Important Week Ahead

As the month of November came to a close stocks rallied and in the process gain 19% in the last 5 trading days to close down only 7.5% for the month.  November 21st kicked the rally off but the day ended with Nasdaq volume falling 4%, generally not the way you want to start a new advance.  Breadth was also light with winners beating losers by a modest 9-to-5 ratio on the Nasdaq, and less than 2-to-1 on the NYSE.  The last 4 trading days took place during a holiday shortened week causing volume to taper off as the advance developed.  While some individual stock leadership has appeared it is still very thin and combined with some of the previously mentioned shortcomings; the overall action leaves me skeptical this rally will be sustained.

In terms for the bond market, corporate junk bonds remain under price pressure and yield nearly 24%.  As the stock market improves you would expect junk bond yields to decline as prices rise.  On the other hand, 10 year treasury bonds continue to appreciate, sending their yields down to 2.94%.  In response to the most recent government action to bring relief to the home market mortgage rates did see a drop with average 30 year fixed rates around 5.76%.

A series of cabinet and administration appointments by President-Elect Obama helped kick start the stock buying.  He tapped New York Federal Reserve President Timothy Geithner to be the next Treasury Secretary.  Mr. Geithner's intimate knowledge of NY based financial institutions and his direct involvement in several of the rescue deals already announced could prove to be helpful as the government continues to navigate the volatile credit crisis.

World economic data continues to be mostly weak and domestic leading economic indicators I follow indicate the worse may still in front of us.  The residential housing market remains under pricing pressure base on the most recent data released by S&P/Case-Shiller.  Inflation in the U.S. and many other places around the world appears to have cooled, but when I pay nearly $4 for a stock of celery I'm not so sure.

Next week will be an important test for U.S. stocks.  After big price advances for the broad indexes, additional volume and wider participation would be a welcomed development in the days and weeks that follow if we expect recent lows to mark a bottom in the current bear market.