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Financial Market Update

StrategicPoint of View®
February 27, 2012

The holiday shortened week here in the United States managed to produce some mildly positive gains for equities. This past week the S&P 500  closed at its highest level since June 2008, a few months before the Lehman Brothers collapse. The DJIA  pierced through 13,000 momentarily, while the NASDAQ managed to close at its highest level since mid-December 2000!

Two major reports on the housing sector were released this past week, and both continue to show signs of improvement. Existing home sales demonstrated a gain of 4.3% in January to an annual rate of 4.57 Million. This is a far cry from the September 2005 high of 7.25 Million, but it is moving in the right direction. Locally, the Rhode Island Association of Realtors released their own data for the state, and it showed a jump in sales of over 16%. A large number of distressed homes did drive down the median price almost 13%, but in order for a recovery to take place this inventory should be moved. Nationwide inventory continues to dwindle to a total of just 6.1 months of supply at the January sales rate. That number does not take into account the amount of shadow inventory sitting on bank balance sheets.  

New home sales data issued on Friday wasn’t as positive as other signs from the housing sector, but again the trend is moving in the right direction. After a sharply higher reading in December, January’s reading of 321k annualized did represent a dip. However, this report is commonly revised and with the strength in sales in the South, which is the largest region in the US, producing a jump of 9.3%, it wouldn’t be surprising to see this number revised higher next month.  Analysts are often reminded of the late 1960’s hit from Nancy Sinatra when digesting housing sector data. The title of her hit was “I’ve been down so long, it looks like up to me.”

Finally, the market saw continued strength in the consumer sentiment report released on Friday. The index came in at 75.3, far above consensus, and strong enough that next month’s reading is expected to run at levels not seen since the recession started. This report compiled by the University of Michigan polls 500 American households on their personal financial conditions and their attitudes towards the overall economy. In the face of a laundry list of economic issues, the latest being rising oil prices, it’s an encouraging sign that many Americans continue to see better times ahead.   

S&P 500: 1365 (up 0.33% for the week and up 8.6% on the year)
NASDAQ: 2964 (up 0.40% for the week and up 13.77% on the year)
Dow: 12983 (up 0.26% for the week and up 6.26% on the year)
US Treasury 10 yr: 1.98% (from 2.01% last week)
Crude Oil (March): $104.04 (from $98.98 last week)
Gold (April): $1,776 (from $1,725 last week)  
USD/Euro: $1.3448 (from $1.3142 last week)

The markets will continue to monitor the recent spike in oil prices this week. AAA’s average price at the pump is currently running at $3.67 and with this past week’s increase of almost six dollars for a barrel of oil, gas prices most surely will be headed higher.

Elsewhere, markets will digest a plethora of reports from a variety of sources. These reports include: Pending Home Sales, Consumer Confidence, Durable Good Orders, GDP, Jobless Claims, Personal Income and Outlays and finally the ISM Manufacturing index. This last report, issued Thursday, will be especially interesting as the manufacturing sector has shown increased activity in many regional parts of the United States. The last Richmond, Virginia report showed significant acceleration in all the major categories. If the regional activity is a precursor to the national report, Thursday’s release could far exceed current expectations.

Would you rather take the stairs or the elevator?

How many times have we asked a companion in the mall, a hotel or a high rise that simple question? Generally the answer is tied to how quickly one wants to reach the destination. Occasionally it depends on the mood one is in, or perhaps we would like a little exercise. The stock market has its own mood as well as its own desire to arrive at a certain destination by a certain time frame. This is why there is an old Wall Street axiom:

“Bull markets take the stairs and bear markets take the elevator.”

From a psychological standpoint, that sort of market volatility makes complete sense. Some event occurs that is not priced into current market conditions and it causes selling. If it is a true bear market then selling begets more selling, as investor’s confidence starts to wane. Usually the news media begins to pick up on the story and the drop in equity prices seems to give the story credence. Finally true panic sets in and the market experiences a major sell off. The amount of time that it takes for the wave of anxiety to overcome the market is usually quite short, thus the elevator has taken the market down in price quite rapidly.

Last summer the S&P 500 experienced a 17% sell off in just 10 short trading days. During that time the culprit was a myriad of data. The European Debt Crisis had more questions than answers, the economic data from the US seemed to be wobbling towards contraction and the debt ceiling debate was in full swing. In just 10 trading days, the market had given back all of 2011’s gains, and had eaten into one half of 2010’s. The discussion of how and why these sell offs are so pronounced has been blamed on high frequency trading as well as the rapid transfer of information, rumors or otherwise, that causes immediate reaction by traders. However, at the core of the selling is a lack of confidence in the future. Prices paid the day before now seem excessive as well as the thought of taking any risk. This is not a new phenomenon, however; panic selling has been around since the beginning of time. Perhaps now it just gets more coverage.

Conversely, markets tend to grind higher, not sprint. Bull markets slowly build a foundation of time and price that slows the panic selling. Traditionally the event that caused the panic selling has yet to find a solution, but the outright fear has subsided. As investors and analysts start to price in the effects of the event, they begin to realize that perhaps they swung the pendulum too far in comparison to reality. However, unlike the elevator down, this rally occurs over a much longer time period. Some investors still fear a further pullback or perhaps lack confidence in the solutions put forth. They shrug off any positive data as a one time event and not the start of a new trend. On and on this pattern continues until the market has fully recovered from the original sell off.

This is the point at which the market now finds itself. The S&P 500, since the major decline of last summer, is essentially flat. The “debt ceiling debate” sell off has been fully recovered. However, it took seven months for the market to regain all the losses that occurred in ten trading days. Unfortunately, trading volume has been quite low this whole time, and many continue to point to that fact as confirmation of a lack of confidence. We may not know for some time if that lack of conviction is proof of an untrustworthy rally, or maybe it’s just that this traveler took a lot longer to get up those stairs than his companion really had hoped.

*Past performance is not indicative of future results. Indices are unmanaged and you cannot directly invest in them. The Nasdaq Composite Index measures all NASDAQ U.S. and non-U.S. based common stocks listed on the Nasdaq Stock Market. The S&P 500 index is based on the average performance of 500 industrial stocks monitored by Standard and Poor’s. The data referred to above was taken from sources believed to be reliable. StrategicPoint Investment Advisors has not verified such data and no representation or warranty, expressed or implied, is made by StrategicPoint Investment Advisors.

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