— by George Leong, B. Comm.
Trading last week could best described as lacking any inspiration and direction. After the recent rally to above the breakout levels, traders appear to be playing it safe and seeing how things, especially the economy, unfold.
The reality is that the current investment climate is much more encouraging now than it was a few months ago. We are seeing continued evidence of economic renewal in the U.S. and in other major global markets. The International Monetary Fund (IMF) came out and upgraded its growth estimate for global regions, which will add to the optimism that the recession will end later this year. Add to that comments from the FED suggesting that the downturn was slowing and that the worst was over. Yet, you must be mindful that this does not mean the economy will suddenly take off, since it may not be until mid-2010 that we finally see some stronger growth. The positive is that the March lows may be in place, which helps to reduce the downside risk for traders.
Another positive continues to be the ability of stocks to hold above the breakout levels and avoid any major selling pressure. Yet, for stocks to trend higher, there must be fresh new major market news to entice investors to come back in and bid stocks higher. Investor sentiment continues to be bullish and this will give some support to stocks and potential for another upward move.
At the forefront continues to be the technology sector, with the NASDAQ up over 18% this year. Last week, we saw key chipmaker Texas Instruments Incorporated (NYSE/TXN) provide additional catalyst for the buying after a positive outlook. We remain positive on technology.
Retail Sales for May were encouraging, as sales with and without autos increased following two straight down months. Excluding autos, the reading was better than expected. In the jobs market, the weekly claims were also not as bad as expected.
In the housing sector, home renovation company The Home Depot, Inc. (NYSE/HD) raised its earnings outlook for fiscal 2010. The positive guidance followed on the heels of the results of rival Lowe’s Companies, Inc. (NYSE/LOW) and signals of improving conditions in the home renovation market. At least homeowners are spending to fix up their homes. In the housing sales market, rising rates for mortgages recently are impacting the demand for mortgages and refinancing.
There are also some concerns swirling around the U.S. debt market. An example of this was a somewhat expected lackluster reception to the government’s auction of $19.0 billion of 10-year notes last week. The problem was that poor initial response ultimately forced the government to raise the yield in order to attract buyers. In the past, higher rates and stability in the U.S. attracted investment in debt, but now, with interest rates at a record low and a massive deficit and debt, investors are becoming cautious towards U.S. assets as investments. In addition, China, the number one holder of U.S. debt, has been reducing its buying of U.S. debt, so it may prove a challenge for the treasury to attract buyers to help pay for the country’s mounting debt.