Yes, but . . .

January 25, 2005 11:51am by

I have to take issue with some of the economics I see discussed around town lately:

Seasonality was preempted by an overextended
Q4 rally; It has not been a positve lately;

Mutual fund inflows have been nonexistent; Institutional buying has been similarly missing;

Good earnings? Yes, but they are rather misleading — the
15% SPX earnings gains are disproportionately due to energy firms — back out
their gains and the S&P500 gained 10% — while respectable, its hardly
a house-o-fire, and represents a continued decrease in earnings momentum;

Non-existent inflation Um, how can I phrase
this — Wrong! Inflation is by any measure rising — commodities are in
the midst of a 2 year rally; And producers are being squeezed — they have been having a hard time raising their prices;

Lower long-term rates: The fact the long term
rates have been stable while the Fed tightens only tightens the yield curve —
and that is hardly a good thing.

Coda: I don’t think these are the reasons the market
hasn’t gone higher — I believe these are the future explanations why the lift
of the lows in late January/early February will top out (my guess? Late in Q2)
before heading South.

But that’s the longer term view — off of the levels I have been
discussing, there is likely a bounce acomin’ . . .

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  1. Lee commented on Jan 25

    As an FYI, Jason Roney on Minyanville just posted an interesting corollary to today’s action. He shows that SPX and Bonds have moved to opposite extremes (SP futures four consecutive lower closes with the most recent being a 30-day low while bond futures post four consecutive higher closes with the most recent a 30-day high.)

    This has only happened twice before. Once was one day prior to the 9/98 low and the second was one day prior to the 7/02 low.

    All well and good. The problem: each time a furious 3+ week rally commenced, followed by a multi-week downturn that made marginal new lows below 9/98 and 7/02. After that, it was off to the races.

    If this corollary holds, we could see the rally (beginning today?) stall in mid-Feb, followed by serious weakness into mid-March. Once the second low is in, it would be safe to buy (if corollary is applicable.) Food for thought anyway.

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