Summary
For stocks, day two of 2005 turned out much like day one, although somewhat worse in its downside momentum. What happens next, as in the next couple to few days, could be very instrumental in determining how severe this down-leg will be.
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According to Tout TV and other venues in the regular propaganda loop, the equity market's poor behavior during 2005's first two trading days is nothing more than "expected profit-taking." Funny, but I don't recall this expectation being voiced too vociferously as 2004 was drawing to a close.
Maybe an innocuous bout of profit-taking is all that's in progress -- or, maybe not. If what is going on possesses a meaningful element of hundreds -- perhaps even thousands -- of hedge funds rushing to the same door, with few people willing to take the other side of the trade around current levels, then there is the genuine potential for a "critical-mass" situation that could make the pullback a good deal more severe than the simple "profit-taking" that is alleged.
Using my seven-measure tracking group as the proxy, here's what things looked like through the year's first two trading sessions.
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SELECTED STOCK-MARKET RETURNS
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01/04 12/31
2005 2004
Close Close Change
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DJIA 10631 10867 -1.4%
S&P 500 1188 1218 -2.0%
NYSE Comp. 7091 7268 -2.2%
Wil. 5000 11701 12024 -2.3%
NASDAQ 100 1572 1635 -3.0%
Value Line 391 406 -3.2%
Russ. 2000 629 654 -3.5%
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Average -2.5%
Median -2.3%
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Market breadth was very poor again yesterday -- a second day of well over 2,000 NYSE declines. In addition, Big Board volume swelled to more than 2.1 billion shares.
Yesterday, there was more on which to blame the slide, at least its later stages. Around 2:00 PM (ET), the Fed released the minutes of the FOMC's 12/14 policy meeting. All of a sudden, some (emphasis here on "some" as opposed to "all") of the public servants overseeing the nation's monetary policy have finally joined some of us in expressing a higher degree of concern about inflation, as well as the bond and stock markets' heightened state of irrational exuberance:
"In their discussion of the outlook for prices, a number of participants cited developments that could pose upside inflation risks. Although oil prices had fallen of late, they were still considerably higher than they had been in the spring, and the recent decline in the dollar would raise import prices and diminish competitive pressures on many industries. The pass-through from both sources should be limited, but they were still a potential source of upward pressure on prices that could get embedded in higher inflation under certain circumstances. In addition, productivity growth had slowed appreciably in the most recent quarter and unit labor costs had increased, raising questions about cost pressures going forward. A few participants also noted that uncertainty about the extent of resource slack in the economy was considerable and that it was quite possible that the economy could soon be operating close to potential, particularly if labor force participation rates did not turn up much while employment continued to register gains. The increase over the last few months in five-year measures of inflation compensation derived from Treasury nominal and inflation-indexed securities might be a warning sign that expectations were not as well anchored as they had been over the summer."
And how about this? The following passage got some market attention yesterday:
"Some participants believed that the prolonged period of policy accommodation had generated a significant degree of liquidity that might be contributing to signs of potentially excessive risk-taking in financial markets evidenced by quite narrow credit spreads, a pickup in initial public offerings, an upturn in mergers and acquisition activity, and anecdotal reports that speculative demands were becoming apparent in the markets for single-family homes and condominiums."
It's worth reading these minutes in their entirety. You can get to them via the link below, and they are also posted in the "Topical Links" section of the GRA website.
http://www.federalreserve.gov/fomc/minutes/20041214.htm
So, let's see what today brings for the stock market. But if it should be a continuation of days one and two, something worse than CNBC, et al are talking about could be in the making.
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