The marketplace continues to not want to make any directional move for better or for worse. The major indices were slightly positive for last week's trading session with the Dow ending the week with a trifling .008% gain (14.91 points) while the NASDAQ only did slightly better with a .03% return. The S&P 500 had the most significant return with its climb 1.4% higher.
The markets have been in a trading range for nearly a month. Since the opening of the trading week of November 10th up to its close on Friday, December 4th, the total return for the S&P was a mere 1%. It opened the trading session on the 10th of November at 1,091.86 and closed December 4th at 1105.98. The indecisiveness that the markets have publicized over the past month leave traders and investor alike pondering and debating when the market will move out of its range bound territory and proceed with either a continuation of its bullish run or turn and to compose a reversal to begin a bearish descent.
The U.S. Federal Reserve Chairman, Ben Bernanke, on the other hand, has not shown any indecisiveness throughout the past several months of our recession plagued economy. The head of the Federal Reserve maintained a dour stance in regards to his comments to the Economic Club of Washington on Monday.
The vow of the Federal Reserve to keep interest rates at the record lows near zero at its next meeting on December 15-16, as they have been for the past year, is supported by several key remarks Bernanke made to the economic club. The head of the central bank's five most noteworthy statements to the club that supports the notion for continued rates hovering near zero are the following:
- Chairman Bernanke warned that our economy is meeting head on formidable headwinds - including a frail job market, wary consumers, and prolonged tight credit.
- Only moderate improvements in the U.S. economy were likely due to pressures such as the weak job market and the low availability of credit.
- We still have some way to go before we can be assured that the recovery will be self-sustaining.
- Mr. Bernanke's belief in the modest economic growth in the economy next year leads him to conclude that it will be sufficient to bring down the unemployment rate, but at a pace slower than we would like. To draw on this conclusion by Bernanke, the Fed has warned previously it may take five to six more years to return to normality for the job market.
- The strongest remark by Bernanke to sustain the concept of continued low interest rates was when he declared in a point blank manner that the rates were likely to remain at these levels for an extended period.
These declarations to the Economic Club of Washington by Chairman Bernanke, in addition to other comments he affirmed, indicate he is well aware that the deep recession is far from advancing back to a normal economy. These remarks by Bernanke further conclude he believes that continued low interest rates is one methodology in which the U.S. can see a quicker economic comeback albeit it is likely for some time before it does.
What Does the Indecisiveness of the Markets and the Steadfast Position of the Chairman of the Federal Reserve mean for the Current Marketplace?
The drastic upward trend for the S&P 500 began on March 6th of this year at its annual low of 666.79 and closed the trading day this past Friday at 1,105.98. The S&P is regarded by most financial professionals and individuals as the index that is the most representative of the economy as a whole. It has yielded a 66% return from its 2009 low to the close of trading on Friday. However, as mentioned in the beginning of this report, for nearly a month the S&P has only posted a mere 1% gain which is negligible in relation to the returns it had been posting since March 6th.
Almost a month of stagnant returns has the investment world contemplating whether the markets are poised to regress causing a double dip recession, also known as a W-shaped recession, or if the markets will thrust through key resistance levels, such as 1,120 for the S&P 500, and continue on with the V-shaped recovery of the U.S. marketplace. I will portray three key rationales that a double dip recession could occur and then take a bullish stance with three pivotal reasons for a continuation of a V-shaped recovery.
Rationales for a Double Dip Recession
1) Government Stimulus Programs are Ending On January 1, 2010, millions of unemployed Americans will see stimulus programs that have aided their survival in the mist of the Great Recession come to an end. Among these benefits are the conclusions of the unemployment insurance extensions, the aid for COBRA health insurance payments, the tax break on unemployment insurance disbursements, and the $25 weekly increase in the unemployment insurance payment. If Congress does not do enough to make up for the lost subsidies for the unemployed, many Americans will be forced to make additional untimely withdraws of their funds from the markets which were invested for future times.
2) The Unemployment Rate Remains Very High The unemployment rate is at its highest rate since 1982. Besides 1982, the only time the unemployment rate of the United States was higher was during the Great Depression. Although the unemployment rate did decline from 10.2% to 10.0% as of the last unemployment report, the number is still drastically high. Furthermore, the drop may vary well not be sustainable as its downward move is likely attributable to a large degree by the seasonal hiring for the holidays.
3) The Current/Put Call Ratio has Turned Bearish It has been some time since there has been a bearish reading for the put/call ratio according to the figures provided by the CME. The ratio calculated for this report is .90 as depicted towards the end of this report. The ratio neared a level of neutrality in some of my more recent reports, yet it did not fall below one to indicate a bearish indication from a contrarian viewpoint.
Justification for a V Shaped Recovery
1) The Federal Reserve Will Keep Interest Rates at Record Lows As explained with detail at the beginning of this writing, Chairman Bernanke is making it as clear as his position will allow that interest rates will remain low for an extended period. This time frame has been brought forth in previous statements from the central bank to support the fact it is committed to keeping rates low until a solidified recovery occurs. The Fed knows that holding rates at super-low stages will attract more consumers and businesses to spend to help relieve the exceptionally feeble economy.
2) The S&P 500 is Still 43% Off Its All-time High of 1,576.06 as of Friday's Closing Level Although the indices have all had monstrous gains since their lows, with the S&P jumping 66% off its bottom as of Friday's close, the markets are still far from their all-time highs. The S&P 500 still has a giant gap between its closing price on Friday and its all-time high of 1,576.06 which occurred on October 11, 2007. It is unlikely that the S&P or the other indices will hit their all-time highs in the next few years, but there is still a very large gap between their current levels and their highs that should be filled to a greater extent with money that is still lingering on the sidelines.
3) President Obama is Tackling the Issue of Job Creation with More Vigor The President is moving away from creating artificial GDP through stimulus programs such as the Cash for Clunkers program and the $8,000 credit for first time home buyers to incentives that will decrease the jobless rate. I hold a strong stance that we will not have a true economic recovery until the unemployment rate returns to its natural level which many economists argue is around 4% or less.
Among the programs Obama is looking to initiate are a strategy of fresh expenditures for highway, bridge and other infrastructure projects to create additional employment. More importantly, the President plans on stimulating the growth of small businesses which account for two-thirds of the jobs in the U.S. In 2010, President Obama is seeking a tax cut for small companies that hire this upcoming year as well as a one year extinction of taxes on the profits from small business investments. These favorable measures for small firms would, in turn, free up their cash flows and, thus, induce hiring to increase the American workforce.
The merits cited and explained above strongly advocate a double dip recession as well as a V-shaped recovery. Depending on which way the marketplaces decide to move, as of this writing, their progressions will be due in large part to the points brought forth in this report. I feel the more likely scenario is at least a continuation in the upward trend as the powers that be are taking more logical approaches to provide for a sustainable economy.
It is of my opinion that the markets have taken a breather for the past month as they have had a brisk move upward since their lows. A large retracement would have occurred to commence a double dip recession which did not occur over the course of the previous month. This is not to say a W-shaped recession will not occur in future as the U.S will be faced with further difficulties such as the continually increasing record deficit. As of now, though, the logic holds that there will still be a further move upward for the indices.
As reported by the CME's Volume and Open Interest final account for December 7th, there are 13,603 puts outstanding for the S&P December E-mini compared to 15,046 calls. These figures offer a put/call ratio of 0.9 as indicted earlier in this report. As mentioned, this is the first time this sentiment ratio has been bearish in quite some time. In relation to its relevance, the put/call ratio was much more bullish in the last reading than the minimal current bearishness it represents for those individuals that take the opposite side of the majority opinion within the investment realm.
Since the reading from the November 30th final report, the ratio dropped slightly into negative territory posting a 55% decline in the indicator. Excluding my last report, it is interesting to note that the put/call relation was hovering above the neutral level with a bias for a bullish stance in some of my previous writings. Once again, this sentiment ratio is close to neutrality, yet this time with a bearish standpoint.
The proximity to a purely neutral indication correlates to the sideways movement of the marketplaces traders and investors have been experiencing in the past weeks. It should be intriguing to observe how this contrarian sign progresses in the upcoming weeks as it could possibly substantiate a move in the market for better or worse if the ratio attains either a very pessimistic posture or takes on a conversely optimistic one.
Trade Recommendations & Questions
For trade recommendations on any of the indices or other commodities, further information regarding this report, or to provide comments on it, please call or e-mail me at my information listed below.
James M. Gangloff, MBA
Senior Research Analyst / Stock Market Indices
Portfolio Strategist / Managed Futures
Toll Free: 800-275-8844