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More Mixed messages from the Markets - Money Matters for 10/21/05 Don Bravo | 10/21/05
As I said yesterday, Friday's trading action may give us a indication of the direction of the markets for the near future. Confounding the task is the split direction of the various exchanges. While the Nasdaq was in the green and stayed there all day, the Dow was down sharply while the NYSE Composite was up narrowly.
For a better focus, advancing issues far outstripped decliners and the gap between new highs and lows (lately in favor of new lows) narrowed again today. That gives us an outlook for Monday a positive feel, especially since the only index in the red was the Dow, composed of 30 big-cap issues. The feeling is that big-caps is not where one wants to be during a slow period or "soft patch" in the overall economic landscape.
It makes perfect sense. The big-caps are less nimble and slow to react to change, while smaller companies can move quickly to enter markets, get new products out, change prices and be more competitive. The Dow has been bloated and hovering for nearly two years and there are signs that investors may have had enough of dawdling earnings, accounting tricks like one-time charges and the abysmally low level of dividend returns and are turning to riskier, more growth oriented stocks.
Tech is still the pick to lead the way, though there are hidden gems in the NYSE and on the smaller exchanges, notably the American and Pacific Exchanges.
The two major catalysts for the markets today were two blockbuster stocks, Caterpillar (CAT) on the Dow and NYSE and Google (GOOG) on the Nasdaq. Caterpillar, the massive construction equipment manufacturer, posted earnings short of Wall Street's expectations and issued lower guidance. Shares were down more than 5 points.
Google, which reported record earnings and a rosy forecast after the markets closed Thursday, gained 36.70 points on Friday, a 12% increase. 22 million shares changed hands on Google, more than 10% of the total trade on the Nasdaq.
The bond market continues marking time until the next FOMC meeting, at which the governors are expected to raise interest rates another 1/4 percent. The spread between the 2 and 5 year treasuries has narrowed once again, to a mere 5 basis points, though the gap between the 2 and 10-year has held in a range between 18 and 25 basis points. On Friday, the 10 year yield closed lower at 4.38%. While rates are widely expected to rise, there's still scant breathing room between the different maturities, with the danger being that the rates become inverted and cause an upheaval in the lending markets.
Some may have already seen enough of the near-flat yield curve to conclude that we are well on our way towards a recession, broadly defined as two consecutive quarters of shrinking economic activity. The GPD growth has not yet gone negative, but the momentum since mid-2004 is surely gone. Forecasts are for growth rates of between 2.5 and 4% for the 4th quarter and into next year.
One thing is for certain, commodities have hit a consolidation level, especially gold and silver. Oil gained slightly today, but is near the low end of its recent range. While gold and silver are likely to rise with interest rates, oil, more dependent on supply and demand issues, may be in for a long-term decline, even back to $45-50 levels, a move which would certainly dampen inflationary fears.
Overall, the indices are all at depressed levels, though further declines would hardly be surprising. With earnings season in full swing over the next two weeks, more see-sawing is expected before real direction and leadership can be established.
Dow Jones: -65.88; 10,215.22 close
NYSE Advancers: 2147
Nasdaq Advancers: 1803
NYSE New Highs: 34
Nasdaq New Highs: 60
Gold: +5.90; 469.10 close
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