Thursday, January 25, 2007

Roller Coaster Won't Stop

Just when I think there's some direction to this market (in the last two weeks I've been of both opinions, bullish and bearish), the following day obliges a reconsideration of my position. So, I, like the market, am still in flux, with my year-end prediction of a lackluster 2007 in equities still very much intact.

Today's disaster was presumably precipitated by poor participation in the government's bond auction, sending yields on the 10-year to highs not seen since last August. A poor reading on existing home sales - an 8.4% drop for 2006, the biggest decline in 17 years - added to money flow woes and sent investors fleeing for safer bets.

Treasuries are unwaveringly an ambiguous condition, with the yield curve nearly flat and partially inverted. 2-year notes are yielding 4.97%, while at the other end, 30-year bonds are at 4.96% That's about as flat as it gets and one should assume that bond traders are just as confused as their stock-trading brethren.

The problem, from a stock trading perspective, is that yields are rising, signifying a tightening economy and that's bad for stocks. That's almost believable, today. Tomorrow will surely be another story.

The whole cycle is pointing in a negative direction depending on which measures you watch. If profits are being squeezed, price pressure will ensue, and that's unmistakably inflationary. Bond yields will rise as a coolant, and stocks will fall. Rinse, repeat, ad nauseum.

I'm not about to buy into the argument that the economy is on the verge of recession or collapse. There are certainly issues to be resolved, not the least of which happen to be political (fiscal policy and Iraq), but they seem to be churning slower than grandma making the butter.

Resolution to the nation's political and economic malaise would supply some impetus for extension of the rally, though we could be on the edge, with a major correction just weeks or even days ahead.

A 1500-2000 point decline on the Dow would probably shake out weak hands and do more good than evil. Today's 119-point shave nearly wiped out the gains of the previous two sessions (145 points). I'd expect more of the same tomorrow, but, as previously expressed, the opposite has usually occurred thus far in 2007.

We're all still on pins and needles on the January Barometer watch. The S&P 500 lost almost all advantage, losing 16.23 today and leaving it just 5 points into the green for 2007.

It looks as though we won't know much of anything until the very last day of the month, this coming Wednesday. Even then, if it's close on either side of break-even, it may be meaningless and the confusion will continue. As we dip and dive, shuck and jive though the first month of the year, the one thing for certain is that nothing's for certain.

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