Bears Making Room for the Bulls
by Paul J. Nolte, CFA
February 1, 2010
Last weekend in the northern climes, a whiff of spring could be felt as temperatures rose to levels well above the norms for late January. Unfortunately, we were quickly reminded that winter still holds serve as temperatures quickly dropped to well below normal. Could the ’09 rally be nothing more than a winter reprieve and the ushering in of the ’10 calendar year will ultimately remind us that the bear market is still very much with us? Ok, a bit dramatic, however the past week saw the bullish equity camp decline rapidly as prices fell below their December lows, which historically does not auger well for the remainder of ’10. The economic data, outside the very rosy GDP report (which will get revised at least two more times!), was merely tepid, however comments from the corporate earnings front did little this week to bolster the thought that economic growth is really at hand. The unemployment report this month will closely watched, as December’s was much worse than expected. Also, the data series will have some revisions to prior year data as they revise their seasonal adjustment factors, which could make this month’s report much significantly different than expectations.
The market “internals” have deteriorated noticeably over the past two weeks, when only two trading days of the past ten have shown more stocks up than down. Also, the volume figures have grown as the markets have declined – never a good sign. Many market technicians, or those looking at charts to divine the next move in the market, are looking at 1038 on the SP500 as the next “logical” resting spot, as the benchmark index closed below 1080, which marked a point that the market has hit and bounced from many times since October 2009. Many of our weekly indicators have rolled over, indicating that it could be more than just a few trading sessions before the markets are ready to advance. So we are expecting a rather volatile market over the next few weeks as investors sort through still weak economic data and an earnings season that is satisfying on the bottom line, but very suspect regarding growth in overall revenue. The range of 1020 to 1030 marks the bottom the SP500 hit as a high in August, then as lows in early October and November. A break of that level could see a decline toward 950, which erases roughly 35% of the gains made from the bottom in March. The next couple of weeks could be very important ones for the tone of the markets for the remainder of the year.
The huge decline in commodity prices, led by gold and oil, has kept the bond model in positive territory for another week, indicating that the likely direction of interest rates is lower. Commodity prices, as measured by the CRB index had increased by nearly 50% when measuring December ’09 against December ’08. This matched the year-to-year gains to mid-July ’08, just before the large commodity collapse that began in late summer. is time. Concern about inflation remains high, however given the huge run higher in commodity prices, we would expect much higher inflationary figures in either the consumer or producer price indices that so far are very tame. The Fed is on hold “for an extended period” and we could see the 10-year bond once again try to break below 3.25% later this year.
© 2010 Paul J. Nolte, CFA
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.