The Toronto Stock Exchange's broadcast centre.Frank Gunn
Forget about the significance of Thursday's euro-deal stock market rally. Stocks have been on a tear throughout most of October, promising to deliver the best one-month performance for the S&P 500 since 1974.
But do these gains put the stock market recovery back on track after its recent stumbles?
October's rebound, which followed terrible losses in August and September, is a big source of relief to anyone with substantial exposure to stocks. But there are a few signs that the gains are being fuelled more by hope than substance.
For one, recently well-received U.S. economic data are hardly uplifting. Yes, the Commerce Department reported last week that the economy grew at an annualized pace of 2.5 per cent in the third quarter, relieving some fears of an oncoming recession.
But economists pointed out that it is quite weak for an economic recovery and below the pace that is needed to put a dent in the unemployment rate, which is stuck above 9 per cent.
Europe is no better. There, slumping manufacturing activity in October points to an economic contraction in the fourth quarter.
The other thing weighing on the rally is that relatively few investors have been buying into it, based on the number of shares changing hands. When trading volumes are low, many technical analysts believe that there is little conviction in the market's moves.
There is still one trading day left in the month, but the number of shares traded within the S&P 500 is unlikely to rise above 18 billion in October. That might sound like a lot, but it is actually quite low. Consider that in March, 2009, when the S&P 500 began to shake off the tremendous bear market of the previous year, volume was nearly 35 billion for the month, or nearly double what October's is likely to be. Now there's a rally that had support.
Even on Thursday, when the S&P 500 rose 3.4 per cent, volume was merely respectable, at 1.1 billion shares. Big selloffs in August and September had daily volumes as high as 1.9 billion shares.
And finally, there is the European deal itself. Markets loved the fact that bickering European leaders were able to agree on something to help solve the sovereign debt crisis.
But the substance of the deal was another matter. Details were in short supply, requiring a leap of faith that they will fall into place at an appropriate time.
Meanwhile, the general ideas raised some concerns over whether the deal will work. Will China agree to contribute to the bailout fund, and is the fund now big enough to take on the debt crisis? How can Greek debt be cut by 50 per cent without triggering a default, and will such a cut put Greece back on its feet?
These are big questions. And the stock market is going to be looking for answers.