A Look At The Past Week And The Markets

This week, we saw consumer sentiment up by 4 points to 70.2. Consumer sentiment is supposed to be related to the strength of consumer buying, however, as my colleague stated in a prior post, indicators can be skewed and biased. The reality is that consumers are not spending, they are saving. They are still concerned about losing their jobs and if they are unemployed, they certainly are not spending, with less or little household disposable income available. Also, commodity prices have been rising - we have seen the dramatic increase in oil from its lows in the $30s during 2009 to over $70, with some predicting $85 by year-end. Import prices were reported to be up by 6% this week. Can inflation be rearing its ugly head in the near future, further eroding the spending power of the consumer and forcing the Fed to raise interest rates?

On another note, fundamentals do not support the rally we are experiencing in the equities markets. Sure, Q2 earnings beat expectations; however, they were based on lowered estimates and in many cases earnings improved because of bottom line cost cutting, not top line revenue growth.

The technical daily and weekly charts show that the S&P and Dow are currently over-bought, and are due for a pull back. I will cover technical analysis and charting in future posts and articles in detail. Volume is an important indicator to confirm a trend. For example, in the Dow, the weekly volume for the last five weeks has been substantially below its 50 week average of 1.5 billion, ranging between .5 billion to 1 billion per week. This shows a lack of conviction in the buying. Also, the weak dollar and the continuing propping up of the markets by the government are major factors contributing to the current lofty heights. These reasons alone could continue to propel the market upward, but it appears riskier to chase prices at these levels, as the rally is getting a bit long in the tooth and a correction is needed.

C. Cohn