Another holiday shortened week and another week of lousy economics news. Consumer confidence hit a record low and home prices continued to fall. Jobless claims fell but probably due to weird seasonal adjustments – not as much holiday hiring and therefore not as much post holiday firing. The ISM survey hit its lowest level since 1980 with new orders falling to a low not seen since 1948. Okay, we get it; the economy is lousy. That’s not news anymore and as the stock market demonstrated this week, what’s not news anymore doesn’t affect investors all that much.
Stocks on the week were up over 6% with the NASDAQ Composite leading the way with a devilish gain of 6.66%. The DJIA was up 6.1% and the S&P 500 was up 6.16%. Leading the way were resource stocks of various kinds. Oil was up big on the week as the latest confrontation between Israel and Hamas continued:
For now, this looks like nothing more than a rally in a downtrend, but it was enough to get the oil stocks moving:
iShares Energy ETF:
Until the downtrend in oil prices is broken more decisively, I suspect the basing pattern in the energy names will continue.
Interestingly, the dollar did not confirm the move in commodities:
US Dollar Index:
There is generally a negative correlation between the dollar and commodities so when this relationship isn’t evident, it would seem prudent to be wary. The rally in oil this week certainly had nothing to do with fundamentals as the oil curve remained in deep contango. The February 2009 contract settled at $46.34 while the February 2010 contract was $15 higher at $61.76. There is a lot of oil being stored right now to capture that spread so future supply would seem plentiful. The demand side doesn’t seem to be improving either. If this wasn’t driven by the dollar and it wasn’t driven by fundamentals, it seems unlikely that it would be the start of a trend.
As for the market as a whole, the S&P 500 seems to be following the script to a tee. The emerging consensus seems to be for the market to rally into the inauguration (and maybe even a little longer) and then for economic reality to set in when the Obama economic miracle fails to develop on schedule. I am always wary of the consensus so I don’t expect it to be that easy, but the alternative scenarios don’t seem all that likely. Could this be the start of a new bull market? Could the economy recover sooner than everyone expects? Could borrowing and spending be the answer to excessive borrowing and spending? Could the Miami Dolphins win the Super Bowl? I have serious doubts about all those things, but while I’m rooting for them all to be true, only time will tell. In the meantime, this is at least a bear market rally and I think it has a bit more to go:
Sentiment remains positive from a contrarian point of view. The Consensus Index and the AAII poll of individual investors show bull sentiment in the low to mid 20s. Meanwhile, the Market Vane report on the bond market shows the bulls at nearly 90%. A contrarian drools at such numbers but with the cover of Barron’s this week yelling “Get Out Now!” in reference to the Treasury market, it is hard to view the recent pullback in prices as anything other than a correction. Rarely are market tops or bottoms announced on the cover of national publications:
Until proven otherwise, this is just a correction in an ongoing bull market:
10 Year Treasury Note:
From a yield perspective, other parts of the bond market are much more appealing, but of course they bring risk along with the yield. Corporate, high yield and emerging market bonds have rallied over the last few weeks, but unless the economy is really at a bottom, there is probably another down leg to come.
I Shares Corporate Bond ETF:
The New Year is off to a good start, but 2009 is likely to be a year of fits and starts. The economic picture is far from clear and is unlikely to get that way in a short period of time. This recent rally may have more to go, but I don’t believe it is time yet to proclaim an All Clear. Better to err on the side of caution at this point, so if you don’t own stocks or the riskier types of bonds, it is probably better to stand aside at this point. I suspect you’ll get another chance to buy them at lower prices later in the year.
Disclosure: Alhambra Investment Management and/or its clients have positions in the S&P 500 (via various ETFs) and LQD (iShares Corporate Bond ETF).