Breakout Likely to Prove False
Market Views of Comstock Partners, Inc.
Thursday, July 14, 2005
Today’s market breakout was totally unconvincing. First, the peak price was reached ten minutes after the opening, and went nowhere after that. Second, declining stocks far outnumbered advancers on both the NYSE and Nasdaq. Third, trading volume of advancing stocks barely exceeded that of decliners. This type of action has typically signified false breakouts in the past, and is likely to do so this time as well.
While June retail sales were spurred by the deep discounting at General Motors and the advent of warm weather after a cold spring, the indicators of upcoming economic performance are signaling, at best, a significant slowdown ahead. Oil prices, which lead the GDP by about a year, are now up about 45% over a year earlier. The Fed is continuing to tighten, with another 25 basis point increase in the funds rate almost a sure thing at the August meeting. If they stop raising rates after that it will be only because of an economic slowdown that becomes obvious to all. Money growth as measured by either MZM or real M2 is extremely sluggish on year-over-year basis, an occurrence that is usually a harbinger of economic weakness or recession ahead. The yield curve, which is already flattening, will flatten even more after the August FOMC meeting. The recent payroll employment report for June indicates a continued tepid rise in employment that has typified the current recovery cycle. Judging by past economic recoveries, total employment is about 9-to10 million jobs short of where it should be at this point in the cycle. In addition the 5% unemployment rate is somewhat misleading since the labor force has inexplicably dropped, and the participation rate is sharply lower. Topping it off, economic growth in most foreign economies has been slowing.
With the S&P 500 still selling at far above average valuations, and most investors bullish or complacent, we still think that the market is in for significant disappointment in the period ahead.
© 2005 Comstock Partners, Inc.
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