Signs of the Times:
"Take Federal
bailout money, watch your company's stock fall 90%, become a Co-Chair of
Davos"
~ Bloomberg, January 20
The headline was referring to
Citigroup CEO Vikram Pandit.
"Junk-bond
trading volumes are rebounding to the highest levels in 11 months -
optimism."
~ Bloomberg, January 27
"Societe General SA and Credit Agricole
SA were among French banks to have their credit grades cut by Standard & Poors."
~ Bloomberg, January 24
"The IMF cut
its forecast for the global economy as Europe slips into recession."
~ Bloomberg, January 24
Stock Markets
The best January for the stock
markets in years has restored their popularity. Bullish comments include low
P/Es and attractive dividend yields as well as favourable comparisons to bond yields. Not to overlook
outstanding earnings gains.
In our dispassionate approach this is
considerably different to conditions in early October. Choppy action, but
rising until around January was possible and couple of weeks ago we thought
it could continue into February.
The February 24th ChartWorks
"Complacency Abounds Oh-Oh!" outlined the probability of a top
within the next four weeks.
The surge out of mid-December has
been exciting enough to register some cautionary alerts and last week we were
looking for some "key" technical excesses. The S&P has since
reached 73.3 on the daily RSI and this compares to 70 reached with the high
of 1370 at the end of April. That was on the speculative surge that out
proprietary Forecaster expected to complete in that fateful April.
Stock markets are poised to roll
over. If so, the latest rally is a test of the April high which we considered
the cyclical best of the first bull market out of
the crash.
Credit Markets
The demand for risk continues with favourable action in corporate and municipal bond
markets. Yields for the Italian ten-year keep going lower and after
registering scary headlines last week even the Portuguese bonds are declining
in yield.
Sub-prime mortgage bonds have rallied
in price from 38 in October to 51.6 - that's up a little more than half a
point from last week.
Money market stuff such as the
Ted-Spread started to narrow at the end of December.
To Ross's "Complacency
Abounds" in stock market volatility we would add that it is abounding in
the credit markets as well.
Fortunately, we may have an exit
indicator.
The action in municipals (MUB) has
been good enough to register an Upside Exhaustion. The price could roll over
within a couple of weeks and the change could be part of a general reversal
in risk products. This will likely show up in the reversal in the stock
market VIX.
Long-dated treasuries are working on
a big top. Within this the final rally has been likely to occur as the
excitement in stocks and commodities fades.
This has taken the bond future from
the 140 level to the 145 level. The high was 146 in December.
Currencies
Ross targeted the decline in the US
dollar index to around 78.8 and so far it has bounced off this level a number
of times. With this, the Canadian made it up to 103 (briefly). It is now vulnerable
to a decline in commodities.
Bob Hoye
Institutional Advisors
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Copyright
© 2003-2008 Bob Hoye
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