My Market Notes for the Week

|
Includes: DIA, FDX, QQQ, SPY
by: Finance Banter

Given the very low daily trading volume, market participants are considering a four-day workweek (maybe they should!). In fact, there are traders who only trade the first and last hours of the day, as the trends and volume outside of those two hours are not worth trading.

Market participants are now anticipating a double dip recession (or the lack of a recovery) to such an extent that “better than expected” news, normally considered poor, is now being cheered by investors and pushing stocks higher. With all the better than expected news around, Washington is preparing yet another “stimulus” package that begs the question: if things are getting better, why is additional spending necessary? If the economy is in need of more stimulus, than why are stocks reacting so well?

The coming week should be busy for economic reports, from inflation (both consumer and producer indices) to manufacturing (inventories and production/capacity). With Federal Express reporting earnings as well, many will look to their report as a proxy for economic activity. Finally, trading desks should be full, so keep an eye on volume figures this week.

Little in the plethora of market indicators point to more than what we have experienced over the past 11 months – mind numbing trading range with euphoric days followed by gloom and despair. This week was a perfect example: from Monday’s worries about defaults in the European community and weak banking balance sheets to a narrowing of the trade deficit and weekly jobless claims, the markets sold off on Monday and rose modestly each of the next three trading days to finish the week just positive. After finishing August just below its long-term average price, the SP500 is once again above and has bounced around the flattened average since May. Again, trying to discern a long-term market direction has been difficult in a very volatile day-to-day market. Until the markets break their recent trading ranges decisively (on high volume) expectations for a continued grinding market heading nowhere is likely to continue at least through the election.

The anti-equity, bonds, have been moving lower as stocks have been rising on expectations that the Fed is not out of bullets to fight deflation or the government’s desire to get the economy moving at all costs. Whether this two-week move marks the end of the bond rally or merely a rest is likely to take a few more weeks to decide, as the bond model remains bullish, indicating lower yields still ahead. What has been interesting is at the very short end of the curve, 3 month Treasuries have actually fallen further in yield, forcing the yield curve to the widest spread in five weeks and may be reversing the flattening trend in short vs. long yields that has been going on over the past four months. However the spread between short and long rates is constrained, as short rates are fixed near zero and long rates are “floating” and very unlikely to drop much below 3%.

Unlike the prior week, last week the SP500 bested 65% of the industry groups, while only half were actually up on the week. As has been the case with the broad market, as outlined above, little has changed with the various industry groups, with both the top and bottom 15% showing very little change in their weekly positions. Looking for any trends within the middle portion of the group rankings showed the defensive groups falling, as utilities, brewers/distillers and non-durable household showed the most weakness while machinery, diversified industrial and were among those making the biggest positive moves. The sectors showed technology now among the worst with energy issues going from the worst to better over the past two months. I highlighted a couple of energy stocks a few weeks back, the smaller issues in the sector seem to be performing better than the behemoth energy stocks. Continued improvement in energy issues would be a very good sign of overall economic strength that so far has been missing.

The 6% rise in the SP500 in September is very unusual, however stocks generally remain in a trading range and until/unless the SP500 clears 1125-1150, noise may be a better term to describe daily trading. Patiently hanging out in the high quality stocks make it easier to participate in this trend less market. Bond investors may have to finally change from buying long-term bonds to short-term bonds if yields continue to rise, we’ll know more in a week or two.

Disclosure: None

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.