September 12th, 2005

My apologies to all for not having

My apologies to all for not having written more frequently but Katrina and its wake last week is a new element to be factored into any view about the market’s future direction. The personal losses it caused was unbearable to look at but, having said that, it’s not clear whether her devastation is cause to be bearish or bullish.

Logically, the Federal deficit, recently on the mend due to a stronger economy, will take a significant hit. Scarce resources like energy, building materials, labor and equipment will be stretched further and add to what the case for seeing inflationary forces. The net result is that the excellent prospects for an end to Fed tightening will likely be delayed.

Regardless of these bearish pressures, some market experts still see a underlying strength, at least in select industry sectors. For example, Barrons in a recent front page headline called for a 10% market rise to the end of the year.

This week, however, the market has been unable to breach the recent past highs. For example, the DJ30 has stalled at the 10710 range:

….. and the SP500 balked at 1245.

While the indices are apparently attempting to build some momentum and push to new highs, the true health of the market was underscored by Gary Kaltbaum in his radio show this week. He said that if energy stocks were excluded from the SP500, that index would show a 10% decline year-to-date rather than its 1.3% increase. If you weren’t heavily in oil and gas stocks this year (at least in proportions equal to their weight in the S&P), your portfolio probably shows a decline year-to-date.

So the market is being buffeted by a variety of forces this week:

  1. Kristina is pointing to a reversal of the favorable recent trend in the Federal budget with significantly larger deficits looming on the horizon and next Tuesday, September 20 is the next Fed meeting.
  2. Consumer confidence and retail sales seem to be eroding due, most analysts say, to the high gasoline, heating oil and gas prices.
  3. Tomorrow, Friday September 16, is triple witching in the options markets as stocks with high option positions are squared up causing significant price fluctuations.
  4. The $US dollar has recently been losing value as foreign investors see difficulties in the US economy.

And, finally, gold stocks, after being out of favor for a very long time, recently starting to lunge ahead as exemplified by the gold ETF (GLD):

Fortunately, I had been keeping an eye on gold after reading The Contrarian Investor who has been saying that gold and oil prices are directly correlative and has been predicting a dramatic run-up in gold and gold stock prices. That move may be beginning. Seeing that many gold stocks were among those that are bumping against resistance levels these should be added to watchlists or in stock or call positions. At the moment, it’s unclear what that means for stocks in other sectors.

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