Sunday, February 11, 2007

Weekly look ahead

The seasons earnings are tapering off this week, and profit growth has slowed but is still relatively healthy. Healthy enough that investors seem content that companies will continue to grow if left alone.

The healthy but moderating growth explains some of the strange recent market reactions. Week before last I predicted a huge upward jobs revision and also that it would drag the market down, not push it up (here, below the break). We have been seeing a market that wants the market to plod along without good or bad news, really. Good new sends the market down because it increases the risk of inflation and action from the Fed, bad news can send the market down if it suggests pain to corporate profits.

Unfortunately this week will be full of news (check out the economic calendar graphic below). Most certain to cause waves: Fed Chairman Ben Bernanke will be performing his semi-annual reports in front of the Senate (Wed) and House (Thu). Together will all the economic reports out this week Bernanke's testimony guarantees that investors will have a laser-like focus on inflation. Expect signs of inflation to invoke selloffs in the market.

Finally let me counter the general journalistic sentiment on what happened friday. I don't think the rise in oil had much to do with the market decline friday. I have been conducting analysis on this and for one thing the stocks that do well with increased gas prices did not rally at all. I believe friday was a general profit-taking which suggests people will have money in their wallets and be looking for openings to invest.

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