Stock Market Climning a Wall of Worry?

By: Paul_J_Nolte

In keeping with the theme from last week – how many straws will it take before the markets finally break? Or is the “wall of worry” that the market is climbing higher still? Adding to the continued housing woes and a confident (but not spending) consumer, we should see General Motors declare bankruptcy this week (which will force the Dow to change some members).

The coming week will also be chock full of meaty economic data, like employment, consumer credit and consumer income/spending data that could either bolster the case for a “less worse” economy or one that is still trying to find firm footing. The primary discussion of the financial markets is beginning to center on nascent signs of inflation – from rising gold and oil prices to an increase in shipping indexes (an indication of higher demand for basic materials). While not yet in the official numbers, many are concerned the Fed will not be able to undo the huge injection of money that many believe is the source of future inflation.

The dichotomy between our indicators and the markets continue, with our short-term indicators deteriorating while our long-term indicators remain at or near levels that have led to market corrections. The SP500 has moved sideways over the past three weeks, slowly working off the extreme readings of early May, which we suggested was at least one way to reduce/eliminate those extreme readings. There remains a couple of important levels for the market to clear before we can embrace the current move as maybe something more than just a bear market rally.

First is the 940-950 level, which represents the highs at the beginning of the year and the 10-month average closing price of the SP500. Next up will be the nice round 1000 level – which was the November peak. If those two levels can be cleared, then it looks to be a straight shot up to 1200. Given all the money tossed into and around the economy over the past six+ months, nothing should be surprising anymore. We are indeed in new and unexplored economic territory.

The beginning of a new rally in treasury bonds or was last week just another head fake before we see significantly higher bond yields? While the treasury offerings were gobbled up at a “normal” rate, once the auction results were publicized, bonds sold off and yields rose. At current levels and accepting today’s low inflation environment, treasuries are providing well above normal real returns.

The extremely wide spread between short and long-term rates is also a boon for the still ailing financial/banking stocks as they make money on the spread between the two. Could the rise in yields cut off any early recovery or force the mortgage market into another fit of convulsions? Given the endless things that are being pulled from the Treasury’s “hat” it is hard to provide a solid conclusion.

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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