The Nvest Market Blog, our current thoughts on the Street

Markets Tread Water on Light Volume

posted 05.26.2009 at 09:28 a.m. by steve

Despite a sizable boost last Monday, the major US stock indexes finished roughly flat for the week ended May 22 on light trading volume. The NASDAQ managed to claim the biggest advance at +0.71%, while the S&P 500 gained an even more muted +0.46% and the Dow floated +0.10% higher. While the rally that began in early March has lost its steam in recent weeks, 880 on the S&P continues to be defended by the bulls and remains a key level of market support. Meanwhile, institutional investor surveys suggest that the smart money, despite remaining somewhat skeptical of the spring rally possibly being the start of a new bull market, is being forced to get incrementally more invested and participate on this advance. All this cash on the sidelines suggests that key support levels will have more staying power. Despite having enjoyed a nice recovery of value in the recent months, we too feel great pressure (self imposed) to work client portfolios back toward their objective stock allocation.

Still, we see some near-term risks that threaten to put pressure on the recent rally. Notable is the weaker than expected retail sales (consumer spending accounts for over two-thirds of GDP in the US) and the ever-problematic jobs market and teetering unemployment situation (fallout from the automakers current ails could have a negative ripple effect on employment and housing). And, commodity prices have risen sharply in recent weeks (think gasoline prices over the weekend) despite the fact that there has been no data suggesting a pickup in demand has even started to occur yet. Still, while much of that sounds bad, we are approaching some months and quarters which should offer some very easy comparisons when looking at the economy compared to a year ago. Compared against the extremely weak readings of year ago, the economy will look like it is again growing. Albeit, this growth will be at a much reduced pace as we believe the process of deleveraging for the consumer is still in the very early innings of the game. Consumers are not as likely to spend like they have in the past decade.

This holiday-shortened week could be an interesting one to watch. Already, it is shaping up to be a bumpy ride as world markets attempt stave off the fear and uncertainty that always seems to come with rising international tension (North Korea test-fired two missiles a day after a nuclear test). Against the backdrop of still-weak economic news, this may be the concrete reason investors reference to go ahead and take profits after a strong advance.

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Spring Rally Faces Pressure as Green Shoots Fade

posted 05.18.2009 at 09:37 a.m. by steve

The major US stock indexes finished last week lower; the first such week in which all 3 major US indexes have retreated in the last 11 weeks. The S&P sank -4.99% while the NASDAQ and Dow dropped -3.38% and -3.57%, respectively as the green shoots story faced pressure. Recently, the market has shot higher on less-bad news, otherwise referred to as green shoots, have become ever more prominent. However, last week there were several noteworthy items which, in the words of influential economist and professor Nouriel Roubini, looked more like yellow weeds. Retail sales came in weaker than expected, and sent the market notably lower mid-week. Further pressuring the rosy tint of the news lately was the announcements by Chrysler and General Motors that they will begin cutting ties with some 25% of their US dealerships; a move that would surely provoke higher unemployment figures.

All said, the recent stock market rally since March 9 is increasingly showing signs that it may be stalling out. Near-term headwinds have picked up, including an uptick in gasoline prices (although still cheap compared to prices last year), a slowdown in home refinancing activity, and a tax refund season that is now behind us. It is possible that the recent increase in favorable news, especially as it was related to the health of the consumer, may have been distorted by consumer spending that was stimulated by big tax refunds (tax refunds were up roughly 17% this year over last). Still, while the market took its first stumble in over two months, we are looking to make incremental moves back into the market with idle cash. There are many economic indicators that are hinting that the end of the recession may be near (for instance product inventory levels are reaching very low levels, suggesting that businesses will need to begin producing again, and trucking surveys are showing that there has been an improvement in freight movement). One leading indicator, which has a nearly perfect record at predicting both the start and end of expansionary economic periods is the yield curve (when the yield curve is positive sloping it is a bullish indicator); it is now at a historically steep positive slope.

Bottom line, we believe that the current market is due for further correction after the significant spring rally. However, we will be looking to get incrementally more invested in client accounts on market weakness, as we believe that a recovery is probably not that far away, and that the bigger risk for investors remains missing the upside rather than further downside.

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Good Times Roll

posted 05.11.2009 at 6:12 p.m. by steve

The market made good on investor hopes for another positive week. The S&P 500 jumped +5.9% while the NASDAQ rose +2.2% and the Dow inched higher +1.2%. The relative outperformance by the S&P stemmed from its larger number of financial sector stocks, which rocketed higher by +23.0% on the week! It seems that the results from the government stress tests of the 19 largest US banks, indicating was viewed by investors as manageable (the government concluded that 9 of the banks did not need any new capital). In addition to the news of the banks, the markets also successfully shrugged off news that the unemployment rate in the US has now risen to 8.9% (although new job losses were announced at a slowing rate). It has now been 10 weeks and over +35% in gains on the S&P 500 since the current spring rally began on March 9, making it longer than an average bear market rally (typically 1-2 months in length and +19% in magnitude).

All that being said, it is clear that the general sentiment has become more favorable in the last two months. The market is rallying not on good news, but instead on news that is less-bad than the Armageddon scenarios that were previously priced in and feared. Still, while it seems that the worst is behind us, a majority of institutional investors do not believe this is the start of a new bull market. At the very least, it does appear that the market has rallied too far, too fast given that the economy still faces significant challenges (think how GM looks ever more likely to enter bankruptcy which could spawn an uptick in unemployment and again pressure housing prices and loans). A stock market pullback seems likely. From a technical perspective there are also signs that the current rally is losing steam. New bull markets are typically characterized by a change in sector leadership; not so in the current rally. The financial sector was the leader during the last five-year bull market. It is not likely that it would be the leader during the next bull, yet it has been the overwhelming leader since the March 9 low. Still, while there are plenty of reasons to remain skeptical that a new bull market might not be that far away, we are reminded the there is still oodles of cash sitting in money market funds earning almost nothing. Lots of money waiting to be invested is a good indication that the market should have some pretty meaningful support as investors seek to reacquire risk and begin recovering what has been lost over the last 18 months. We continue to watch this market closely, and are looking for opportunities to be reinvesting client monies on market pullbacks in the near future. We still believe that it is the amount of time in the market that makes an investor most successful.

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Stressful Tests - Results Due This Week

posted 05.04.2009 at 1:18 p.m. by steve

The market concluded the month of April as one of the best months in history, and marks the second consecutive month of gains. Such strings have been rare since the bear market began over 18 months ago in October 2007. The Dow, Nasdaq and S&P 500 melted higher by +1.7%, +1.5% and +1.3%, respectively last week; helping extend the April charge to +12.3% for the Nasdaq, +9.4% on the S&P 500, and +7.3% for the Dow. Since the cycle lows nearly two months ago on March 9, the Dow is over +25% higher, while the broader S&P has fared even better at +29.7%. It has been an impressive advance, indeed!

While the gains of the last 7 weeks have been a welcome relief for investors, the debate lingers on in the minds of nearly all as to whether this is the start of a new bull market, or just a head-fake rally within a bear market. Whatever the case may be, it does appear that the economy is beginning to turn the corner, at least from the perspective that its pace of deterioration appears to be slowing. Green shoots, as many are now calling them (the bits and bites of less-bad news and improving sentiment), seem to be appearing in more places. Further, the credit markets have shown notable improvement in the last several weeks as evidenced by lower credit spreads (indicative of more normal credit market function) and higher new corporate debt issuance. Still, with the encouraging improvement, worry remains concerning the bank stress test results. The findings were originally slated for public release today, but have been delayed to later this week. The delay raises some question as to why the delay (bad news, perhaps), and may further challenge the credibility of the results in the minds of some critics when the results do finally become available to the public.

That being said, we do continue to be encouraged by the green shoots becoming more evident in the news cycle. In the meantime, the market will be focused closely on the results of the bank stress tests later this week. So far today, the markets are starting the week notably higher; will it be another week of gains following results? Stay tuned.

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