Rally To Where?
Lots going on in the markets these days. Last week's surprise rate cut wasn't such a surprise but the SocGen mess was. In fact it may have spurred the Fed who saw panic and took action. Rates have cratered, stocks have rallied, fear factors are high and gold continues to rise.
Regarding rates, the Fed has no choice but to lower to help a sloppy-at-best economy. Among many things, it will ensure that hundreds of billions of resetting mortgages in 2008 do not rise and add to economic pain. To be sure the Fed is clear that it will fight economic weakness at the risk of inflation. In fact, inflation may be just what's needed as it will raise asset and income levels and make the debt load that much easier to swallow. Flooding the market with dollars will accomplish this. More money available at lower cost are two key ingredients to growth, the missing one is velocity. Once velocity rises the economy will take off and "pay" back for the risks taken. Until that time however there will be major perceived risks about the dollar and inflation. Just look at charts of the interest rates, the dollar and gold and you can see this picture. The question is are we earlier or later in the cycle and how much is left on the table? The way I see it the Fed is boxed in and the only weapons they have are inflationary. Add this to the view that the Fed is unproven and suspect at best (among other things political) and its hard to see an improving dollar. Rates suggest that economic weakness is for real. Gold tells us to be concerned about something or a lot of things. Inflation is high on that list.
Look at market sectors and the most bullish are basic materials and mining especially those related to gold. Look at highs and lows in the stock market and golds are there again. Again, the big question is are we late or early? While most of the stocks in this sector are up nicely in the last 6 months, they mostly appear to be coming out of 12-18 month price bases. Not only do I think we are not late, I think that we may be at the cusp of a sharp move in this sector. AEM, NEM, GOLD, ABX are the best of the bunch.
The market got creamed - down 20% in 3 months, most of that coming in less than one month. From the low the market got a third of that back in 5 sessions and is right near resistance. S&P 500 resistance is roughly the range of 1370 - 1420. Financials rose sharply in the last week or so and are at similar resistance levels. The advance decline line is still holding up ok but new highs/lows are still poor. Few stocks are healthy as only 20% of stocks are above their 200 day ma. Other notable puzzle pieces include NYSE volume which has declined daily thru this rally and the probable concern about what the Fed will do this week. The market is telling us that it is tired. What will make it more tired is the supply of stock that was bought at 1400 or higher (on the S&P) during the past year and is ALL underwater. Any rally from here will help those holders breakeven and will put pressure on the market. While I don't see the market getting much above 1400 on this move I respect that forces out there can change on a dime and turn this weakness into a huge rally to new highs. But we will see that developing if the market holds and failes to follow through on the weak economy/weak dollar/rising inflation and fear scenario. Market weakness and volatility should dominate for at least six months at such time we should see evidence that the Fed is winning the war. Or not.
Its the current battle that we are most concerned with. The plan is to be defensive, sell daily into rallies and add to gold positions until the market tells us that's a bad idea. Until then, stay tuned. The retest of the lows will happen - it always does - and we will learn much about our thesis at that time. In the mean time I will be thinking of all the things that could go right for the market which would be wrong for us...
Regarding rates, the Fed has no choice but to lower to help a sloppy-at-best economy. Among many things, it will ensure that hundreds of billions of resetting mortgages in 2008 do not rise and add to economic pain. To be sure the Fed is clear that it will fight economic weakness at the risk of inflation. In fact, inflation may be just what's needed as it will raise asset and income levels and make the debt load that much easier to swallow. Flooding the market with dollars will accomplish this. More money available at lower cost are two key ingredients to growth, the missing one is velocity. Once velocity rises the economy will take off and "pay" back for the risks taken. Until that time however there will be major perceived risks about the dollar and inflation. Just look at charts of the interest rates, the dollar and gold and you can see this picture. The question is are we earlier or later in the cycle and how much is left on the table? The way I see it the Fed is boxed in and the only weapons they have are inflationary. Add this to the view that the Fed is unproven and suspect at best (among other things political) and its hard to see an improving dollar. Rates suggest that economic weakness is for real. Gold tells us to be concerned about something or a lot of things. Inflation is high on that list.
Look at market sectors and the most bullish are basic materials and mining especially those related to gold. Look at highs and lows in the stock market and golds are there again. Again, the big question is are we late or early? While most of the stocks in this sector are up nicely in the last 6 months, they mostly appear to be coming out of 12-18 month price bases. Not only do I think we are not late, I think that we may be at the cusp of a sharp move in this sector. AEM, NEM, GOLD, ABX are the best of the bunch.
The market got creamed - down 20% in 3 months, most of that coming in less than one month. From the low the market got a third of that back in 5 sessions and is right near resistance. S&P 500 resistance is roughly the range of 1370 - 1420. Financials rose sharply in the last week or so and are at similar resistance levels. The advance decline line is still holding up ok but new highs/lows are still poor. Few stocks are healthy as only 20% of stocks are above their 200 day ma. Other notable puzzle pieces include NYSE volume which has declined daily thru this rally and the probable concern about what the Fed will do this week. The market is telling us that it is tired. What will make it more tired is the supply of stock that was bought at 1400 or higher (on the S&P) during the past year and is ALL underwater. Any rally from here will help those holders breakeven and will put pressure on the market. While I don't see the market getting much above 1400 on this move I respect that forces out there can change on a dime and turn this weakness into a huge rally to new highs. But we will see that developing if the market holds and failes to follow through on the weak economy/weak dollar/rising inflation and fear scenario. Market weakness and volatility should dominate for at least six months at such time we should see evidence that the Fed is winning the war. Or not.
Its the current battle that we are most concerned with. The plan is to be defensive, sell daily into rallies and add to gold positions until the market tells us that's a bad idea. Until then, stay tuned. The retest of the lows will happen - it always does - and we will learn much about our thesis at that time. In the mean time I will be thinking of all the things that could go right for the market which would be wrong for us...
posted by David Geller at 5:19 PM
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