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BOTTOM LINE: Overall, last week's market performance was very positive. The advance/decline line rose, almost every sector gained and volume was above average on the week. Measures of investor anxiety were mostly lower. However, the AAII % Bulls fell again to 29.35%. This contrary indicator has declined 29.25 percentage points in eight weeks and is now approaching depressed levels, which is a huge positive considering most major averages are at 4 ½ year highs. The average 30-year mortgage rate fell to 6.21% which is only 100 basis points above all-time lows set in June 2003. Moreover, the benchmark 10-year T-note yield fell 2 basis points on the week after the Fed made less hawkish comments, economic data was mixed and measures of inflation decelerated.
Technology stocks outperformed on optimism over increased corporate spending, new consumer products and lower interest rates. Likewise, energy shares gained as oil rose on fund inflows and fears over Middle-east stability after the hospitalization of Ariel Sharon. Unleaded Gas futures bounced on the same catalysts, but are still almost 40% below September highs even as refinery utilization remains below normal as a result of the hurricanes. Natural gas supplies this week increased by the most during any week of January since record-keeping began in 1994 and are now 6.8% above the 5-year average for this time of year even as over 19% of daily Gulf of Mexico production remains shut-in. Natural gas prices have plunged almost 40% in 3 weeks. Gold rose on the week as the dollar declined and international diversification continued.
I still believe prices for many commodities are being driven by fear and record capital inflows into commodity funds, rather than fundamentals. I continue to expect global energy demand destruction, decelerating economic growth and a significant increase in supplies into 2006 to push energy prices substantially lower from current levels. US stocks have gotten off to one of the best starts to a new year in recent memory. I am expecting the S&P 500 to return around 15% for the year as long-term interest rates remain low, inflation decelerates, economic growth slows to averages rates, energy prices fall, the dollar remains stable, the job market remains healthy, housing slows to more sustainable levels, consumer/investor/corporate confidence improves, demand for US assets increases further and p/e multiples expand.
*5-day % Change
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