The doors have closed on a quiet quarter, and by the way, the best since late ’04. What the market didn’t have in excitement, it made up in persistence. The SP500 traveled in a very narrow band the entire quarter, setting records for trading boredom. But if you looked, there was plenty of excitement – metals, oil, small and international holdings all did terrifically well during the quarter. So what is on tap? With the Fed carrying on in the Greenspan tradition of obfuscating, the next two weeks will be laden with economic news (unemployment, data on mfg and suppliers) and the beginning of the earnings season gets going. Expectations for earnings remain above 10% for yet another quarter, supportive (maybe?) of current valuations, however higher interest rates (and the thought they may go higher than anticipated) are giving investors pause. Once again we enter the quarter with negative readings on our indicators (average quarter negative 54% of the time) that have registered a positive quarter in five of the last seven. Stay tuned; we hope that this stopped clock is right this time!

In what has been a broken record for the better part of the past six months, the back and forth nature of the market is frustrating many who have been used to a “directional” market (either up or down) for the past 25 years. Culprits for the narrowness may be pinned on hedge funds, scalping daily moves “forcing” a reversal the following day – or the follow the crowd mentality that puts money into the recently hot sectors. As a result, small stocks and international investing have been anything but boring. Our models continue to point to outperformance of these two sectors, but our indicators are trend following and we will stay in these sectors until they no longer best the rest. Trying to guess when a change will occur forces too much trading and poor overall performance, the first increasing costs, the second deadly to money managers. The backdrop continues to point to lower stock prices, but until they actual begin to fall, we are likely to be in for more of the same.

Our bond model continues to perform well, indicating that rates are destined to go higher still, with a negative reading of “1”. The Fed raised rates, as expected, however investors were expecting a bit more clarification around when the Fed might be done (will they do 16 hikes?). Unfortunately Bernanke sounded more like Greenspan and left the impression on the markets that there was still plenty of work to do ahead. As a result, the 30-year bonds got to their highest levels since October ’04. The week ahead could be treacherous for bonds, as the employment report has been a bond market mover over the last year as investors look at the number of newly employed as well as indications of higher wages. Based on the weekly jobless claims, we could see roughly 200k new jobs and wage growth should still be relatively tame. All in all - a decent report, one that is not likely to be a boon to bond investors.

© 2006 Paul J. Nolte, CFA
Editorial Archive

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.

CONTACT INFORMATION
Paul J. Nolte, CFA
Director Investments
Hinsdale Associates
630-325-7100
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