Saturday, August 07, 2004

Market Week in Review

S&P 500 1,063.97 -3.43%

Click here for the Weekly Wrap by

Bottom Line: The U.S. market's main problem in recent months has been a supply/demand issue. A sharp acceleration in the number of IPOs created too much supply ahead of a period of very high anxiety for investors. Fundamentals in most sectors have continued to improve. Thus, investors did not want to sell their stock, but didn't want to commit new capital ahead of possible terrorist acts and the U.S. election. This resulted in the slow deterioration in stock prices witnessed over the last few months. However, real sellers are finally starting to emerge as fundamentals have weakened slightly in some sectors and more so in others. This is very painful, but is actually a positive as it provides the necessary levels of investor angst to propel stocks sharply higher in the fourth quarter. The VIX, Put/Call, Arms and AAII % Bulls readings all showed significant increases in anxiety. Furthermore, natural gas, base metal and unleaded gas futures all declined last week. I continue to believe the CRB Index is on the verge of breaking down through its 200-day moving average, which bodes well for future readings of inflation. Finally, interest rates are plunging. The yield on the 10-year T-note has now declined almost 75 basis points from its recent high set just 2 months ago. With most commodity prices dropping, recent inflation readings decelerating and interest rates plunging, the mainstream press and the bears will likely find other negative issues besides inflation to harp on in the near future.

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