Stock Market Spring Rally Ahead of Summer Lows Retest

By: Paul_J_Nolte

As we race toward the close of another (negative) quarter, spirits are getting a lift from the fact that Spring has sprung and the markets have put on a rally, making March statements (for now) look a bit brighter than many of the past six months. The focus of Wall Street is not on the economy, but the circus that is Washington. (Warning: political comment!) It is funny to see Congress chastise executives for paying bonuses then turn around and ask for political contributions from the same group – hypocrisy at its best!

The belief seems to be that the economy is getting better (or at least less worse!), however with the jump in housing starts (do we need more housing?) and a bit higher inflation than expected, we don't believe the economy or the markets are out of the woods just yet. With the announcement from the Fed that they will be buying $1 trillion in treasuries, it makes it perfectly clear the Fed is willing to do anything to get the economy going – even if the results down the road are just as bleak as today's economy.

The strong rally early last week made it possible for the markets to but in their best back-to-back weeks in over two years. However, as we mentioned last week, we are interested in our indicators surpassing recent peaks and not falling below the recent lows (higher highs, higher lows). This sets up for a positive trend in the market and breaks the long series of stair step declines that we have seen for over a year. So far no prior peaks have been surpassed. If we look at the November to January rally, the net number of gaining stocks vs. declining fell well short of the August peak. If we assume the rally takes six weeks to run its course, then “retest” the lows, it could be May or June before we are able to say with any certainty that the bottom is “in”.

Even the cumulative net volume numbers we usually look at, while strong during the rally, have not gotten above their January highs. Were still from Missouri – and so far the markets have yet to show this rally to be “for real”. As such, we are going to treat it as a rally inside a bear market and will expect the averages to revisit their lows over the next couple of months. At that time we may get more excited about stocks, but for now we remain cautious about the short-term.

The bond market got a huge shot in the arm when the Fed announced they were buying treasury securities. The rally that ensued would have been like a 500-point rally in stocks – one the bond market has not seen since the crash in '87. Interestingly commodity prices also shot higher as expectations rose for inflationary pressures to build due to the flood of money entering the economy.

Our bond model, on the commodity strength, flipped negative for bonds last week. We don't believe inflation is just around the corner, as spare capacity exists in abundance in many industries. Employees are happy to have a job and are not in a position to demand higher wages (very inflationary). So while inflation may be a problem down the road, it is not yet something we are ready to embrace today.

By Paul J. Nolte CFA
http://www.hinsdaleassociates.com
mailto:pnolte@hinsdaleassociates.com

Copyright © 2009 Paul J. Nolte - All Rights Reserved.
Paul J Nolte is Director of Investments at Hinsdale Associates of Hinsdale. His qualifications include : Chartered Financial Analyst (CFA) , and a Member Investment Analyst Society of Chicago.

Disclaimer - 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.

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