December 21, 2010
Market Forecast: From the Editors of "Leeb's Aggressive Trader"
We're off to a slow start so far and it promises to be a sleepy week heading toward the Christmas holiday. Volume yesterday, for instance, was one of the lightest of the year on the NYSE. In the absence of any downward pressure, stocks largely managed to post positive returns. The creeping trend could well continue in the weeks ahead, but there is reason to be cautious.
Even more interesting than stocks have been the action in commodities – and by that we're talking across the board, whether it was energy or metals or agriculture. The Reuters CRB Index, a broad measure of commodities, is trading at a record high. The group is up 23 percent during the past six months, so we would caution you about being complacent about the 1 percent year-over-year rise in the Consumer Price Index. The pressure is mounting and we have the ingredients for runaway inflation to take hold at some point. We're not there yet, but the later half of 2011 could be interesting.
Long-term bond yields have backed up a full percentage point to nearly 4.5 percent since late August when Chairman Ben Benanke signaled the central bank would initiate a second round of quantitative easing was on the way. Since then the Fed has both stepped up its asset purchased and starting prepping the public for yet another round of quantitative easing once the current round runs its course.
It's hard to envision stocks and bond yields rising in tandem for long. And complacency among equity investors is quite low as evidenced by the current low reading on the S&P Volatility Index. With the S&P trading about 9 percentage points above its 200-day moving average we're well into overbought territory. The Russell 2000 index of small cap stocks is even move overextended, trading 15 percent above its 200-day moving average.
Low volatility and overbought conditions, however, don't automatically mean a correction is about to happen. Indeed, these conditions can last for a while without a catalyst to bring about a change in sentiment. And to be honest, we don't see a pullback happening just yet. However, keep in mind the last time we were in this same spot was in April and a 15 percent decline soon unfolded.
Until Next Time,
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