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2K Market Deja Vu - Good News, Bad Action

04/16/04 11:52:51 AM
by Matt Blackman

How markets interpret news tells much about underlying investor sentiment. Bull markets ignore bad news. Bear markets ignore good news. It appears that of late, we may have fallen back into the latter category once again. For those in the bull camp, this is a troubling sign.

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In a recent edition of the Murphy Market Message Newsletter, John made the observation that the market appears to have reached the point where good news is becoming bad news. As evidence he referenced the 1.8% jump in March retail numbers released April 13. It should have had a positive effect on markets but instead the Dow dropped nearly 135 points leaving bullish investors scratching their heads. Is it simply a case of the market becoming a victim of its own success or is something more fundamental taking place? And what implication does it have for the longer term?

Figure 1 Weekly chart of 10-year bond yields showing the downtrend in rates since 2000. A break in the trendline in which yields jumped to 4.38% (43.8 points) could be warning of interest rate trouble ahead for the markets. Note the positive convergence between yields and the MACD (lower window). Chart and data provided by Stockcharts.com and the Murphy Market Message Newsletter.
 
Ever since the far better than expected non-farm payrolls increase of 308,000 jobs was announced in the first week of April, concerns have shifted from the economy to inflation and interest rates. Bond yields have jumped substantially since and rising energy prices with no end in sight aren't helping improve investors' moods.

Debt runs rampant at all levels of the economy from high interest credit card indebtedness to federal government deficits, thanks in a large part to the lowest interest rates in 45 years. But an economy that has become so addicted to debt is also highly vulnerable to any increase in rates and it appears that from this perspective at least, the good times of buy now and pay later on the near-zero interest plan may be near the end of its days.

Interest rate sensitive issues got severely trounced in the first two weeks of April. Those worst hit included housing stocks, REITs, banks and financials. The challenge is that good news causes bad action and bad news can be downright devastating on stock and index values. It's a no-win situation for bulls.

One silver lining in all this is that the beleaguered US dollar has been making a comeback of sorts, which should partially allay inflation fears. Speaking about silver, it does not fare well in a rising rate environment and neither does gold. Both have been casualties of percolating bond yields.

Of greater concern and an aspect that bears watching is how markets interpret the news going forward. If good news continues to cause market retracements, it is like waving a red flag in front of the bears, who have been patiently waiting for just such a change in sentiment to take over once again.

SUGGESTED READING:

Murphy, John [2004} Surge In Rates Punishes Stocks -- Financials, Utilities, And Gold Are Hardest Hit. . . , April 13, Murphy Market Message http://www.stockcharts.com



Matt Blackman

Matt Blackman is a full-time technical and financial writer and trader. He produces corporate and financial newsletters, and assists clients in getting published in the mainstream media. He is the host of TradeSystemGuru.com. Matt has earned the Chartered Market Technician (CMT) designation. Find out what stocks and futures Matt is watching on Twitter at www.twitter.com/RatioTrade

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