Saturday, May 14, 2005

Market Week in Review

S&P 500 1,154.05 -1.48%*

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BOTTOM LINE: Overall, last week's market performance was negative considering the mostly positive economic data, falling energy prices and declining long-term interest rates. The advance/decline fell, most sectors were lower and volume was average on the week. Tech stocks outperformed substantially as investors rotated out of commodity-related shares. Measures of investor anxiety were mostly higher on the week. The AAII % Bulls rose modestly, but is still at pessimistic levels, which is a positive. Investors are currently pricing in the possibility of a US hard landing and lower inflation. I see very little evidence of a hard landing and significant evidence that inflation has peaked for this cycle. Another leg lower has likely begun in energy prices and the contango in the futures market still exists. I continue to believe this situation, slowing demand, excess supply and a firmer US dollar, will result in a much larger decline in oil prices than almost anyone expects. The accelerated decline will likely occur when the contango begins to reverse itself. Many believe the Fed is targeting the housing market with it continuing "measured" rate hikes. However, each time the Fed hikes rates the odds of a US hard landing increase, which results in lower long-term interest rates and more investors leaving the stock market. Thus, Fed raises may be inadvertently adding fuel to the housing fire. I have to believe the Fed sees this. I suspect it is more likely the Fed has been targeting the CRB Index instead, which has been the main source of inflation fears. The recent breakdown in the CRB is unambiguously positive for future inflation readings. I continue to believe the Fed will hike rates at the June meeting and remove the "measured" language, paving the way for a pause in their rate of hikes. With recent developments, I am now more confident in my prediction of a strong second half for US stocks.

*5-day % Change

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