6.15.07

6.15.07

It was another interesting week

 Stocks tumbled Tuesday as a market increasingly sensitive to rising interest rates used the latest uptick in bond yields as an excuse to take some more money off the table. The S&P 500 paced the way lower among the majors as all 10 of its sectors closed sharply lower.  Only four of the 147 S&P industry groups finished higher. China's inflation rising at the fastest pace in more than two years exacerbated concerns about global tightening and was the initial spark behind the exodus out of Treasuries. More unwinding of mortgage hedges and concerns that upcoming inflation data (e.g. PPI, CPI) may validate last week's sell-off in Treasuries also contributed to the rise in yields.  In turn, that stirred concerns for equity investors that bonds will soon be seen as a more attractive alternative to stocks and that a continued rise in borrowing costs will slow down M&A activity. Showing signs of fatigue initially after Wednesday's sizable rally, it didn't take long for the bulls to get back to their winning ways Thursday as more signs of bond yields topping out left the bears with little to work with. Stocks put together another strong performance Friday as investors rallied around a tame inflation read that pushed interest rates lower, a resurgence in M&A activity, and an upgrade of a Dow component. Another day of broad-based buying enabled the major averages to string together their best three-day performance since the third week of March. Since Tuesday's sell-off, the Dow, S&P 500 and Nasdaq posted respective gains of up 2.6%, 2.7%, and 3.0%. From March 19 through June 21, they surged 2.8%, 3.5%, and 3.5% respectively.

With the Fed still exhibiting a hawkish stance on inflation, and given the monthly CPI report's influence on monetary policy, core CPI rising just 0.1% in May was the springboard behind today's strong follow-through efforts. The year/year rate fell to 2.2%, which is now at levels the Fed should be comfortable with heading into the next FOMC meeting in two weeks. With stocks moving in lockstep with the action in Treasuries of late, bond traders also embracing further evidence of easing inflationary pressures pushed yields lower across the curve and gave stock market the bulls the green light to keep buying. Although we are still showing a BUY signal with a PPP, we are still in an ultra conservative stance and remain in CASH in our own account. This market just doesn’t have any leadership. We are taking a wait and see attitude.

Till next week

The staff at MTA