While the daily onslaught of economic news is depressing, it is also moot in terms of its impact on the financial markets. How else can you explain last week’s rally amidst staggeringly awful job declines in January? Both in Canada and the US.

Simply stated, investors are placing bets that deepening job losses will spur the Democrat majority in the US Congress to pass the near trillion-dollar “stimulus” bill early next week. Although you could have used any of a number of potential backdrops for last weeks rally. Including a market reacting to an oversold condition.

The longer term reality is more benign. What we saw last week, and have been seeing for most of 2009, is noise. Intermittent volatility driven by market participants trying to weigh the severity and length of this global recession. Or more specifically, weigh in on how much of this slowdown has already been factored into the stock market.

That this intermittent volatility has created a wider than normal trading range, supports the view that this global downturn is truly a once in a century phenomena. Leaving few if any real points of reference.

The best guess says that the financial markets have discounted a 4% to 5% decline in US GDP, and likely, a 10% unemployment rate. I also think, unlike past recessions, that unemployment has become a coincident rather than lagging indicator. Which is to say, the top end of the unemployment range, may coincide with the trough in the recession. Which means that we need to brace ourselves for a rapid increase in unemployment over the com in weeks.

Of course there are issues that have not been discounted. For example, recent data from the US Commerce department shows that consumers have turned into net savers. Very different from the last 15 years, when US consumers spent more than they earned financed on the back of low interest rates and rising house prices.

Taken alone, that shift in sentiment could be significant. Going from a -3% negative savings rate to a +2% positive savings rate represents a 5% shift in consumer demand. Consumer demand represents about 70% of US GDP, which means that a shift towards saving could have a 3.5% impact on US GDP.

Assuming a $15 trillion economy, that 3.5% shift in demand equals roughly US $525 billion. Which absorbs almost all of the first year stimulus that is likely to come from the package making its way through Congress.

Still, the stimulus package will create some demand short term. And traders believe that will add some punch to the bottom line of Canadian companies, particularly those that ply their trade in commodities and energy.

That explains the performance of companies like Potash of Saskatchewan (TSX: POT) that rallied 22% last week. Same among the oil companies, albeit without as much gusto. Suncor (TSX: SU) up 9.6%, Canadian Natural Resources (TSX: CNQ) up 5.6% and EnCana Corp
(TSX: ECA) up 5.1%.

Time to step on that gravy train. Perhaps? But again, it depends on how much of the good news has already been factored in to the stock prices. Given last week’s rally, one could argue that little potential is left from a stimulus package.

Keeping with that theme, I am reminded of that old saw that says buy on the rumor and sell on the news. Which may mean that companies rallying on the potential stimulus package, may sell off once the package has been approved.

The typical hedge in this space would be the sale of in or at-the-money covered calls because premiums are high. In fact that may be the most appropriate strategy if you own the stock. Because even with a pullback, these stocks will likely remain within their month long trading range. And the premium will provide some cushion from this intermittent noise.

More aggressive investors, might want to look at buying short term (March or April) at-the-money puts on any of these stocks, for a short-term trade.