We are always on the lookout for magazine/newspaper articles that highlight popular opinion or sentiment of the markets. We could not help but notice the following article from the front page of the business section of the New York Post:
In essence the article is saying that the markets’ six-month run is unsustainable without increased profits or jobs. The author goes on to give seven reasons as to why she thinks the market will go down:
- Investors are reacting to positive assertions rather than realizations;
- Corporate profits are not there;
- Banks aren’t extending credit to individuals or small businesses;
- Consumers are 70% of GDP and are being squeezed on all fronts;
- Unemployment continues to grind higher;
- The fast institutional money has leveraged up and created a bear trap for individual investors;
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Cash for clunkers and first time home buyers tax programs can only temporarily revive the economy.
We think that this article reflects what the crowd is currently thinking. We can find relatively few who genuinely believe that the stock market will move materially higher over the coming weeks (as has been the case ever since the rally started in mid March). Perhaps this “denial” is what is driving the market higher in the first place! It is important to remember that stock prices are based on expectations……..what is happening in reality is of little importance.
Anyway to the markets we go…….what are they telling us?
Equity markets remain strong. We keep saying this week after week and this week is no exception. We think markets will continue to move higher due to the broad participation. Small cap indices continue to outpace large cap equity indices which suggests that the uptrend underway remains all powerful.
The strength of the broad stock market is being mirrored by junk bonds. We would be skeptical of the new high in equities if there was no corresponding new high in junk bonds. US treasuries remain in a somewhat indeterminate state! We continue to be surprised by how well treasuries have held up over the last 3 months. However, perhaps we have been led into a trap by thinking about the inflationary consequences of the FED “bailouts/stimulus”. Anyway, from a long-term perspective treasuries are in a down trend, we are merely looking for short term confirmation of the long term down trend. Patience is a virtue!
Will the CRB (as a proxy for the broad commodity group) break above the 270 level this week? Will that result in a fall in US treasuries? If history was anything to go by, gold and silver have usually led the broad commodity group in material moves. Given that the big three (gold, silver, and platinum) broke to multi-week highs last week, odds must favor the CRB clearing the 270 level over the coming days.
After 8 negative days it would not be unreasonable to expect some strength in the USD Index. In fact it would be seen as a healthy “correction” of an oversold position. However, any correction should be contained to below the 77.50 level and be seen as a selling opportunity for the dollar rather than buying. We have yet to see any speculative blow-off that typically signals an end to a bear market.
So it remains business as usual for financial markets. The current trends that had their origins way back in November last year remain in place with little or nothing to suggest that they are about to make an about change. The critical level to watch is the $75 level for oil. Yes we are ordinary citizens of humanity……..even we hold beliefs and keep a rabbits tail!
