Weekly Financial Market Review

After a weak start to the week, U.S. stocks clawed their way back to post another weekly gain, continuing the rally that started in March. Continuing to lead the way are the semiconductors, and some more economically sensitive groups, such as resorts and casinos, lodging, and even auto dealerships. Those groups have moved the most in the last seven weeks or so since the rally began.

Although we have seen some significant rallies in some individual stocks, there are not many that are trading at all time highs. Some are at 52 week highs, but still well below their peak prices seen in since the market topped out in late 2007.

I do not believe this is a great time to begin a new investment campaign in stocks. When this rally started, the market had been plunging at a substantial rate of decline that was unsustainable for long. A trading rally was overdue, and that is what we have seen. Now, however, the rate of ascent has slowed a bit, and volatility has shrunk quite a bit as well. Once earnings season is over, we will likely see a pullback of sorts. At that time, it may provide a safer opportunity to begin investing in stocks again. Keep in mind though, market returns going forward can not be expected to match those seen in the 1980's and 1990's. You just need to have a look at what happened to Japan over the last 20 years to get an idea of what could happen in the U.S. Government spending and propping up banks and auto companies without letting market forces take care of that issue itself is what Japan did, and that economy has languished.

I believe we are heading toward a period of stagflation. A view of the Treasury markets indicates that the yield curve has steepened quite rapidly over the last couple weeks. Optimists will say that the bond market is pricing in a recovering economy. However, I believe these markets, along with the currency markets, are pricing in an inflation problem down the road.

Since the Fed announced its Treasury purchase program to keep interest rates low back on March 18th, the 30 Year Treasury Bond has actually sold off to new 5 month lows. 10 Year Treasury Note yields are now HIGHER than before program was announced. So much for seeing any profit from government action in the financial markets!

I would also note that the U.S. Dollar is approaching multi-month lows while the Canadian $ and Australian $ are approaching their highs for the year. It is clear that Forex traders are betting on higher commodity prices by buying currencies that stand to benefit most from these higher prices. The Yen has been tanking for months due to a languishing economy and since Japan is a huge importer of natural resources.

Going forward, investors should continue to consider investments in commodities and businesses that produce them.

Scott Cole
www.theultimatestocktradingsystem.com