Tuesday, August 18, 2009

Monday Night Market Comments

Reader "OG" led me to review the performance of the stock market after the Weekly Index Growth Rate of the Economic Cycle Research Institute hit a post-recession or near-end recession recovery high. As noted in EBR's recent post titled ECRI Pounds the Table So Hard It May Break, strong growth is projected by this very good forecasting outfit, though with the caveat that this will not be apparent to casual observers until next year.

Looking at other periods where the growth rate of its forward-looking index has moved to a peak after being negative at the onset of and during recession, the stock market had reached important interim peaks in 1976, 1983 and 2002. Only in 1992 did the index's growth rate forecast a stable stock market for a few months but no important better buying opportunity.

In another vein, market observers know that the 2002 -3 S&P 500 bottom was around 800 and the recent top was around 1000. If the market has made an interim top by now, it's quite a coincidence that support at 800 in the beginning of the decade is now resistance, adjusted for about 25% inflation.

If the market has topped for now, this will be the best-advertised trend change since the March bottom.

At least for now, the strong dollar/strong Treasury bond play is working. For sure, that's a minority paradigm, which is why it's worth watching. A deflationary "boom" may be underway: this could be good for T-bonds and not so good for the average stock. Certainly Monday's stock action was consistent with a trend change: NASDAQ down more than the Dow, low-dividend stocks such as JPM and GS down more than utilities, and stocks such as Wal-Mart breaking through 50 and 200 day moving averages, following the pattern set by insurers such as RE and CB; possible to be followed by bond proxies such as TLT and IEI.

Certain stocks such as XOM and NOK have completely broken down; GE is less than a point away from breaking through its 50 and 200 day ma on the downside; and GTU, a gold bullion play, has also broken down.
GTU is of real interest in that it tracks bullion but swings from variable premium pricing to, occasionally, discounts. GLD is more liquid, but GTU incorporates the psychology and therefore offers buyers of the stock a double-barreled way to win by buying at a low gold price and at a discount to NAV.

Interesting times and for the nonce calmer than 11 months ago. But the first Atlantic hurricane of the season has been named . . .

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