Small cracks of a recovery on Wall Street

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NEW YORK (CNNMoney.com) -- Despite overwhelming signs that the economy has moved deep into recession territory, some investors are increasingly pondering another 'R' word of late: Recovery.

Although a turnaround appears to be far off, there are some early signs that Wall Streeters may be trying to position themselves ahead of such a move.

For example, a recent spage of bad corporate and economic news hasn't wreaked havoc on the markets, suggesting a floor has been put in place after months of heavy selling. (For details, click here.)

Additionally, railroad, trucking and homebuilding stocks have been rallying - a surprising occurrence considering those sectors have been among the hardest hit by the credit crunch. (For details, click here.)

"We're waiting for the economy to start showing it is recovering and that's keeping stocks stable right now," said Ron Kiddoo, chief investment officer at Cozad Asset Management. "But if we don't get some hint by late summer that a recovery is on the way, we could see bad days again."

Last week Chairman Ben Bernanke and other Federal Reserve officials came as close as they have yet to acknowledging the depth of the economic slowdown, with Bernanke telling Congress that a "recession is possible." And on Tuesday, the minutes from the last Fed policy meeting confirmed that many of the central bankers were worried about a recession.

But that wasn't much of a surprise to investors, who for months have traded stocks as if a recession is already here.

That belief led to an "all news is bad news" philosophy that saw investors reacting poorly to any economic report or piece of company news that seemed to confirm the worst.

That philosophy seems to be going through a transition of late.

"It's still too early to tell," said Thomas Nyheim, portfolio manager at Christiana Bank & Trust. "But I do think that when you have Ben Bernanke, the IMF, and all these strategists saying we are in a recession or about to see one, and the market doesn't sell off much, that tells you something."

The reaction to last week's miserable March jobs report was a good example, said Alan Gayle, senior investment strategist at RidgeWorth Capital Management.

"We lost jobs in every month in the first quarter, the unemployment rate rose and the market managed to look beyond that," Gayle said.

While that reaction was positive, he's concerned about how investors are going to manage to stay positive amid a falling job market, falling home prices and gas prices that are flirting with $4 a gallon. Investors are, after all, consumers as well.

On the upside, exports are strong, some earnings outside of financials will be decent and the market has the support of an aggressive and innovative policy response from Congress and the Fed, Gayle said.

Since the near collapse and rescue of Bear Stearns last month - a move aided by the Federal Reserve - stocks have shown some resilience. Investors seem to be taking in stride the bad news, including more multi-billion writedowns, record commodity prices, a plunging dollar and further evidence of the economic and consumer spending slowdown.

The mild reaction to the negative news suggests that the market is trying to put in a so-called 'bottom,' said Gary Webb, CEO of Webb Financial.

"It's been interesting, it's been nerve wracking and it's been encouraging," Webb said of the markets over the last few weeks. "But we won't really know for another few months whether this was the start of a shift in sentiment."

The bottoming process is technical - with the S&P 500 and the other major gauges having hit a low in late January, recovered off of it, retested that low in March and then recovered again.

But the bottoming process is also psychological as investors try to account for all the bad news and then to begin making moves in advance of an eventual recovery in late '08 and early '09. By that time, the impact of the recent fiscal and monetary policy will be more noticeable, the outlook for financial companies hit by the credit crisis should be clearer, and earnings will start showing improvement, due to easier comparisons versus a year earlier.

Historically among the first areas to recover after a recession, the railroad sector has risen about 14% year-to-date. Meanwhile, the Dow Jones Transportation average, the S&P Transportation average and the Merrill Lynch Early-Cyclical index are all up between 5% and 10% this year, versus a decline of 7.5% for the S&P 500.

And the transportation stocks have been moving ahead at roughly the same pace that financial stocks have been declining. Homebuilding stocks, also often among the recovery early birds, have been rising too. So have oil service, and metal and mining stocks.

But homebuilding stocks were battered so hard last year amid the ongoing housing and credit market crises that analysts say a recovery in that sector is largely attributable to bargain hunting. Oil, gold and gas prices at or just below record highs could be the main catalyst for a rally in the underlying stocks although worldwide demand for those commodities is helping too.

Surging energy prices have hurt profits at airlines, package delivery firm UPS and some of the truckers. Yet, the railroads in general are more fuel-efficient and have lower costs than other forms of delivery, which has helped them. Growing demand for coal and other forms of fuel have helped as well.

"Railroads are picking up business because their cost structure is better than other forms of shipping," Nyheim said. "A company like Burlington Northern has such a wide footprint that its cheaper, for example, to ship coal that way."

The stocks have also benefited from the interest of Berkshire Hathaway head honcho Warren Buffett, who has invested heavily in the sector of late. If Buffett sees something the broader market is just beginning to notice, it wouldn't be the first time. (Full story).