Ready for Second Stimulus?

A number of short-term indicators have moved into over-bought territory and there are reasons to suspect that the softness especially in small cap stocks, we have been seeing will continue for a week or so. Within the context of a bull-market elsewhere, the most sensible response is to step away from it and more aggressive investors may actually wish to short them.

The development of a ‘double-top’ now in the S&P 500 is going to get bears excited and a head-and-shoulders topping formation may be forming to boot will also renew their courage unless new catalysts to be found to reverse the momentum.

Last week when I was holidaying, I learned that Goldman Sach is telling its clients that the Obama administration is going to announce another major stimulus package. That would mean that the combined monetary and fiscal infusion package that is already historic in proportions might actually be kicked up a notch.

Of course, the administration would have to persuade Congress to pass the legislation at a time when conservatives are already screaming about the extreme state of the nation’s deficit. But one should not ignore the possibility that the government has gone all-in with low interest rates and fiscal stimulus and is ready to go way overboard in its attempt to get the US economy rolling again. It is after all they are well politicians with the first, second and third motivations of these people are to get re-elected!

In that context, Goldman says that we should pay attention to two developments that suggest a greater likelihood of more stimulus ahead – first, we have comments from US Senate Majority Leader Harry Reid that the Senate was likely to consider a jobs bill in early 2010 and second, President Obama announced that the White House would convene a jobs summit in December.

Goldman analysts believe that Congress will enact $250 billion in additional fiscal measures to support growth over the next three years, including $75 billion more in 2010. However, recent developments – including the $45 billion bill to help homebuyers enacted last Friday – make this assumption look conservative. The analysts say that the timetable would be similar to what we have seen in each of the past two years – policy formulated internally in December, debated publicly in January and enacted in February. But they note that it would likely take longer to create and pass due to concerns about the effectiveness about prior efforts.

If this is real as speculated, I would think that the reaction to this second package would also be positive. This could be news that kicks-off the next leg higher or at least forestalls the recent consolidation phase that seems to have gotten under way.