Wednesday, March 11, 2009

Wednesday Morning Market Commentary

Almost everyone wants the economy's and securities markets' pain to have ended with yesterday's explosive stock market rally, a "turnaround Tuesday" as suggested in yesterday morning's post.

For now, despite how extreme many sentiment, up-down ratios, distances from moving averages, etc. readings are, there is one lodestone that has kept yours truly in the bearish camp since July 2007, and that is the credit markets.  The credit markets have predicted the economy and with variable lags, the stock market.  Unfortunately, the trends in credit market reports today are reported as bad.

At Calculated Risk the title of last night's post, "More Credit Tightening", says enough.  It references Bloomberg and the WSJ, the former re Libor creeping upward and the latter re worries about the quality of the corporate debt of financial holding companies.

Similarly, Bloomberg today reports:

Credit Market Cracks

While stocks around the world staged their biggest one-day rally of the year yesterday after Citigroup Inc. said it was having its best quarter since 2007, credit markets weakened.

The extra yield investors demand to own U.S. corporate bonds instead of Treasuries rose to 8.09 percentage points, the most since December and up from the low this year of 7.03 percentage points on Feb. 11, according to Merrill Lynch & Co. index data.

Also, the McDonald's indicator shows that the stock not only has quasi-collapsed, but MCD failed to participate in yesterday's rally.  What one wants to see, as in the bottoming process in 1982 and 2002, are stocks with good relative strength that also show leadership on the rallies.

Similarly though lagging, gold (and its poor relation silver) continues to act "heavy".  While I believe that everyone who can afford it should physically own some gold, I suspect that there is substantial downside short-term risk in gold.  Intermediate- to long-term, the thinking here is different.

Re Treasuries, they continue to trade within the new, lower trading range established in the second half of last year, despite all the new supply.  Five-to-ten year T-notes could be interesting speculations for those willing to sell into price strength or hold till maturity. 

Getting back to stocks:  although my emotions push me to "put cash to work", be "bullish on America", and other such platitudinous stuff, my head says:  keep to the plan.  Stay with what is working.  From a market perspective, the Yamada big picture take of a structural bear market has been working (as discussed here recently).  From a fundamental standpoint, listening to the credit markets has been working.  Stocks may go anywhere, including sharply upwards, but without strength in the credit markets any rally will likely not be a moon shot.  

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