All Eyes Remain on Greece

By: Paul_J_Nolte

Over the past sixteen weeks the markets have managed only a few declines, pressing ever higher, skirting sovereign risk (Greece, Spain, Portugal – anyone else?), avoiding legal action against Goldman Sachs (adding criminal charges to the civil) and still modest economic growth, although better than expected earnings. The Fed, by keeping interest rates pegged at near zero has allowed the party to continue. Like the Staples commercial – that was easy! However the volatility that accompanied the decline late last week now have investors concerned that just maybe this is the beginning of the long awaited correction that will (finally) take stocks down more than just the few percentage points experienced so far this year.

The coming week will be chock full of market moving data, from manufacturing (ISM, construction and factory orders) to the consumer (unemployment, income/spending and credit). With earnings season winding down, the economic data will dominate. Best guesses are for roughly 200k in new jobs (but how many are census workers?) and expectations are still high for the manufacturing sector. Could be another roller coaster ride!

The spastic decline of last week (three 100+ moves) barely moved the needle on our longer-term indicators, while the short-term moved enough to warrant an early week reflex rally. As has been the case over the past six months, volume once again picked up during the decline, indicating investors are standing at the door, ready to rush out. In a perverse way, that skittishness is likely to lead to additional gains in the weeks ahead, as those that sold last week may be forced to buy back again if the markets are successful pushing higher. It has been our contention that there may be more on the upside, but it will come begrudgingly, frustrating investors over the next few months. Finally, one indicator that we reference sporadically is something we call “smart money”.

It looks at only the first and last hour of trading, subtracting the first hour move from the last hour and then accumulating the Dow points. The theory behind it is the first hour of trading is generally short-term reaction to news overnight or just published economic data, while the last hour are the market specialists (smart money) positioning for the next day’s trading. The success of the indicator is spotty, bottoming a year in advance of the ’08 decline, while topping just three months ahead of the ’00 peak. It has been in a steady decline over the past six months and until confirmed by any other of our indicators, it remains the sole negative in our work.

Investors ran from Greece and toward US bonds, pushing prices up and yields back down toward the low point of their 2010 range. If the 3-year Treasury can break below 4.50% over the coming few weeks, then yields may fall to 4.25% and may have a shot at 4%, last reached in October ’09. If the employment data comes in below 100k in new jobs could yields fall that fast this week. Our bond model remains positive with only the commodity index showing up as a negative reading.

For investors focused on the popular 10-year Treasury, currently at 3.66%, a fall below 3.5% would signal renewed concern about the pace of the US economy and with the 30-year bond, push toward the lower end of the 6-month range. The theme of the bond markets seems to be slow growth, low inflation; while emerging markets are better positioned for solid growth with some inflation.

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

Copyright © 2010 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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