David Fry's Market Outlook for Tuesday

Includes: DBC, EFA, FXI, GLD, SPY
by: David Fry

After last week's volatility investors are a little more tentative whether to chase stocks higher or back off a little. All eyes are on interest rates, so perhaps we won't know until Friday when Bernanke speaks on inflation; then we will get a better sense of it and implied Fed policy. Today Cleveland Fed Reserve president Sandra Pianalto said inflation was still the primary concern -- so no soothing rhetoric from her anyway.

Crude oil staged another of its fitful moves as Saudi Arabia indicated 10% cuts in contracted supply for heavier crude to both Japan and Korea.

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Meanwhile gold rallied despite a slightly higher dollar as some suggested last week's sell-off was overdone. We'll see.

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Bond market action is now the key. What some investors understand is that often Fed policy is more in the hands of the markets than with policy makers. The bond market vigilantes often direct markets in the direction the Fed will have to go. They're a smart bunch, and currently they're telling us the Fed won't cut interest rates any time soon.

PIMCO's Bill Gross "had" been predicting that the Fed would have to cut interest rates by now or allow housing prices to fall in excess of 20% to make them more affordable. He's now suggesting that we're in a bond bear market, predicting yields on the 10-year will eventually reach 6.50%. That would put the 30-year near 7% most likely and kill any stock market rally, while putting housing in the dumps. But he's been wrong before, but such are the risks in punditry.

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Volume was light, and so too is this commentary since the real fireworks may not begin until Bernanke starts speaking on Friday.

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D Fry Market Outlook 12 06 2007It was a relatively quiet and tentative start to the week. The bond markets now hold the key to stock price behavior, and should interest rates continue higher that could thwart economic expansion and hurt stocks. High earnings growth rates can offset higher interest rates. Perhaps that can be delivered only from energy and tech -- just like in the late 1970s and early 1980s. But the investment climate seems much different than it did then.

Disclaimer: Among other positions, the ETF Digest maintains long or short positions in: PowerShares DB Energy Fund (NYSEARCA:DBE), streetTRACKS Gold Trust ETF (NYSEARCA:GLD), PowerShares DB Commodity Index Tracking Fund (NYSEARCA:DBC), S&P 500 Index (NYSEARCA:SPY), MidCap SPDRs ETF (NYSEARCA:MDY), iShares Goldman Sachs Technology Index Fund (NYSEARCA:IGM), iShares MSCI Emerging Markets ETF (NYSEARCA:EEM), iShares S&P Latin America 40 Index Fund (NYSEARCA:ILF), iShares Trust FTSE-Xinhua China 25 Index Fund (NYSEARCA:FXI).