Financial Markets Are like a Soap Opera

By: Paul_J_Nolte

The financial markets are beginning to resemble a soap opera rather than the economic landscape. The daily drama of early losses, wiped out by the end of the day or the breathless rise in oil prices or even the on again, off again love affair with the dollar or gold (you pick!). But too, like a soap opera, you can walk away for a couple of weeks and pick up right where you left off, never feeling as though you missed much.

The S&P 500 is merely two points better than three weeks ago and commodity prices have changed little over the past six weeks. So, dear viewer, what cliffhanger will be on tap this week? There will be housing news that has yet to rally and remains on life-support (could yet another government bailout save the day?!). The consumer is out of intensive care, but may relapse depending upon spending numbers on Friday. All of this excitement is in advance of earnings season that will kick off in two weeks – for heaven’s sake, don’t touch that dial!!

While the stock market is marking time, the internals have recently peaked and have begun to deteriorate, indicating that we are in the early phases of a correction. As mentioned in the past, that could take the form of a wide trading range, which we have seen over the past seven weeks between roughly 880 on the SP500 and 950. Or the correction could be a long and tortuous decline that erases half of the gains, in which case the SP500 would get down to about 800 – a decline of 14+% from Friday’s close.

For now, we’ll stick with the trading range, until the 880 level is broken, then we’ll begin to put more credence into the correction being one of price rather than time and we’ll watch the 800 level. All of this presupposes that the economic data remains “less-bad” and does not deteriorate significantly from what many are expecting to be a full-blown recovery late this year. If that expected date is pushed out to early to mid-next year, then we could see even the 800 level broken and would open the door for a more serious test of the March lows of 660.

The bond market is getting caught in a catch-22, with commodity prices relatively well behaved, short-term rates still low and inflation as reported by the government showing deflation is opposed to the heavy issuance of debt that shows little in the way of abating. Even other governments are discussing cutting their level of buying, which could force rates even higher to entice buyers to sop up the huge amount of issuance. The model has flipped back and forth over the past three weeks and is currently on a “buy”, indicating that longer-term bonds will soon begin to rally and push rates back down. If 30 year bonds do rally, the likely target would be about 4.10%, which has market other bond lows going back six years. Not a bad return, if it happens and as of yet, we’re not convinced.

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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