Market update for week of November 16th

Evan R. Guido Financial Advisor

The equity markets marched higher last week supported by the premise the Fed will keep interest rates low, the economy will continue to improve and the November and December time frame will again prove friendly for stocks.

The stock market also benefited from renewed weakness in the dollar as investors poured into large-cap stocks that enjoy a huge edge over small caps as the weak currency works in favor of global exporters. The result was new 2009 highs in the Dow Industrial, S&P 500 and NASDAQ 100 indices.

Failing to make new highs last week include the Russell 2000 Index and the broad market as measured by the NYSE Advance/Decline line. Although the path of least resistance remains to the upside, it is important that the divergences do not persist as they can often be a leading indicator of technical problems three and six months out.

The investor sentiment indicators are mixed and rated neutral overall. The latest survey from the American Association of Individual Investors (AAII) shows a rise in bulls to 38% from 22% the previous week. The outright bears fell to 38% from 56%. The CBOE options statistics are mixed.

The CBOE 10-day put/call ratio dropped to 92% from 97% the previous week but considering stocks have rallied the past two weeks this number is unusually high (75% is considered bearish and 95% bullish). The CBOE equity put/call ratio slipped to 57% from 66% the previous week (56% is considered bearish and 68% bullish).

The CBOE Volatility Index fell to 23 from 24 the previous week and is considered neutral (21 is considered bearish and 30 bullish). The most recent report from Investors Intelligence, which tracks the recommendations of Wall Street letter writers, shows a drop in bulls to 44.4% from 48.3% and a rise in bears to 26.7% from 24.7%. The latest data on mutual fund cash shows fund managers are holding only 3.6% cash, one of the lowest readings in history.

The most significant economic reports last week were news that the trade deficit widened in September and consumer sentiment declined for the fourth time in five months. The trade deficit was a surprise given that despite the weak dollar the deficit widened with most of our major trading partners. The trade figures are expected to reduce third quarter GDP by 50 basis points.

The plunge in consumer confidence is directly tied to the weak labor market. The fact is that job creation the past 10 years is negative for the first time in more than 50 years and that most of the gains this decade have been related to the abuse of credit from 2003 to 2007. The most important economic data to be released this week includes retail sales, inflation and the leading indicators for October and all should be friendly to the equity markets. Retail sales are expected to show year-over-year gains but last year’s numbers were very weak and therefore easy to beat.

The Producer Price Index (PPI) and the Consumer Price Index (CPI) are expected to show prices rose 0.6% and 0.2%, respectively. The Leading Indicators are expected to have risen for the seventh consecutive month. The bond market could be tested this week with the economy gaining strength and the dollar under attack, yields will be under pressure to rise. Nevertheless, we expect the yield on the benchmark 10-year Treasury note to vacillate between 3.25% and 3.75% into year-end.