NOLTE NOTES
Flight to Safety
by Paul J. Nolte, CFA
March 30, 2009

The bull market train is leaving the station and investors are jumping over each other to get aboard! A monster Monday and a marvelous month are making investors wonder – is a bull market finally here? The economic data of last week was at least portrayed as better; however digging a bit deeper uncovers a still struggling economy that is not yet showing signs of recovery. This coming week will be another important one as the employment report is released. We are expecting the payroll losses to be in the 650k range, however the key will be the revision to prior months – which last month added another 150+ to the prior months data. Then begins earnings (and baseball!) season. Given the actual loss in earnings for the fourth quarter and a still moribund economy in the first quarter, are the surprises likely to support a market that has already jumped 20%? Until we see more than scattered improvement in a few minor data points, we will keep the champaign on ice.

Unfortunately another strong week did not bring the desired surpassing of prior peaks that we have been looking for to mark the potential beginning of a more sustained market gain than merely another bear market breather. Jumping forward just a bit – assuming we are able to meet the requirements of getting above the January data peaks, we would expect the market to take a break and decline as investors begin pocketing some of the short-term gains. Instead of a free-fall into another abyss, we would expect the markets and our indicators to stop well short of the early March low. Another couple of tidbits in the rush to anoint the new bull market: first, looking back over history, the largest one-day gains have not been at the beginning or during bull markets, but in the middle of bears – look no further than the last six months. We have also seen overwhelming “net advancing” as well as declining days – a ratio of advances to declines (or vice versa) is greater than 9 to 1. The regular flip-flopping of the strong up then down days is not a hallmark of a bull market. Finally, our reading of the sentiment tea-leaves indicate investors are jumping onto this market a bit too quickly and are likely to be disappointed in the outcome.

We may be in a period where the bond model flips regularly between “buy” and “sell” as many of the indicators we use are at their long-term averages and moves above and below those averages trigger the buy/sell indicator. We are still playing a cautious game with rates, betting that rates don’t fall too much from here (how much room is there with a 10 year at 2.77%?) and given the excess capacity in the economy, that rates don’t move significantly higher from here either. One note of caution is that spreads between low and high quality bonds are beginning to widen, indicating an aversion to risk by investors. This “flight to safety” was also evident during the market meltdown and should be watched for further deterioration.

© 2009 Paul J. Nolte, CFA
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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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