JANUARY 24, 2005

Another late day fade. The market closes right on its lows. Oil finished close to $49, more weak economic stats from Europe and Asia. Taiwan industrial production fell 0.9% and Italian retail sales fell 0.4%. Walmart stuck with their 2-4% SSS forecast. Next week will be the acid test. They ususally don't change it until the final week. The bond market had a nice little rally. The TLT Lehman 20yr bond index closed at a 52 week high. The buck and gold were pretty much unchanged.

You can blame it on a lot of things, but a let's not forget most of the things to worry about were around during the year-end rally. The Fed raising rates, the trade deficit, the budget deficit, Iraq elections, consumer debt, valuations, a housing bubble, the weak dollar were all part of the wall of worry the maket climbed in Nov and Dec.

I think what is driving both markets is oil. It closed at around $42 on the first trading day of the year, as opposed to $49 today. A lot of people at the end of the year thought at $42 it was on its way to the mid $30's. The economy was able to absorb high forties oil in 2004. I don't think it can absorb $50 oil with the Fed raising rates. The longer we stay above $47.50. The quicker and deeper will the economy slow down. Profits will follow. That is what the bond market is saying . $50 oil is certainly not good for the inflation indexes.

As I've mentioned before , we are in the 1160-1170 support range for the S&P. If we break down it will be because the market will be pricing in the coming economic and profit slowdown.European economic weakness and Fed tightening is preventing the dollar form weakening and providing support to the market. We were at 134.87 euro at the begining of the year and at 130.47 now. Stocks like a weaker dollar and we are not getting it.