Insights & Advice

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Stocks Climb But at a Lesser Pace

After the S&P 500 Index’s sharp 5% bounce, gains have been tougher to come by this week although the index still put together a 2% move higher. The bulls are loving that and expect even more upside in the coming week.

The fact that the markets consolidated for most of this week is a good short-term sign. It helps work off what is called an ‘overbought’ condition, which is when the markets move up too far, too fast. This consolidation has taken place in the face of some not so good news. BP, which dominated the news and the markets for most of the week, ended up $20 billion poorer by agreeing to a compensation fund for victims of the oil spill. The company canceled their dividend for three quarters to help pay for this relief fund. That dividend cut will hurt investors worldwide, since BP is an income stock that many buy specifically for the dividend.

Like GE in this country, Britain’s largest energy company is owned by hundreds of thousands of retirees who depend upon that dividend payment to make ends meet in retirement. Yet, BP’s stock and other drilling stocks rallied at the news since investors felt that at least some of the uncertainty has been removed from that sector. I don’t agree.

Given that 1) oil is still spilling into the gulf and 2) nothing BP has done has stopped the flow to date, I see no way to calculate the ultimate damage and thus the future liability is open-ended. I see the downside but little upside, even though the stock has come down in price substantially. Once the leak has been plugged, there may be a case for buying BP, but that time is still a long way off. I would urge investors not to bottom fish right now.

In other less than encouraging news, the banks are preparing new fees to charge since regulations are now preventing them from gouging us for every over draft we make. Fannie Mae and Freddie Mac, the government-owned mortgage giants, lost half their remaining value this week as it was announced that their stocks would be de-listed, and housing starts appear to be falling, while industrial production is booming. And if that doesn’t confuse you, take a look at gold.

The precious metal hit another new high, now $10/ounce above my target of $1,250. That’s happening despite the lack of even a hint of inflation, the decline of most other commodities, and the relative strength of the “doomed” euro. The euro this week rose to about 123 to the dollar versus 118 a week ago, as Europe’s central banks intervened in the currency markets. That’s a big move in a currency.

But it is clear from the price of gold that investors are not buying the all clear signal generated by the moves in the euro and equity markets. It has also come to my attention that two death crosses have occurred this week, one in the MSCI world index and another in the Brazil Bovespa Stock Index. A third is forming right now on the emerging markets index.

“What is a death cross?” one worried investor asked at last week’s Southern Chamber of Commerce’s event in Great Barrington.

“It is when the index’s 50 day moving average crosses below its 200 day moving average.”

Now don’t go out and sell everything international just yet. The death cross is only one of a number of technical signals. However, it should at least provide a cautionary yellow flag to you. It is not bullish and should be considered a neutral to bearish indicator. It is somewhat worrisome over the medium term since Brazil; and China have been two bright spots on the world economy for some time. China also looks less than healthy and would be a market I would continue to avoid. The emerging markets index is just three points away from its own death cross. If it does cross under the 200 DMA, it would simply add weight to my argument that investors should treat this present rally with caution and suspicion.

It looks like markets may have some further upside left in this bounce. I would not be surprised to see the S&P 500 leg up to 1,130-1,140 before stalling. But this rally has been on weak volume, with the big institutions profiting the most and just a few stocks such as Apple and sectors like gold and energy carrying the weight of the move higher. I will change my mind if I begin to see expanding volume, a broadening out of market participation and a reversal of retail selling, but I’m not holding my breath.

Posted in A Few Dollars More, At the Market