Friends
The GDP number was just released and the U.S. Economy grew at 3.2% for the 4th quarter 2010. The number is a little less than analysts were estimating (consensus was for 3.5%), but if we look back 6 to 12 months, we all would have been thrilled to see a number north of 3%. The U.S. Economy is growing and that is the good news. The problem is that it is not growing at a pace that will create enough job growth to put a sizable dent into the monthly unemployment number. All this points to the Federal Reserve holding firm on monetary policy as they indicated in their meetings this week. Look for short-term rates controlled by the Fed to remain low for the foreseeable future.
How does all this affect stock prices? Well, knowing that the Fed is still in the camp of trying to increase asset values (stock prices), traders will continue to feel that there is an artificial floor on stock prices. As we have continued to say for a couple of years now, it does not pay to fight the Fed. As we suspected, prices have been choppy this week with the bulk of earnings reports hitting the tape. Stocks such as Caterpillar had tremendous earnings yet this morning Ford’s numbers seem to have disappointed the market. We are watching the stocks that have sold off on earnings, whether expectations were already factored in or the numbers just disappointed, to see how quickly they recover. This gives us an idea as to how strong the trend is and how bad investors who have missed this advance want to get in. In general, far more companies are beating estimates than not, and one can’t deny that this is positive in the long run.
We saw the Dow peek over 12,000 earlier in the week and the S&P 500 dance slightly above 1300 for a couple of hours. These type of round numbers typically take several attempts to break through, and often provide a sturdy resistance level. On the other hand (I sound like an economist now), if traders can push through these levels without much of a pullback, you may begin to see some panic buying by those waiting for these levels to fail and stocks to pull back. If traders can get stocks decisively above these milestones, then they may provide nice support levels going forward. Having said all that, we would not be surprised if stocks run into this resistance and pull back a little. It could provide a buying opportunity for those hoping to get in.
Gold has had a sizable pullback, making the gold-bugs very nervous as it approaches some very interesting support levels. Oil also has pulled back to the mid $80’s, temporarily stopping the march towards $100 per barrel. We still feel eventually both could head higher and that these pullbacks will prove to be temporary. Perhaps stocks will follow the same pattern.
Next week earnings season will wrap up, and the corporate news cycle should slow a little. This will give traders a moment to decide if the next move is up or do we sell off first, to shake a little of the optimism that has developed. Does Dow at 12,000 or S&P 500 at 1300 provide major resistance to higher prices? Stay tuned.
Have a great weekend everyone.
