Friday, April 15, 2005

My Guess: Stock Market Bounce Coming

Today the Dow, S&P 500 and Nasdaq ended the trading day down, as they had yesterday and the day before that. All stock indices are significantly off their recent highs:

Dow: 10,088 (recent high: 10,941 on March 4)
Direction: Down 8%

S&P 500: 1143 (recent high: 1225 on March 7)
Direction: Down 7%

Nasdaq: 1908 (recent high: 2178 on December 30)
Direction: Down 12%

However, macro indicators seem to be pointing in a more bullish direction:

Interest Rates:
General Market Belief: Higher interest rates are bad for stocks.
Spot: 10-year Treasury yield at 4.27%
Recent High: 4.62% on March 28
Direction: Interest rates are DOWN 35 b.p.

Oil:
General Market Belief: Higher oil prices are bad for the economy.
Spot: NYMEX Light Sweet Crude at 50.49
Recent High: 57.27 on April 1
Direction: Oil is DOWN 12%.

Gold:
General Market Belief: Higher gold prices signal lack of confidence in "paper" assets.
Spot: 426
Recent High: 447 around March 10
Direction: Gold is DOWN 5%.

Forex:
General Market Belief: A weaker dollar means foreigners have less confidence in U.S. assets.
Spot: 1.292 USD/EUR, 107.8 JPY/USD
Recent Low: 1.360 USD/EUR around December 30; 102.5 JPY/USD around January 20
Direction: The dollar is STRONGER by 5% against both the Euro and the Japanese yen.

To the extent that:

* Lower interest rates mean a lower borrowing cost for corporations and consumers,
* Lower oil prices mean reduced inflation fears,
* Lower gold prices mean more confidence in government policy, and
* A stronger dollar means a stronger appetite by foreigners for U.S. assets,

shouldn't U.S. stock prices be rising, not falling?

Taking a look at just how negative investor sentiment has become:

Sentiment Index: Investors Intelligence Bull-Bear Percentage Spread (data available at http://www.yardeni.com/pub/sabb.pdf)
Current: 17% (bull 46% vs. bear 29%) as of April 13
Recent High: 43% at end-December
Recent Low: 10% at August 2004 market low,

I think that stocks are due for a bounce soon.

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Moreover Recently we have witnessed that Indian stock market has touched new heights surprisingly IT sector was not part of it.

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