NOLTE NOTES - Stock Market Rally on Low Volume - What, Me Worry?
Stock-Markets / US Stock Markets Oct 29, 2007 - 12:21 PM GMT
Oil prices rise, the markets rise, as demand for oil remains high, indicating that the global economy is still chugging along. Oil prices decline and the markets rally, as lower oil prices will add to consumer's ability to spend. Let's face it; the markets are not really paying attention to oil prices, other than a convenient reason for a market rally. However, that rally is coming on lower volume and less participation than at any time since the August bottom.
Earnings outside of the financial sector look OK, however financial stocks have taken it on the chin as write-offs of loans erase a large chuck of earnings that were made in 2006. In fact, Merrill Lynch wrote off loans totaling more than they earned during 2006 – costing the CEO his job. Once the rumors began flying that he would be fired, the stock rose and for the week Merrill Lynch lost a mere $0.17 on the week. Investors, maybe to their detriment, are believing that the financial sector is “tossing in the kitchen sink” with regard to write-offs, making next years earnings look that much better – and if that fails, then the Fed will cut rates enough to bail everyone out.
No matter the news, the markets continue to rally – forcing investors into stocks to avoid missing out on potential gains. However, we are seeing a lack of conviction among buyers, as volume continues to be anemic, save for the days that the markets actually decline. In fact, if we look at a simple accumulation of volume (adding the daily volume when the market rises, subtracting when it declines), the current reading is well off the peak in July and is also below the recovery high of October 10 th . The number of stocks making new lows is also running relatively high – and depending upon the day, is actually above those making new highs.
Finally, over the month of October, the total volume going into stocks that were declining is higher than the volume going into stocks that rose – again not a healthy sign for the long-term markets. But, even with all the bad news outlined above, investors are likely to be focused on the Fed meeting this week (figure another cut – this time one-quarter percent) and the financial markets are now entering the strongest part of the year (November through May is the best stretch). So investors are likely to maintain the Alfred E. Newman toothy smile on their face and repeating –“What, me worry?”
Bonds are losing their safe haven status and are beginning to act more like the manic-depressive stock market but rising and falling by large amounts on a weekly and even daily basis. This week, short-term bonds fell to 4%, from 4.3% last week. The 30-year bond, in six weeks, went from 4.7% to 4.91% back to 4.7%, a huge swing from the normally mild few basis point weekly changes. The yield curve has also been gyrating wildly – from inverted in early August to nearly 2% a few weeks later and then less than a half point positive sloped by mid-October. Discussions around a recession, slowdown or just a “growth recession” continue among economists.
Our bond model is once again pointing to lower rates with its positive reading of “4” this week. Having been positive in four of the past six weeks, we are of the opinion that interest rates are likely to be lower than higher by yearend. The Fed is likely to help that prediction along with a rate cut this week and likely one more before yearend.
By Paul J. Nolte CFA
http://www.hinsdaleassociates.com
mailto:pnolte@hinsdaleassociates.com
Copyright © 2007 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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