Market Commentary

In my view nothing much went on in the various US markets yesterday.
March 10, 2010

In my view nothing much went on in the various US markets yesterday.  It appears all are awaiting next week’s FOMC meeting given the dearth of top tier data releases.  Perhaps one possible area of interest was the strong bidding for the record $40 billion issuance of three year treasuries.  Was/is this a function of the massive cash balances held at financial and non financial institutions alike?  Probably.

The S & P is now about 1% below its 15 month high of 1,150 reached on January 19 retracing the approximate 8.5% 3 week decline following the commencement of fourth quarter earnings season.  As widely noted, fourth quarter profits broke a record nine consecutive quarters of declines rebounding about 75%, exceeding expectations by a relatively wide margin.  As noted I believed this decline was a classic example of “buy on rumor and sell on fact.”

Why the month long advance, an advance that some believe lack a catalyst?  Latest investor sentiment—a contra indicator--is bearish as measured by the American Association of Individual Investors Sentiment survey.  The current survey states bulls outnumber bears by 1.37 times, far from a reading of 2 that would trigger a sell signal.  It is because of this negativism is why I believe equities have advanced. 

What I think is interesting as per Bloomberg total volume for the week ended March 5, rising volume for stocks on the NYSE exceeded that of falling stocks by 13 times, the greatest difference since the week ending November 9.   Incidentally it is around this time the S & P began its rally that boosted the averages to a 15 month high.  Moreover investor sentiment then was around the same levels as today.

Will this rally continue?  Earlier in the year I wrote the markets could rally about 5%, then post a 8%-10% post fourth quarter earnings decline predicated upon monetary policy fears, but ending the year higher around 10%-12% as all become convinced the recovery is indeed a bona fide.

I got the decline right, timing and catalyst wrong.

As noted above, the Federal Open Market Committee (FOMC) meets next week.  No change is expected but all are awaiting further information on how the Central Bank will end its great experimentation with quantitative easing (QE).  At this juncture the markets have fully discounted a change in monetary policy by November.  Will this perception change?

If the post meeting remarks are interpreted that the ending of QE will not occur in the intermediate future, I think equities will continue to advance.  On the other hand, if the inverse is perceived I think stocks will again experience some rough sledding.

However I do interpret the inevitable change in monetary policy as bullish as this would be the clearest sign that the worst is over.  During the two prior tightening campaigns of 1992 and 2003 stocks staged handsome advances.

What will occur today?  Little is on the economic or corporate calendar hence suggesting the markets will trade upon geopolitical headlines.

Last night the foreign markets were up. London was up 0.12%, Paris up 0.39% and Frankfurt up 0.27%.  Japan was down 0.04% and Hang Sang flat.

The Dow should open quiet.  The 10-year is off 5/32 to yield 3.72%.