Thursday, March 30, 2006


The Markets: New Highs and Lows

I thought you might be interested to know that there are some strange goings on, relative to recent history, in the stock, bond, and metals markets.

I have been watching the Russell 2000 (R2000) index other than the Dow, S&P 500, and Nasdaq because it has been trending very well. A lesson I learned in the nineties is that sometimes lesser watched, but ironically broader, stock indices give a clearer image of the market's direction. An index called Valueline was very clear in 1990 that a new bull market was beginning because the low made by the Valueline was very near the low that index made in October 1987. A double bottom which should lead to a new high and that is exactly what happened. On that note, the R2000 has been trending higher between very clear channel trend (parallel) lines since October of last year. Right now we are at the peak of the channel. One thing I have noticed is a great deal of volatility in the Dow, etc. which is usually indicative of a trend change. Too early to call a top but things are getting interesting. I will wait to see if the R2000 breaks just above the channel line and then falls below, a very good sell signal.

The bond market is at muti-year lows in price (high in yield). While that might make all of you t-bill and note holders happy it is bad news for the housing market and, potentially, for the economy. Bonds are in a mood to go down and it makes for very dangerous trading and prognostication. I would expect that prices will find a floor soon or it could turn into a route. Scary stuff. This is what happened in 1987. Bonds kept falling and it eventually weighed on the stock market.

Which leaves the metals markets. Gold and silver are hitting new highs. Gold is within 10% of $600/ounce and silver is approaching $12. This makes sense if you consider that the Fed has been very easy with credit feeding inflation. It also should indicate that the Fed is not likely to stop raising the discount rate.

What is strange is the fact that the stock market is staying strong in this enviroment. The only thing that makes sense is that the Feds easy credit has been fueling inflation (lower bond prices, higher metals) and fueling the housing market which leaves enough cash to prop up the stock market. There is nothing written in stone that says all markets must turn at the same time so the stock market could hold up for awhile but that should not be much longer. With interest rates rising rapidly the stock market is in a precarious position. The big question is will happen first, bonds stop falling or will the stock market crash?


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