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From The Trading Turret
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From: R.A. Christy
Editor, ‘From the
Trading Turret’
President/CEO, Christy
Investment Group
http://www.christyinvestments.com
Date: February 22, 2007
Current Field Position:
OFFENSE
Bullish Percent NYSE:
Xs @ 74
Bullish Percent OTC: Xs
@ 58
Bullish Percent Option:
Xs @ 78
This week’s
comment …
The equity markets
continue to creep higher with all of the major indices now trading at
new all-time highs or new reaction highs (NASDAQ). The strongest
characteristic of the market today is the trend. It is often said that
the trend is your friend, and currently the trend is higher. Even though
short side traders have tried to pull the market lower, the market has
remained resilient and has resisted every selling attempt. The strength
that the market has displayed has bullish longer-term implications,
especially given the favorable valuation backdrop.
Nonetheless, a
correction within a longer-term up trend is overdue, and the risks of
such a correction at present are visible. If the market does succumb to
a bout of weakness, I think the correction would serve to replant the
seeds of worry in the market that would set the stage for a buying
opportunity for stronger gains during the second half of the year. Of
course, time will tell.
From a technical
perspective the market is overbought and a loss of upside momentum is
evident in several technical indicators. For example, the percent of
issues in the S&P 500 that are currently trading above their respective
200-day moving average is at the highest level since March 2004. In
2004, this overbought measure marked the point in which a correction
began that lasted into the summer months. I view this as a short-term
negative but longer-term bullish condition, which is just another reason
why we think any correction would be just that, a correction within the
confines of a longer-term up trend.
In addition to the
technical overbought condition there are signs of complacency written
all over this market: (1) the volatility of the U.S. market, measured by
the CBOE Volatility Index (VIX), is near a record low; (2) the major
indices have now risen for over 900-days without at least a 10%
correction. The rubber band is currently stretched to the upside, and
usually the longer and more stretched it becomes, the sharper the
eventual correction; (3) the spread between junk bond yields and U.S.
Treasuries is near a record low. This means investors don't perceive
there to be much risk in lower quality debt. This kind of sentiment is
usually seen at major inflection points; and (4) investor sentiment is
overly optimistic as reported in the Ned Davis Research Crowd Sentiment
Poll.
All of these signals
point to caution.
Economy
Fed Chairman Bernanke
testified before Congress last week and indicated that the Federal
Reserve is for the most part content with current monetary policy. He
said "The data have supported the view that the current stance of
monetary policy is likely to foster sustainable economic growth and a
gradual ebbing of core inflation."
Bernanke told lawmakers
that the central bank's "predominant" concern is that inflation may not
ease. The Chairman went on to state "There are some indications that
inflation pressures are beginning to diminish." However, "The monthly
data are noisy and it will consequently be some time before we can be
confident that underlying inflation is moderating as anticipated." As
such, it appears that the Fed is on hold for the foreseeable future. The
Chairman attributed the slowing of the economy in part to the
"substantial cooling in the housing market." The Fed does see signs of
stabilization in the housing market and said the housing downturn
appears to be contained and has not "spilled over to any significant
extent to other sectors of the economy." The consensus forecast from the
Fed is for growth to moderate this year and next. The Fed expects GDP
growth of 2.50%-3.00% for 2007 and 2.75%-3.00% for 2008. The Fed also
expects the core PCE rate, their preferred inflation measure, to ease
from 2.0%-2.25% this year to 1.75%-2.00% in 2008.
Economic reports
released last week after the Chairman's testimony support his assertion
that inflation is easing, but they also highlighted the risks to the
economy from the housing market. The producer price index dropped a
sharper than expected 0.6% in January, led by declining prices of energy
related products. Crude energy prices fell by 16.2% with gasoline prices
falling 13%. These are likely to exert an upward pressure on producer
prices in February's report as crude oil has rebounded to over
$60/barrel.
Meanwhile, consumer
prices rose a bit more than expected in January. The consumer price
index increased 0.2%, and the core rate, which excludes food and energy,
rose 0.3%. The mixed message between these inflations measures supports
Bernanke's assertion that it will be some time before the Fed is
confident that inflation pressures have eased.
The housing market had
a setback in January as housing starts plunged 14.3%, the biggest
decline in nearly 10-years, with housing starts hitting a new low for
this cycle. In past updates, I have stated that the housing slump is one
threat that the economy faces this year. As can be seen from the chart
above, a sharp decline in housing starts preceded 9 of the past 10
economic recessions. To help put the current housing downturn in
perspective, past housing downturns home starts have fallen by an
average of about 52% over two years. In this downturn, housing starts
have fallen by 38% in one year. So the risk is that housing has more
contraction ahead. The sharp decline is in stark contrast to the
expectations that housing has stabilized. The silver lining to the
report may be that some of the decline could be weather related due to
the heavy snow and cold temperatures that occurred during this
timeframe.
That’s about it. Have a
great week!!
RA Christy
P.S. Please fee free to forward this to your peers, friends and
associates you think would benefit from its contents. They will thank
you for it - and so will I!
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R.A. Christy is a
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