What the Two Most Important Stock Charts of Today Tell Us
Thursday, May 1st, 2008
By Michael Lombardi, MBA for Profit Confidential
Yesterday, in a widely anticipated move, the U.S. Federal Reserve reduced interest rates one more time — by one quarter point to two percent. Wednesday was the seventh consecutive interest rate cut by the Fed.
The big surprise for investors yesterday?
The Fed said that inflation “expectations” have risen, while it also removed its usual “downside” risk to the economy language that has accompanied the Fed’s past few interest rate cuts. The surprise was that the Fed indirectly told the market that it may be through with interest rate cuts for now.
And how did the stock market take it?
You’d think a stock market so fixated with every move the Fed makes would tank on news that the Fed may be done with interest rate cuts for some time. But, instead, the Dow Jones Industrial Average registered an insignificant loss of only 12 points!
The S&P 500 was up almost five percent in April, capping the best month for the S&P 500 in about five years. But we need to look deeper, at specific industries, to see what the stock market is really telling us.
There are two very important stock group charts I want to talk about today.
First, let’s look at the Dow Jones U.S. Retail Index. The index, which comprises the largest retailers in America, bottomed out in March 2008, and it is now up 11.9% from its 2008 low. If U.S. consumers are in such bad shape, if they’re cutting down on their spending like the popular media is telling us, why is a leading market indicator on retail sales up almost 12%?
The second chart to look at is that of the Dow Jones U.S. Home Construction Index. This chart looks like a catastrophe, having fallen from a level of 1,100 at its peak in mid-2005 to a low of 259 in the first week of 2008. But, today, this very important barometer of the U.S. housing market is up an astonishing 38.4% since its early 2008 low.
If the housing market is going to hell in a handbasket, why is the stock index that comprises the largest U.S. homebuilders up 38% so far this year? Just days ago, the president of the fifth largest U.S. homebuilder, KB Home, came out and said that home prices could fall another 20%. Why are the stock charts telling us a different story?
Dear loyal reader, in all honesty, I don’t care about the questions (I do ask them so we can stop and think about what is really happening). In all reality, I always follow the market, I don’t question it. The fact of the matter is that, in face of the most pathetic economic news the U.S. has faced in over a decade, the stock market has failed to go down. Key stock market groups are actually rallying. Investors should be in this market, not out of it.
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Tags: Dow Jones Industrials, federal reserve, homebuilder stocks, S&P 500
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Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland.Follow Michael and the latest from Profit Confidential on Twitter
