Silent Night, Silent Market

By: Paul_J_Nolte

Two very quiet weeks now confront investors, as the Christmas and New Year’s holidays cut the trading for the week to but a whisper. Amid the quiet and solitude however are some rumblings from last year’s financial earthquake. Ratings on Greece debt were cut, Dubai has been backed by Abu Dhabi at least temporarily and concerns are growing about some Eastern European countries’ deficits. So far, the surfiet of cash from the US has allowed both the economy and financial markets to keep their collective heads above water – but for how long?

The economic data points to modest growth, although fourth quarter growth could come in over 4% (due to one-time issues). We are ending the year, for now, in a much better place than a year ago. We’ll be making our annual prognostications next week after a bit more Christmas cheer! For now, we are expecting a rather quiet week, with both volume and volatility low. We do get a couple of important numbers from housing – existing and new home sales, which may be modestly higher than prior month data. Only a major deviation from expected would push the markets signifcantly in either direction.

Much like the overall market, many of the internal indicators are stuck in the great middle ground, indicating little in market direction for the next couple of weeks. While volume got a pop from the quarterly expiration of options and futures as well as some rebalancing of the SP500, the picture has changed little over the past two months, markets have been rising on lower volume and falling on higher volume. Over the past 25 trading days, total declining volume has turned up from prior levels that preceded weak periods in the markets that have lasted a month or two. While our base case is continued strength into the first quarter, we may see a minor decline early in the year, before the markets regain their footing for a charge higher into the second quarter.

Another interesting indicator that has been in decline for the past six months is the “smart-money” indicator. It looks at the first and last hour of trading, where the first hour is viewed as uninformed knee-jerk activity and last hour are the “professional” money. It was rising from October ’08 into and just after the bottom in March ’09. The decline since may point to the short-term nature of the market rise – that it is not the beginning of a new bull market, but a rally in a bear.

The re-confirmation of Ben Bernanke to head the Fed was done so with much theater and political posturing. However, as with his predecessors – confirmed for another term. The bond market has been the most volatile, as 10 year bonds hit 4.2%, then 4.6% before falling back to 4.55% all within a four-week period. The model remains in positive territory for the fourth straight week. The 30-year bond has increased a bit over that period of time, due in part to dollar strength and some stronger than expected economic data. While the Fed has indicated little change in attitude toward a near zero interest rate policy, that is likely to change by mid-year ’10 due to either a still weak US dollar or continued economic strength.

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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