Being Street Smart 8/11/6

BEING STREET SMART
___________________

Sy Harding


WHAT IS MOVING THE MARKET? August 11, 2006.

Almost everyone agrees investors have been paying far more attention to each economic number as it’s released than makes sense, and have been repeatedly fooled. Where did that habit come from?

Well, Wall Street has been telling investors for well over a year that when the Fed stops raising interest rates the market will take off to the upside. So for well over a year investors have worried over each economic or inflation number, trying to guess if it might mean the Fed is ready to call a halt to the rate hikes. The reactions to each number have created considerable day-to-day volatility, but no follow through in either direction. Even the market’s initial reactions to the numbers have often not been what investors were told to expect.

Most recently, Wall Street’s consensus estimate was that 150,000 new jobs had been created in July, and its advice was that if fewer jobs than that were created, indicating the economy is slowing faster than thought, it would give the Fed more reason to halt its rate hikes, and would be a big positive for the market. The July jobs report, released a week ago Friday, showed only 113,000 jobs were created. Yet the market’s reaction was to the downside over the next three days.

On Tuesday of this week, the Fed finally halted its string of 17 rate hikes in a row since June, 2004. At last, at last, said investors! But whoops! The market closed down for two days in a row, and four out of five days this week.

The oil markets received shocking news on Tuesday. Corrosion problems were discovered in the Alaskan pipeline so severe that BP’s Prudhoe Bay oil field was shut down. Alaskan oil accounts for 8% of the nation’s oil requirements. So no surprise, particularly with continuation of problems in foreign oil countries, the price of crude oil spiked up $2 a barrel on Tuesday, reaching $77.30 a barrel (just short of its record high of $77.03 reached on July 14.).

Over the next few days the news became even worse. BP announced the lost oil production would not be fully restored until January of next year. Rational analysis would expect oil prices to rise even more on that news and continue rising. However, an investor who made that bet would have been fooled. Oil prices began to decline in spite of the more dismal news, and by Friday morning oil prices had declined $3 a barrel, 4%, to $74.30.

On Thursday came the shocking news of the terrorist plot hatched in England but aimed at the U.S., and the ongoing problems it creates for the airlines and travel industry. Rational analysis might have had one expect the market to react significantly to the downside, recalling the market’s 11% decline in the 10 days following the terrorist attacks of 9-11-01. But no. After a small amount of nervousness early in the day, the market reversed to the upside, and closed up Thursday, its first up-day in five days.

If analyzing and anticipating the economic numbers, and even correctly anticipating what the Fed might do, is useless, what’s an investor to do?

It might be useful to observe that in the midst of repeated negative reactions to what the experts on Wall Street told investors would be positive influences, and positive reactions to what rational analysis would have one expect to be negatives, one theme has remained constant – the long history of the market’s remarkable seasonality.

On May 10, the market (as measured by the Dow, S&P 500, Nasdaq, Russell 2000, Wilshire 5000, and other major indexes) reached what is so far its peak for the year. That came pretty close to the old stock market adage, ‘Sell in May and Go Away’, which calls for selling out of the market on May 1, and not entering again until November 1. My newsletter’s Seasonal Timing Strategy, which uses a short-term momentum reversal indicator as its trigger, came even closer, as it most often does. It signaled the end of the market’s favorable season, and time to move to cash and downside positions, on May 12, just two days after the market’s peak. Its earliest possible re-entry signal will be in October, and could be delayed as much as a couple of months, depending on the situation with the short-term momentum reversal indicator at the time. Meanwhile, as I’ve suggested in this column since May, I’ve been concentrating on short-sales and bear-type mutual funds. So far it’s been working out just great, with 14 of the 15 such positions taken since May being profitable, by as much as 17%.

Wall Street likes to quote where the market stands compared to the first of the year. Given the market’s consistent seasonality I believe where it stands compared to its May peak is more indicative of what has been happening. And the Dow and S&P 500 are down roughly 5% from that peak, while the Nasdaq and Russell 2000 are down roughly 12% from their May peaks.

So once again, as happens almost every year, the market seems to be responding much more consistently to its seasonality than in reaction to the economic numbers, Fed actions, and external events that Wall Street, and even rational analysis, says should determine its direction.



Sy Harding is president of Asset Management Research Corp., DeLand, FL, publisher of The Street Smart Report Online at www.streetsmartreport.com and author of 1999’s Riding The Bear – How To Prosper In the Coming Bear Market.