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BOTTOM LINE: Overall, last week's market performance was very bullish. The advance/decline line rose, almost every sector gained and volume was above average on the week. Measures of investor anxiety were mostly higher, which is a big positive considering recent gains. The AAII % Bulls rose to 46.55%, but is still only around average levels. The average 30-year mortgage rate fell to 6.34% which is 113 basis points above all-time lows set in June 2003. The benchmark 10-year T-note yield fell 9 basis points on the week as measures of inflation showed meaningful deceleration. I continue to expect inflation concerns to decline through year-end as economic growth slows to average levels, unit labor costs remain subdued and commodity prices weaken further.
Unleaded Gasoline futures rebounded for the week, but are still 36.4% below September highs even as refinery utilization remains below normal as a result of the hurricanes last year, 23.2% of Gulf of Mexico oil production remains shut-in and fears over Iranian/Nigerian production disruptions persist. Natural gas inventories fell less than expected again this week. Supplies are now 60.1% above the 5-year average, near an all-time record high for this time of year, even as 14.0% of daily Gulf of Mexico production remains shut-in. Natural gas prices have plunged 55.1% in 13 weeks.
OPEC said this week that global oil demand will average 84.5 million barrels/day for the remainder of the year. The most recent data from Energy Intelligence shows global oil supplies at 85.6 millions barrels/day. Since Dec. 2003, global oil supplies have risen 13.1% while demand has risen 5.0%. U.S. oil inventories are now close to 7-year highs. I continue to believe oil is priced above $60/bbl. on fear, not fundamentals. Demand for oil can and will fall, even with healthy economic growth, as we saw in the U.S. last year. As the fear premium in oil dissipates back to more reasonable levels, crude should continue heading meaningfully lower over the intermediate-term.
Gold rose for the week as a decline in the US dollar, mostly positive economic data and higher energy prices offset decelerating inflation readings. The US dollar fell as speculation increased that the Fed will pause sooner than anticipated as a result of lower inflation readings.
Homebuilding stocks outperformed substantially for the week as long-term interest rates fell, takeover speculation increassed and housing data beat estimates. The average US stock, as measured by the Value Line Geometric Index(VGY), is now up a strong 7.2% so far this year. Moreover, the Russell 2000 Index is up 11.1% year-to-date. The ECRI Weekly Leading Index fell again slightly and is still forecasting healthy, but decelerating, US economic activity.
*5-day % Change
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