Business Blog Posts

With earnings season winding down and a light economic calendar this week, the market will be left to its own devices to sort out its direction.

A rise of more than 16 percent in the S&P 500 .SPX since the start of September had many investors expecting a pullback after the trio of big events. But it appears to have emboldened them instead.

The CBOE Volatility Index, a measure of market anxiety, has slipped below 19 and the late-week action suggests a market getting ready for more gains -- not a sell-off.

"Some of the alternatives to stocks (bonds, cash, etc.) now look much less attractive, which should push money in the direction of stocks," said Bill Luby, a private investor in San Francisco, who writes the VIX and More blog.

This will result in "reducing some of the downside risk for owning stocks, and also putting downward pressure on the VIX."

With the Fed supporting markets through quantitative easing, rates could remain low for quite some time. That, in turn, should help stimulate borrowing and make riskier assets more attractive. It could take data of a momentous nature -- something that suggests the economy is not responding to the Fed's plan to buy $600 billion in Treasuries -- to cause anything more than a minor slip-up in the market.

"What the Fed is doing is a consistent increase in money supply. Consistency will be much more important to the psyche of investors than big spikes," said Edward Hemmelgarn, chief investment officer of Shaker Investments in Cleveland.

That feeling permeated the market even before Friday's jobs data, which showed the fastest payroll growth in the private sector since April. It is difficult to see the market fighting Fed-led stimulus, strong corporate results and labor force improvements.

DIAL 'M' FOR MOMENTUM

The Fed's intentions make the search for yield even more intense, which could bolster financial stocks in coming days.

Financials climbed solidly higher on Friday, with the KBW Bank index .BKX up 2.2 percent, on talk the Fed may allow stronger banks to increase dividends. They could continue to climb as they have underperformed the rally since September.

Call volume in the Financial Select Sector ETF SPDR fund (XLF.P) surged, as option traders exchanged about 618,000 contracts in the XLF on Friday, led by the trading of 480,000 call options. The overall options volume was three times greater than its average daily turnover, according to options analytics firm Trade Alert.

A correction might still occur, though. A number of indicators suggest the market is in position to consolidate.

The 14-day relative strength index is at 88.5. A reading above 70 usually indicates an overbought condition. However, some analysts say the indicator for an overbought market expands in a bull market. So this level may not necessarily be a bearish indicator.

China and the United States turned down the heat in an acrimonious dispute over currencies and trade imbalances at a meeting of finance ministers from the 21-member Asia-Pacific Economic Cooperation (APEC) forum.

Meeting in Japan's ancient capital of Kyoto on Saturday, the finance chiefs declared members will move toward more market-determined exchange rate systems reflecting underlying economic fundamentals, and refrain from competitive devaluation of currencies.

U.S. Treasury Secretary Timothy Geithner told reporters on Saturday that while there was now broad consensus to develop some form of policy framework to avoid excessive current account imbalances, specific targets should not be expected from a Group of 20 summit in Seoul on Nov 11 and 12, just ahead of an APEC summit.

"It's not something you can reduce easily to a single number," Geithner said. He had earlier suggested countries should aim to cut surpluses or deficits to a targeted share of gross domestic product over time.

Geithner was also forced to fend off criticism that the United States was deliberately weakening the dollar after the U.S. Federal Reserve announced last week it was in effect running the printing presses to buy another $600 billion in government bonds in an effort to reinvigorate the flagging U.S. economy.

The series of APEC meetings in Yokohama, just south of Tokyo, will conclude next weekend in a summit that brings together U.S. President Barack Obama, Chinese President Hu Jintao Japanese Prime Minister Naoto Kan and other leaders of fast-growing nations around the Pacific rim.

APEC members have signed more than 100 bilateral and other mini-free trade agreements with each other, and stitching them together somehow into an area that accounts for 44 percent of global trade is an ambitious task.

HOT MONEY INFLOWS

"I think FTAAP is a very good idea," Asian Development Bank President Haruhiko Kuroda said in an interview on Sunday, referring to the Free Trade Area of the Asia-Pacific.

"Rather than doing bilaterally or with a small number of countries, free trade deals work better when more countries get involved because that will not only benefit member countries but also reduce the negative impact on non-member nations, and that could be a plus for the global economy."

Kuroda said regional coordination was needed to deal with the differing rates at which currencies are appreciating in Asia's hot emerging markets.

"Southeast Asian currencies are appreciating, but the Chinese one is not. There is a gap among emerging market currencies," Kuroda said. "This is causing a big problem, so we need to talk more about currency cooperation in the region.

"If regional coordination and cooperation progress, it will help ease global imbalances," Kuroda said.

Capital inflows into developing countries have been massive. Flows into emerging market funds reached $46.4 billion in the year to the fourth week of October compared with $9.4 billion for all of 2009, according to Global fund tracker EPFR.

With earnings season winding down and a light economic calendar next week, the market will be left to its own devices to sort out its direction.

A rise of more than 16 percent in the S&P 500 .SPX since the start of September had many investors expecting a pullback after the trio of big events. But it appears to have emboldened them instead.

The CBOE Volatility Index, a measure of market anxiety, has slipped below 19 and the late-week action suggests a market getting ready for more gains -- not a sell-off.

"Some of the alternatives to stocks (bonds, cash, etc.) now look much less attractive, which should push money in the direction of stocks," said Bill Luby, a private investor in San Francisco, who writes the VIX and More blog. This will result in "reducing some of the downside risk for owning stocks, and also putting downward pressure on the VIX."

With the Fed supporting markets through quantitative easing, rates could remain low for quite some time. That, in turn, should help stimulate borrowing and make riskier assets more attractive. It could take data of a momentous nature -- something that suggests the economy is not responding to the Fed's plan to buy $600 billion in Treasuries -- to cause anything more than a minor slip-up in the market.

"What the Fed is doing is a consistent increase in money supply. Consistency will be much more important to the psyche of investors than big spikes," said Edward Hemmelgarn, chief investment officer of Shaker Investments in Cleveland.

That feeling permeated the market even before Friday's jobs data, which showed the fastest payroll growth in the private sector since April. It is difficult to see the market fighting Fed-led stimulus, strong corporate results and labor force improvements.

DIAL 'M' FOR MOMENTUM

The Fed's intentions make the search for yield even more intense, which could bolster financial stocks in coming days.

Financials climbed solidly higher on Friday, with the KBW Bank index .BKX up 2.2 percent, on talk the Fed may allow stronger banks to increase dividends. They could continue to climb as they have underperformed the rally since September.

Call volume in the Financial Select Sector ETF SPDR fund (XLF.P) surged, as option traders exchanged about 618,000 contracts in the XLF on Friday, led by the trading of 480,000 call options. The overall options volume was three times greater than its average daily turnover, according to options analytics firm Trade Alert.

A correction might still occur, though. A number of indicators suggest the market is in position to consolidate.

The 14-day relative strength index is at 88.5. A reading above 70 usually indicates an overbought condition. However, some analysts say the indicator for an overbought market expands in a bull market. So this level may not necessarily be a bearish indicator.

Bespoke Investment Group noted the rally has put the major indexes and sectors into "extreme overbought territory" in the near-term, with the S&P 500 and six sectors at or near two standard deviations above their 50-day moving averages.

The less confrontational tone emerged after a two-day meeting of Asia Pacific finance ministers who gave their backing to last month's Group of 20 agreement to shun competitive currency devaluations and be vigilant against volatile exchange rate movements.

The meeting in the ancient Japanese capital Kyoto came amid growing criticism from a number of countries, notably China and Germany, of U.S. monetary policy and its proposals to solve economic imbalances.

However, China's Vice Finance Minister Wang Jun voiced some support for quantative easing by the United States to help boost its economy.

"And boosting the U.S. economy will play an important role in global economic recovery," he told reporters.

But he added: "At the same time, the quantitative easing policy has already prompted the concern of emerging nations, and we will continue paying attention to the implementation of this policy."

In a clear reference to the United States, which this week announced it would inject an extra $600 billion into its banking system, Wang warned major economies to refrain from excessive issuance of currency.

A number of other leading economies have warned against the latest U.S. moves to lift its economy.

Brazil's central bank head Henrique Meirelles said on Friday that the U.S. Federal Reserve's decision to increase Treasury purchases to boost the economy risked creating asset bubbles elsewhere.

The Brazilian finance minister's warning of a "currency war" in September captured the frustration many policymakers have over the dollar's steady decline and the appreciation in their own currencies due to ultra-easy U.S. monetary policy.

German Finance Minister Wolfgang Schaeuble went further by saying U.S. monetary policy was "clueless."

Federal Reserve Chairman Ben Bernanke has defended the move to buy $600 billion of government debt by saying that boosting the U.S. economy is important for global growth.

REDUCE IMBALANCES

The talks in Kyoto come ahead of a meeting of G20 leaders in Seoul on November 11-12, who will be trying to resolve at least some of their difference over how best to reduce the imbalances that are destabilizing the world economy.

The United States has suggested setting numerical targets for capping current account surpluses and deficits, something Beijing has called outmoded central planning.