As the second quarter winds down, we can expect the usual flurry of activity as trader’s place their bets on what sectors and stocks will do well and which will do poorly in the months ahead. It’s called “window dressing” and can sometimes cause markets to move in sudden and inexplicable ways. After the close on Friday, the Russell 2000 Small Cap stock index will also undergo its annual reconstitution with some stocks removed and others added. That will only increase the perception of increased activity. Yet at the end of the day, the markets have barely budged from last week’s levels.

For the most part, this week the stock market played second fiddle to the bond market as the government auctioned off $106 billion in new debt. Equity investors feared that bond buyers would desert these auctions causing rates to move higher and as a result put downward pressure on the stock market. When their fears proved unfounded and the government managed to sell this week’s mountainous supply of new paper with ease, investors bid up stocks.

It’s all part and parcel of the trading range the markets have been mired in for the last five weeks or so. On May 6, for example, the S&P 500 was about the same level that it closed this Friday. I have explained in past columns that until the markets break out of this range it would be better to simply stay on the sidelines. From a fundamental point of view, the 30%-plus move to the upside from the March lows was in anticipation of an economic recovery and there has been just enough good news to keep the markets from giving back those profits. Now, I believe the markets are waiting for proof that the recent move to the upside was justified.

Given the market’s actions, it’s pretty clear that there has not been enough new data to lift the markets higher. However, quarterly earnings results are just around the corner. What better gauge of the economy then to find out how companies have fared over the last three months? Ostensibly, this should provide some further proof that things are improving but there is one caveat. Investors should be aware that Wall Street plays games with earnings forecasts. In hard times, analysts usually “low-ball” their earnings estimates for the companies they follow. This way when the company reports chances are it will match or in many cases do better than the markets expected. So take these earnings reports with a grain of salt and focus instead on the company’s guidance toward their future prospects.

However, recent conversations with several companies in the region seemed to confirm an improvement in our local economy.

“Yes, it is a little better than it was,” agrees Kathy Stumph, the owner of Chatham Kids in Chatham, N.Y., “I’m optimistic. I think by the end of the year I’ll be fine.”

Kathy’s words carry even more weight since the village’s business district has been hurt by a Department of Transportation project that has closed their main avenue.

Over in Pittsfield, MA. I caught up with George Whaling, President of Whaling Properties, LLC., a property development company in Berkshire County.

“My rental properties are very strong right now and I’m attracting good quality tenants. In the commercial space, we’re also seeing strong demand. We’re about to sign a lease for an entity on upper North Street in the retail trade. It will be a considerable investment made even more impressive given the present economic climate,” he said, “it will be called ‘The Market’ a neighborhood, fresh food market that will be good for Pittsfield.”

Whaling believes the economy isn’t as bad as many people think but they read and watch the business papers and television assuming all the gloom and doom reported is true.

“It becomes a self-fulfilling prophecy. Sure, some businesses won’t make it but a lot of my business associates in Berkshire County will. Backlogs going into the summer and fall may be off a little but are still good. I’m as optimistic as I was two or three years ago.”

Although this is only anecdotal evidence, it does seem to bear out the “green shoots” scenario. I suspect however, that until we see some further evidence in the numbers the markets will mark time and continue digesting the gains of the first half of the year. That is not a bad thing. Those who are invested in income mutual funds as I have suggested continue to get paid a healthy rate while waiting. Patience in markets like this is usually far more rewarding then jumping in with both feet.