Stock Markets Targeting January Lows

By: Paul_J_Nolte

Book-ending the month of February were to big sell-offs that left investors wondering if we were on the precipice of something truly large in the way of another major decline. While the first decline was more the ending to a very poor January, the one on Friday has investors questioning their views on the economy and the implications for stock prices in the weeks ahead.

The overall economic news for much of the week was nothing to write home about, yet stock prices rose – until more bad news from the financial sector on Friday along with very weak consumer confidence (and less than terrific spending) was enough to get the sellers out in full force. Volume, for the first time in a month, was significantly higher on the declining days during the week, a trend that if it persists could spell more trouble in the months ahead.

The coming week is packed with juicy economic news, from employment (last month was terrible) to the manufacturing report from the ISM (last month was very weak). The last few weeks have shown new filings for unemployment have broken from their two-year sideways trend to territory that signaled large job losses during the '00-'03 recession. Friday's employment report risks being negative, and more importantly will be the revisions to the January report – could be another wild week in stocks.

The markets are just above their February lows and the news could get much worse before it gets better. Although inflation reports are higher than desired, the commodity markets are soaring, likely putting additional pressure on inflation in the months ahead. Everything from oil to grains to the products derived from those two (among them are plastics, chemicals, meat and milk). As we mentioned last week, the market internals are improving some, however no prior peaks have been surpassed and therefore to declare “a bottom is in” is premature.

Whether looking at the cumulative net advancing volume, the net advance decline line or momentum indicators, each has improved from their worst levels, however have not topped peaks set late in '07 let alone the October or June '07 peaks. As the market embarks upon a testing of the January lows, it is hoped that many of the indicators do not also go to new lows, setting up the possibility for a “positive” divergence that many will see as finally a bottom put in place. If the retest fails, the next stop is likely another 7% away from current levels. Unfortunately that could be reached rather quickly in a market that is prone to shoot first and ask questions later.

Normally the soaring commodity markets would be lethal to the credit markets – pushing rates higher as inflation fears are stoked. However this time IS different. Our analysis of the various markets shows that the two best performing are commodities (no surprise) and fixed income (big surprise). A year ago, 3-month treasury bills were nearly 5.2%, today just over 2.25%, while longer term maturities have declined some, and their move has not been as dramatic. There are two unanswered questions for bond investors: will the interest rate cuts stimulate the economy (as they have done in the past) and when will the lower rates begin to have an impact? The answers hold the key for equity investors.

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

Copyright © 2008 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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