We’ve been consistently amazed at this market’s resilience. Despite a few days of weakness last week, the markets are on a three-month tear; most indices are at 6-month highs. The S&P 500 hit a 7-month high Thursday and traded above 950, its highest level since November 5th.
Oil has been one of the major catalysts for the market, driving energy stocks higher and shrugging off weak economic data on renewed demand. Oil closed the week at $72.04 per barrel after toppling $73 per barrel for the first time since October. Many traders thought oil wouldn’t reach those levels this year, as supply was expected to significantly outweigh demand.
All major stock exchanges have recently crossed over into positive territory for the year. This is after many were down more than 25% in March. Many market watchers, PinnacleDigest included, think it’s increasingly likely there will be a pullback in the near future. We believe we’ll need to see new support levels formed before this market can make a significant move higher. Pullbacks help build new base levels, so it may not be a bad thing if the market retraces and tests new resistance levels.
As an investor, it’s critical to monitor the many areas of weakness which still exist in our economy. In other words, watch those stormclouds on the horizon - no-one knows for sure if they’re dispersing or gathering power to rain harder. Although the majority of lead analysts have predicted the United States will be out of recession towards the end of the third quarter, they have been wrong before. This global economic recession began with the bursting credit bubble and a huge collapse of the US housing sector. Home sales have increased in recent months, giving rise to discussions of a quick recovery and a soon-to-be-robust real estate market. We would suggest staying cautious. We believe momentary glimpse of a US housing sector recovery could be in danger of getting squashed.
The average fixed US mortgage rate recently increased to 5.59%. This increase makes it the highest level since November and the largest jump since October. The fixed mortgage rate in the US is a critical indicator of lending and confidence levels at the core of the US housing and banking sectors. This increased rate could be telling us there’s still a great deal of anxiety and hoarding going on within the banking sector. The Federal Reserve has been trying valiantly to free up capital and encourage banks to lend. They did this by pumping billions of dollars into the industry and by lowering interest rates dramatically to stimulate buying. Yet various signs -- an elevated fixed mortgage rate among others -- suggest their plan may not be working. Why?
You cannot fix the economy by flicking a switch.
Investors are still very scared and have seen their net wealth diminish by far too much in the last year. If interest rates continue to rise, it could stall purchases and put the US consumer back to sleep. It could also make this recession even more severe. People thinking about buying a home could decide it’s safer to walk away from the deal; people thinking about refinancing may similarly put it off or foreclose on their home. US mortgage applications fell in the week of June 1st to June 5th to the lowest level since February.
RealtyTrac Inc. reported that US foreclosure filings were more than 300,000 for the third consecutive month in May and that it is likely foreclosures will hit a record, 1.8 million by the middle of 2009.
Treasury yields and interest rates are rising for a very simple reason: the US dollar has been losing its value. Investors are worried that the Fed has printed too much money. And we believe they should be. Too much money for private company bailouts and injections of capital throughout the economy may be causing investors to wake up to the fact that the current levels of government debt are astronomical and could become unmanageable. The debt being sold to fund all of these various projects could lead to two things: inflation and higher taxes.
The Federal Reserve has bought $507.1 billion in mortgage bonds to date and bought as much as $25.5 billion in the week of May 27th.
We have warned and written about upcoming periods of increased inflation and urge you to continue to plan for this.
Our team continues to believe that gold offers a great way to hedge against the US dollar's potential loss in value and periods of increased volatility. Understanding the US dollar and the factors that move it will also help you understand gold and its price much more easily. Check out my previous post “Where is gold headed next?” for a summary of those factors that tend to influence gold’s rise or fall.
Regards,
Alex Smith
Co-founder, PinnacleDigest.com
TradeKing All-Star Commentator
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