NOLTE NOTES
Expect Volatility with the Fireworks
by Paul J. Nolte, CFA
June 30, 2009

The daily market drama continued this week, but ended with merely a whimper. The quarterly close seems to take on more emphasis this time as investors hope the green shoots of the past month or two don’t wither under the intense summer sun. This week will be loaded with juicy economic data, from home prices to manufacturing and the usually interesting employment report – all packed into four days, just so we can get three days off to celebrate our country’s birthday. The three-day holiday may create some volatility all by itself, as our markets will be the only one closed. The news cycle will continue around the world on Friday, even though we’ll be partying. Once we get done with this short week, it will be into the earnings fire. Corporate earnings season will begin and we should get an idea of whether companies are actually selling more stuff (sales increases) or whether they’re good at cutting expenses (earnings rise as sales decline). Watch the Wall-Street fireworks – they’re dangerous to financial health!

Many of our indicators are pointing to a correction or at least a pause in the market – which we are getting. As mentioned last week, the stock market has been marking time by trading sideways in a wide between 880 and 950. Last week, the SP500 touched 888 before rallying back up to roughly 920. This week’s economic releases should give traders more to chew on and could begin to demonstrate the “real” direction for stocks. One bullish feature of the market is comparing volume on advancing days to volume on declining days. From the end of February to early May the markets advanced on better volume than on declining days. While still true, there have also been bigger down days than the prior two-month stretch. Volatility measures have also fallen to levels that historically point to bullish market action. Unfortunately given the markets tendency to confound, we are going to wait for a clearer signal (a break of the trading range) before we get more aggressive in our investing positions.
 
The bond model has registered its third positive reading in four weeks, and the 10-year bond has fallen rather dramatically over that period of time from nearly 4% to 3.5%. The auctioning of treasury securities has gone pretty well over the past month with bid-to-cover ratios (an indication of buying interest) fairly high. If we look at the bond rally as some type of indication of economic or inflationary “poll”, the rally would indicate that the economy is weaker than expectations and inflation is not in the cards. If we were to believe the bond market, then stocks have it wrong expecting that these green shoots of recovery will turn into a lush lawn. It could be that investors are rethinking their expectations for robust economic growth, as it may not be visiting a neighborhood near you.

© 2009 Paul J. Nolte, CFA
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The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.

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Paul J. Nolte, CFA | Director Investments, Hinsdale Associates | 630-325-7100 | Email