After the flurry of activity around the usual monthly economic reports and the heavy calendar of earnings, the markets have entered the quiet period, marked by a few earnings reports and some “secondary” economic reports that usually do not move the markets. We will get housing numbers, which usually are not big market movers, however with the news last week of sub-prime home lenders struggling (or maybe going bust) the importance of housing is beginning to take center stage. Although as the news broke on Thursday, the markets didn’t really react until Friday – helped along by comments from Fed officials that the economy remains precariously close to a “high inflation” environment. We will see more inflation figures this week and comments from the Fed chief in front of Congress – hopefully the air will clear after the testimony! For much of last week, the market moves were microscopically small, until Friday, when investors were told the Fed may not be done hiking rates. Although the decline left investors with a bad taste, it has yet to do serious damage to the still rising trend of the markets – again making this week more important that usual, given the heavy dose of news.

As mentioned above, the decline Friday put the SP500 back near/into the range that has existed for two months. In fact, the market is up about 2.5% over the past three months, much less than many of the optimist estimates for annual returns of mid-teens. Volume has been an issue (again!) with the last push to record highs – it has come on below average volume. In fact, the volume associated with stocks declining has been steadily rising since mid-September, when the market was two months into the current rally. The opposite has been true of volume going into stocks rising – a combination that could spell at least a short-term decline in stocks. The problem is even more pronounced in the OTC stocks, with advancing volume generally less than declining volume for the past two months. Finally, a couple of new concerns for stocks has been the quick rise in oil prices, from briefly below $50/bbl to touching $60/bbl and the still persistent higher interest rate environment, with 10 year yields up over one quarter of a percent since mid-December. Not the most ideal conditions for a renewed bull market.

While yields have been increasing on the longer end of the yield curve, conditions in general have improved enough to actually issue a buy on bonds – as our model has given its’ first positive signal all year. We generally like to see two positive reading in a row before getting excited about pushing out maturities, but a positive reading is a welcome reprieve from the poor bond market this year. The yield curve remains negative, with short rates above long rates by their greatest amount (save one week) in two months. Once again, the bond market is signaling an economic slowing that has not yet been confirmed by either the economic data or comments from Fed officials. 

© 2007 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.

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