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2006-08-14 :: Macroeconomic News Takes Center Stage

Now that we are past earnings season and found that the energy, metals, and infrastrucutre stocks are printing money (the infrastructure stocks were up 3% on the week compared to a market that was broadly lower), its time for the market to focus on the macroeconomic and geopolitical news that is going to impact the market.

Foremost, we have an inflation report coming at us that will likely show that inflation increased again last month.  This will add concern to the traders that the Fed’s pause will be short-lived.

Also, we had the Israeli-Hezbollah cease fire instituted over the weekend, but fighting resumed a few hours later.  This may be just a small skirmish or a full breach of the cease fire, its hard to know now.

Energy stocks, in spite of strong earnings, will likely move lower if the cease fire holds.

The graph above was borrowed from Mark Manning.  It shows the performance of the commodity index fund (a fund of energy and metals stocks).   You can see that these stocks – despite the recent pullback – remain in a long-term uptrend and have not breached the trendline.  I know its been a difficult market this year, but as you can see from the graph we remain in a long-term bull market for these stocks and we just have to wait out the current soft patch.  When they resume their upward move to the next high, the earnings growth and low P/E will propel these companies to the normal double digit returns.

More later!

Mark