Posted February 6th 2012
Outstanding Issues
The Greek debt issue is starting to heat up as an agreement is still not in place. The Greek government has not passed the required belt tightening measures which is needed to obtain another round of bail out money.
We have had better news regarding not only our economy in the U.S. but also the economy of Europe in recent weeks. That has been supportive of stock prices as the three major stock indexes approach or slightly break above long term resistance levels. These are levels that need to be broken with some conviction to start the next leg of the rally. This may well not be easy.
If Greece and the other weak countries in Europe do not face up to their debt issues and the IMF, ECB and the rest of the leaders do not continue to take further steps to stabilize their economies, we will have a sharp downturn in our market. Otherwise a normal correction is in order.
Since our economy looks to be gaining strength the fundamentals are in place to hold up the stock market. As earnings season comes to a close investors and traders will be turning their attention away from the U.S. and toward world economy issues.
Good Trading
Steve Peasley
Posted February 3rd 2012
Jobs
The jobs report for January was a big surprise with 243,000 new jobs, dropping the unemployment rate to 8.3%. Also, the previous two months were revised upward.
These numbers are good and should be looked at in that context but it is wrong not to look deeper to get a complete picture on what is going on. One good trend is in manufacturing which continues to be the strongest growth component of job growth. Manufacturing in the U.S. is gaining strength on the back of increasing exports. I think this trend will continue. The world is becoming a flatter playing field where cheap wages in other countries are starting to look less like a big advantage. Transportation costs and U.S. productivity tilt in our favor. Also, in Asia demand for higher wages is starting to gain traction.
In one sense the jobs report is misleading. Well over one million workers dropped off the employment rolls. What happened to them? They are still unemployed. Many just stopped looking for jobs. Also, many are older workers and they may never reenter the job market as their skills wane.
We all know that the government has never properly counted the number of unemployed and underemployed but no matter how you read it January was a good month for returning workers.
Good Trading
Steve Peasley
Posted February 1st 2012
Economic and Stock Market Cycles
Determining the direction of the stock market in the short run is very difficult. There are so many unforeseen factors that can disrupt the most diligent analysis that calling an up or down market is akin to looking into a crystal ball. You need only look back to 2011 and the earthquake in Japan that disrupted the worldwide supply to understand how difficult projections can be. The economist that forecasted 3% growth in the U.S. can't factor in natural disasters. They also underestimated the impact of the European debt crisis on our stock market.
This does not mean you should not make the effort to gauge the strength or weakness of the future economy, but one should always understand the weaknesses of that effort.
If the economy grows stock prices generally go up and if it shrinks it falls. The economic cycle runs 'behind' the stock market cycle. If one can broadly predict the economic cycle then it is easier to understand the stock market cycle. Stock markets move up at bottoms of the economic cycle and fall before the economy falters.
The effort is difficult but worth it, warts and all.
Good Trading
Steve Peasley
