantee that there is no risk in the financial markets.

I can only imagine how Mr. Otelli and crew feel over at Intel (INTC). Intel is very well run business. So far as I know, it never invested in mortgage back securities and didn’t engage in any activity that could be considered a threat to the American economy.

In fact, one could argue the exact opposite - that the productivity gains America has enjoyed from computing power are a direct result of Intel’s innovation. Of course, that didn’t prevent Intel’s stock from getting cut in half after the actions of AIG and its ilk brought the U.S. economy to its knees.

Friday, Intel raised its revenue estimates for the current quarter, a sign that the company is weathering the difficult economic environment admirably. Investors have rewarded the company with a 5% move higher for the stock.

Of course, AIG was up 13% in the early going Friday morning.

Clearly, it’s better to be a complete disaster of a company these days.

Thursday, the Dow Industrials were off nearly 100 points in the early going, as initial jobless came in worse than expected and second quarter GDP couldn’t be massaged to show anything better than the 1% decline economists were expecting.

By the end of the day, the Dow was up 40 points. “Buy the dips” is the mantra for the Cash for Clunker Stock Rally.

I’m starting to feel a little sorry for the bears, who think every red tick is the start of the massive correction they expect any day now. But with money as cheap as it is, and a government hell-bent on supporting asset prices, it’s hard to imagine a significant correction without some kind of shock to the system.

Of course, the Cash for Clunker Stock Rally will end at some point. But it would not be wise to bet on when. After all, a market can remain irrational longer than you (or I) can remain solvent.

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