Stock Market Rally Facing Resistance

By: Paul_J_Nolte

All that great analysis and divining of last week was toss back in our face as the markets raced higher, putting in their best week since March. The catalyst? Some better than expected economic reports, showing home building activity picking up (do we need more?) and unemployment claims fell (messed up seasonal factors with GM/Chrysler bankruptcies).

But too, earnings were better than expected from many companies – Goldman Sachs is minting money (surprised?) and Intel/IBM report decent earnings as did Johnson & Johnson. However, missing from much of the reporting was the fact that while earnings did well, sales still looked poor. Cost cutting (read: layoffs) remains job one at many companies in this still weak economy. While the calls for an end to this downturn are centering around yearend (possible), the trajectory of the growth rate is still likely to be rather low as spending will not be up to historical norms. Heavy earnings week coming up should give a bit more color to the exciting week just past.

The markets remain in the trading range, having gone from testing the lows just last Friday to now beginning to test the highs this Friday. We are feeling much like Emily Littela – repeatedly saying “never mind” week after week as the averages crisscross the same territory as seemingly important economic and earnings data fail to inspire investors for more than a week or two.

Volume remains poor, however when looking at when volume increases, we also find the same lack of conviction as we are seeing volume increases during both rallies and declines. The only positives coming out of this week is that net advancing stocks swamped those declining and pushed the net advance/decline line above their recent June highs. The past week was do or die for the markets and they did very well, but are now smack against resistance that has turned the markets lower three times since May. This time for sure!
 
Everything was up last week, including long-term bond rates, even as short rates dipped a bit, putting the spread between short and long back near the highest levels in over 15 years. It is little wonder then, that banks are making money in this environment. However, also being reported are higher delinquencies for both credit cards as well as mortgages. The bond model remains at a positive reading, although it could easily slip into negative territory – meaning that interest rates are likely to rise in the future. For now, we’ll stick by the model as rates fell nearly half a percentage point since the last signal. If we get some weakness in the equity markets next week (investors may book profits) we could see money flow into the bond market, pushing rates lower once again.

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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