Stock Market Investors Anticipate "V" Shaped Recovery

By: Paul_J_Nolte

The third quarter is rapidly coming to a close with another double-digit gain in the equity markets. Investors are nearly giddy over the possibility of a “V” shaped economic recovery that they are falling over each other to buy stocks. Will the fourth quarter pull the curtain on the recovery? Will the Fed begin to signal an end to their very easy monetary policy? Will home prices ever go up again? So many questions and a mere page to cover it all!

The economic releases of the past week tossed some cold water on the notion of a smooth, rapid recovery and did cause investor to pause. The Fed statement after leaving rates unchanged last week, indicated that the economy is improving, albeit at a slow rate. Finally, durable good orders were also less than stellar, confirming a still tapped out consumer. The coming week is loaded with the biggie economic data, culminating in the unemployment report on Friday. Trading this week will likely determine if this week was merely a bump in the road or a Chicago pothole!

While still a long way from “buy” territory, many of our indicators have turned down from their extreme levels. We regularly visit volume to help determine if there is a mad-dash for the door or merely an orderly exodus. While volume did increase during the week, Friday’s volume fell off dramatically and was the slowest of the entire week. The weekly data was the third worst since the bottom in March, however we have only seen two times where the markets put in two consecutive down weeks. Before we declare the market top is in, we’ll have to wait a bit to judge the conviction of the bearish camp.

So far, the three-day decline in net advancing issues matches that of early July; the last time the market did any kind of correcting. The market is currently sitting on a trend line from those July lows, if broken, then the trend from the March bottom comes in play at roughly 1020 on the SP500. Finally, the most recent lows of August of 980 would need to be broken for a strong declaration of a top being in. That 6%+ “correction” is relatively small given the gains since March. For now, we are giving the markets the benefit of the doubt, but that could easily change with additionally poor data this week.

The world still loves our bonds! The treasury had little trouble unloading debt last week and combined with the poorer economic data, yields declined again with the 30-year bond getting close to under 4%. Spreads narrowed a bit, if only due to a floor of zero under short-term rates (now a bit above 0.10% for a 3-month treasury). It is little wonder that money market rates are paying anything? Commodities (as measured by the CRB index) have struggled to get above 430 and may break an up rend that has been in place since early March. In what seems to be an “anti-dollar” play, both gold and oil prices are trading the opposite direction of the dollar. As with the equity markets, bonds as well as the dollar may see some volatility with the various economic releases due this week.

By Paul J. Nolte CFA
http://www.hinsdaleassociates.com
mailto:pnolte@hinsdaleassociates.com

Copyright © 2009 Paul J. Nolte - All Rights Reserved.
Paul J Nolte is Director of Investments at Hinsdale Associates of Hinsdale. His qualifications include : Chartered Financial Analyst (CFA) , and a Member Investment Analyst Society of Chicago.

Disclaimer - The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.

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