Off 140 points Wednesday and up 136 points the very next day? Does the poor old Dow have any idea where it’s headed? The fact is, the market indexes, with their flailing and floundering, are simply reflecting how most investors feel these days: confused.
The confusion, of course, stems from the news flow.
Some of the information we’re receiving looks fairly encouraging. Corporate America will post record profits — yep, an all-time high — in 2011.
Fewer people are signing up for unemployment insurance. (The four-week count of first-time claims for jobless aid just fell to its lowest reading since June 2008.) So we can infer that the economy’s job engine is revving up a bit.
And yet, Europe continues to send out distress signals. Italy’s latest bond auction yesterday produced mediocre results, pushing the yield on the benchmark 10-year Italian bond back above the “SOS level” of 7%.
Moreover, it appears that the European Central Bank’s money-pumping efforts this month haven’t done much to cool investor fears about the solvency of the continent’s banks. Two-year euro swap spreads, which measure the difference in yields between bank and government debt, have soared in recent weeks to the highest level since November 2008.
In other words, the risk of a Lehman-type event in Europe, with repercussions around the world, is getting uncomfortably high.
Perhaps turning over a new calendar leaf will ease some of the tensions on the other side of the Atlantic. However, I wouldn’t bet my bottom dollar (or euro) on it. Hope for the best, but prepare for a range of possible outcomes.
Yesterday’s mid-session turnaround for gold and the mining shares is a favorable omen for the broader precious-metals complex. Below $1,530 an ounce, gold drew bargain hunters out of the woodwork — much as the S&P did in early October when it briefly dipped below 1100.
I can’t promise you that the Midas metal won’t revisit yesterday’s lows again, or perhaps even penetrate them by a modest amount. It appears, though, that gold is finding good support in this neighborhood. So, make sure to stock up on Barrick Gold (NYSE:ABX) below and Newmont Mining (NYSE:NEM) before they go any higher.
In one of Thursday’s sillier developments, homebuilder stocks jumped on a report from the National Association of Realtors that pending home sales rose 7.3% in November. Recall, this is the same trade organization that just last week revised (downward) its estimate of existing-home sales for 2007 to 2010 by a massive 740,000 units.
Given the widespread weakness in home prices, I would be skeptical of this latest NAR number. It, too, may be reduced significantly in the months ahead. Speculators can look to short homebuilders Lennar (NYSE:LEN) and, especially, Pulte Group (NYSE:PHM).
Of the two, Pulte clearly has the weaker balance sheet and thus, probably, the greater downside potential. Set a stop 15% above your entry point.
A happy and prosperous New Year to you and those you love!
