Stock Market Negative Reactions

By: Paul_J_Nolte

The economic data continues to disappoint, although may are looking at the bright side (at least it is not as bad as last year!). However, the bit of “news” that surprised investors was news from JP Morgan as they released earnings data that they will be stashing more reserves away to cover additional loan losses. That took the markets down a peg and increased investors concerns that just maybe the stock market and economy are moving in two different directions.

Retail sales fell in November, while holiday sales rose 1.1%, inflation remains tame and while capacity utilization rose, it remains in territory usually seen during recessionary periods. Also near recession levels is consumer confidence, which barely budged during the month. Investors, however were much more excited and according to Investors Intelligence, the percentage of bulls is now the highest since the end of 2007. Is the JP Morgan warning company specific or a sign of more bad news ahead? Earnings reports, especially other banking companies reporting on Wednesday, should provide a better answer.

The reaction to corporate earnings, so far, has generally been negative, but not enough to warrant selling everything to cash. One concern that bears watching is the volume during advancing vs. declining days, as this week was yet another period where volume expanded on declining days and contracted on advancing days. The metric peaked in Sept. ’09 and has been in a sideways band ever since. While the markets are up about 6% since this indicator peaked, the net number of advancing to declining stocks as well as overall advancing volume still is swamping those on the decline – hence the reason for the gains in the indices.

The expanding volume indicator was well ahead of the overall market decline, as the last big peak was early in ’07, six months before the indices began their decline. Weakness in many of the technical indicators are symptomatic of a tired market that can still rise, but the days of wine and roses are likely in the rearview mirror. The expectations coming into this year were for a relatively strong first quarter and weakness into the fourth quarter. So far, the overall game plan is still in place.

Investors scurried back into Treasury bonds last week as commodity prices eased and the equity markets displayed some weakness. As a result, the bond indicator flipped positive for the first time in a month. Expectations are that the bond model can make abrupt changes and as a result, we like to see at least two weeks in the same direction before declaring that interest rates are likely to either rise or fall (in this case fall).

There are strong arguments on both sides of the yield picture, one saying rates can fall due to lack of economic strength and a reluctance of the Fed to begin removing excess money from the system. The other is concerned about inflationary pressures that are likely to build due to the very easy money that has been in place for over a year. This week, the betting is on continued economic weakness.

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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