Thursday, January 7, 2010

The Fourth Trading Day of 2010 - The Message From the Market

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

The first four trading days of the year provide investors with an important message of where the big money is flowing in the market. More investing money gets moved around at the beginning of the year than at any other time. Overall, the picture has been very bullish. U.S. stocks, foreign stocks, emerging market stocks, large cap, mid cap and small cap stocks have all rallied. So have commodities, with inflation sensitive energy and precious metals being particularly strong. Even U.S. government bonds and the U.S. dollar have been relatively flat. How is it possible that almost nothing has gone down?  There is only one way this can happen. The liquidity available for investing purposes is increasing substantially, as has been the case since 2008. The zero or just above interest rate policies of the world's central banks are flooding the global financial system with cash. As long as this continues, global stock markets and commodities should continue to rally.

The major U.S indices were up between 1.4% and 2.7% in the four days since the close of 2009. Nasdaq did the worst and the small-cap Russell 2000 the best. A small cap versus large cap performance difference shouldn't be read into these numbers. The big cap S&P 500 was up 2.4%, doing almost as well as the Russell and the even bigger cap Dow Jones was up little more than the Nasdaq. Of the nine sectors of the market, only two were lower than their last price in 2009 - Utilities and Technology, down
-0.8% and -0.1% (essentially unchanged) respectively. The best three performing sectors were Financials, Energy and Basic Materials up 6.3%, 5.1% and 4.5%. Liquidity should have an outsized impact in these sectors and it looks like it did. Industrials put on a decent enough rally, closing up 3.5% after the first four days of trading. Government statistics indicate that manufacturing is reviving in a number of countries thanks to all the stimulus money being spent globally. Stock prices are reflecting this money pumping effort just as they are likely to reflect the withdrawal of stimulus spending when it takes place.

Stock markets outside the United States outperformed. Developed markets overall did about the same as the S&P 500, while emerging markets did somewhat better, rising 3.3%.  The BRIC markets all did well with Brazil, India and China rising between 3.1% and 3.8%. Russia led the pack though, rallying 6.4% in the beginning four days. Commodity based markets were stronger than others. Australia was up 4.1% and Canada was up 3.3%.

Commodities were up 2.5% - on par with the major U.S. stock indices, but there was a mixed picture inside the group. Silver was one of the stars, rising 7.9%. Light sweet crude oil was up 4.2% and natural gas was up 3.8%. Gold rallied 3.0%. The agricultural commodities were the laggards. The dollar was mostly unchanged during early year trading thanks to remarks by the new Japanese finance minister (an expert in health care issues and not economics by the way) who commented that he wanted the value of the yen to come down. This led to a strong rally of the U.S. dollar against the yen. Without that, the dollar would have been down in early 2010 trading. Long-term U.S. treasuries were mostly unchanged after a sharp drop in price and big gain in interest rates in December. Yields on the 10-year and 30-year were 3.82% and 4.69%  compared to 3.84% and 4.66% at the end of December.

Rallies that take place in early year trading tend to have pullbacks later in January. Investors who want to buy into the sectors that performed the best in the first four trading days should watch for these pull backs and use them as an entry point.  Some rallies are likely to go on longer than others of course. The stock market also tends to have a seasonally weak period in March and April. The current rally has already gone on for ten months and this is a long time to not have had some significant give back in price. Watch interest rates for a hint of when this might happen.

Disclosure: Long gold, silver, and natural gas and short long-term U.S. treasuries.

NEXT: U.S. Employment Figures Indicate More Stimulus Ahead

Daryl Montgomery
Organizer, New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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