Financial Markets Action

By: Paul_J_Nolte

The market action over the past few weeks is presenting more questions than answers. First, the new administration is ready to unveil yet another bank bailout package as well as consumer relief designed to cut some taxes, provide some rebates and attempt to provide long-term economic benefit. Earnings season is in full swing, with the usual financial mess – however some bright spots in a variety of industries.

Housing remains in a funk, with new construction starts at their lowest levels in the history of the series, with existing home sales to be released on Monday. While the Fed is also set to meet this week, given the last decision on rates of zero to one-quarter percent, little is likely to be done, however their statements about their economic concerns may garner some headlines. Finally the first estimate for fourth quarter GDP will be released and it is estimated that the economy contracted by nearly 6%. Maybe we could take solace in the Chinese New Year – the year of the ox and of practical work. Gains may be slow and imperceptible, but the year could be building a strong foundation for those that follow!

The past week was as bad as the prior, just compressed into four days instead of five. While not encouraging, we continue to see better trends in volume figures and the constant hitting of the 800-815 level on the SP500 will either strengthen it – making it a short-term base from which the markets can rally or it will finally break, opening the door to a full-blown retest of the November lows at 740-750. While we believe a retest of the lows is likely, we are also of the belief that they will hold, as many of our indicators remain well above their November readings.

Even some of the “fear gauge” readings, while rising during the recent decline are not near the panic stages last seen at the Nov. lows, again indicating a more “thoughtful” retest – instead of “get me the (*&^ out!” The woeful financial sector – once the largest in the SP500, now nearing the smallest, continues to be the emotionally most sensitive sector in the markets and tends to still drive sentiment. Investor sentiment, recently the most bullish in over six months will need to get “more bearish” before we can begin to say with any degree of confidence that a rest is or has been successful.

The bond model has turned negative just as long-term treasury yields rise by more than 10% on the week to their highest levels in 6-8 weeks. Commodity prices, as measured by the CRB index also jumped, led by gold – which is again making an assault on $1000/ounce. While we are not ready to abandon bonds, treasury bonds do look very vulnerable to higher yields as investors shun their very low yields in favor of (still) high-grade corporate bonds. We don't expect much from the Fed meeting this week, especially a cut in rates since we are already at zero. However, the bond model change also does not yet imply any increase in rates on the horizon, so low and stable will be the order of the day.

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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