Sense on Cents

In the process of reviewing price action across the entire spectrum of global equity, bond, and commodity markets, I am struck by one simple fact: virtually every market segment went up in value in July. That sort of price action in a challenged economy is uncommon, if not irrational.

Is this price action a sign of an incipient turn in the economy? Will we continue to rally? Are we going to have a V-shaped recovery? Come on back in, the water’s fine? What recession? Hardly.

I continually see the battle royale between the bulls and the bears in the markets. I truly believe we are entering into a new global economic norm and, as such, before we are able to thrive we need to survive. Thus, in  my opinion, while others may consider themselves bulls or bears in terms of the markets and economy, I would classify myself as an animal which wants to aggressively survey the landscape, strengthen my reserve, increase my store of value (savings), and judiciously put some small stakes (investments) to work knowing that there remain real risks on the horizon. For lack of a better term, call me a friendly fox.

Without further delay, let’s assess the July 2009 Market Review:

I have added a few indices to take a more comprehensive view of the markets. These indices include: DJ-Global ex U.S., an emerging market index (MSCI), a commodity index, and a U.S. dollar index. I hope readers find these helpful.

Let’s grade my calls from last month, at which point I wrote:

I repeat my May calls.
I had forecasted in the Sense on Cents May 2009 Market Review:

Add it all up and I think the following will occur:
– equity markets will now move sideways in range bound fashion;
– the bond market will move lower in price, higher in rates;
– the dollar will gradually decline;

– our economy will be filled with more stops than starts.

I would assess my calls as mixed overall. I certainly would not have forecasted the explosive move higher in the equity markets over the last three weeks. For those who forget, three weeks ago the markets appeared to be breaking down once again as the S&P 500 broke below the 880 level. Were the earnings reports so strong to justify a 12% rebound from that point? I don’t think so. Were there significant fundamental improvements in the economy? Hardly.

The simple fact is there is so much excess liquidity currently in the system looking to be put to work. This liquidity drove all equity markets, bond markets, and commodity markets higher. The U.S. Treasury market did not even sell off as one may have expected.

The risk for investors is that they get chased into the market feeling that they have missed the move. I always respect the markets, but whether I agree with them or not is a different conversation. Based on the current price action, I can foresee a move in the DJIA to the 9600 level. That said, I would not commit capital at these levels. Why 9600? From a technical standpoint, having taken out the 8650 level, the next resistance level is 9600 which represents a .382 retracement of the entire range on the DJIA (14,200 to 6800).

I do feel there is a significant disconnect between our underlying economic fundamentals and our market performance. As I wrote the other day, “Don’t Fight the Fed” and right now Uncle Sam’s liquidity spigot remains wide open.

At some point, we will be forced to clean up the overly saturated economic landscape but for now enjoy the positive returns in your funds if you have them.

Aside from that, continue to pare down expenses and increase savings as this storm is a long way from being over.

Comments, thoughts welcome!

LD

Please do not miss my radio show tomorrow evening: NoQuarter Radio’s Sense on Cents with Larry Doyle Interviews Joe Saluzzi Regarding High Frequency Trading. The show runs from 8-9pm.

For those interested, I also had other fabulous guests in July. All the shows are archived at my No Quarter Radio link. My guests included:

July 26th, Dr. Paulo Vieira da Cunha of Tandem Global Partners reviewing the emerging markets.

July 19th, Aaron Kramer discussing life in the trading pits of Chicago along with Aaron’s views on the markets and economy.

July 5th, Shawn Matthews, CEO of Cantor, Fitzgerald discussing developments on Wall Street, the economy, and the markets.

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Thanks for your support.

This entry was posted on Saturday, August 1st, 2009 at 12:20 PM and is filed under General, markets. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.