11.13.09

11.13.09

          A rally in equities this week helped the major averages regain more of their late-October declines.  The rally was large-cap driven, as the Dow was the first index to reach a new 52-week high on Monday, followed by the Nasdaq 100 and S&P 500 on Wednesday.  The larger composites trailed, particularly the Russell 2000, which only showed a modest gain on the week. Friday was a rare day on the NYSE showing less than a billion shares traded. Ultra light volume for sure.

          The biggest catalyst for equity markets remains the U.S. dollar. The market achieved most of this week's gain on Monday, the same day the U.S. Dollar Index lost 1.1% and made a new 52-week low.  It eventually touched 74.774 on Wednesday its lowest level since August of last year. One reason for the currency's weakness on Monday was last weekend's G-20 meeting, where leaders pledged to keep aid flowing until the recovery was assured.  The weakness helped the Commodity sector -- gold kept setting fresh 52-week highs this week, eventually touching $1,123.40 on Thursday.  Banks stocks were also strong as the G-20 also opposed the use of a tax on financial transactions as a way to dampen risky behavior.

          The remainder of the week was slower, as third quarter earnings season has wound down and the economic calendar was very thin.  But investors remained fixated on the dollar, and the major averages continued to move in an inverse manner to it. We were very close to a buy signal this week but the volume was too light. We will be watching closely next week and may, just may, be getting a buy signal.

          There was another round of longer term Treasury auctions, selling $81 billion in 3-, 10- and 30-year Notes and Bonds.  Demand remained strong for the most part, showing the U.S. government continues to be able to borrow money at very low rates.

          While investors, domestic and global, have been among the buyers, major U.S. banks, awash with capital from the bank bailout funds and the huge profits they’ve earned from investing those funds rather than loan them out, have been heavy buyers. The attraction to banks is that, with the Fed Funds rate at which they borrow from the Federal Reserve at near zero, they can borrow money at zero, and invest it in bonds, earning a guaranteed 2.5% to 4%, which is more than they would earn from loaning the money out in risky loans in a slow economy.

This is probably not what the Fed envisioned.

          Looking ahead to next week, we expect the dollar to remain in focus until the market finds some new catalysts.  The economic calendar will pick up, however, with Retail Sales on Monday, Industrial Production on Tuesday, CPI and Housing Starts/Building Permits on Wednesday and Existing Home Sales on Friday.

          We remain 100% in Cash but have our finger on the trigger.

Till next time

The MTA Staff