George Brooks: Overhead Supply Looms - Some Room to Edge Higher - Careful !

George Brooks |

The stock market has rebounded in response to the lessening of the uncertainties/problems that caused the Feb./Mar. slump. We are now entering an area for the major market averages which comprises resistance per the following:

DJIA: 12,390 - 12,320
S&P500: 1340 - 1335
Nasdaq Comp.: 2830 – 2750
Russell 2000: 838 – 830

A you can see, the market can run a little further before entering these areas, but upside volume will have to pick up if the market is going to punch through this resistance to new highs.

With interest rates at next to nothing, stocks are still the only alternative for institutions which still have a lot of cash to invest for clients, unless their managers see a big decline in the offing. There is no strong evidence that they see that happening yet.

Brooksie’s Daily Stock Market Blog: An edge before the open

Monday, March 28, 2011 9:23 am EDT

DJIA: 12,220.59
S&P500: 1313.80
Nasdaq Comp.: 2743.06
Russell 2000: 823.85

Thinking ahead – probably a little early on this – nevertheless !

I think we accept that the Fed will slowly gravitate to higher interest rates sometime this year or early next if the economy gains traction from here. It’s going to happen at some point, in fact, just the anticipation of the beginning of an increase in interest rates and some investors will head for the exits, triggering a slide in the market.



OK, interest rates are zilch right now, can’t go lower. The economy is almost in full recovery mode in spite of the problems of the world’s #3 economy (Japan) and impact on other economies, as well as higher oil and food prices - (Oh - and the crisis of the month abroad).

The Fed plans to stop purchasing Treasuries in June rather than tapering off its QE2 program over time . Philly Fed’s Charles Plosser said Friday the Fed would have to raise rates and shrink its balance sheet” in the not-to-distant future in order to head off inflation that would hurt the economy.

Plosser is a known “hawk” and is not speaking for the Fed as a whole, but James Bullard (St. Louis Fed) and Jeffrey Lacker (Richmond Fed) are also suggesting the review of its QE2 timeline with consideration of ending it ahead of schedule.

I suspect they are trying to soften the adverse impact of a change in policy. All is moot if the U.S. economy begins to falter.

I am mostly concerned about the initial shock of an increase in interest rates by the Fed. We have had strong economic expansions in the past with interest rates rising and doing so from higher levels. Where it becomes untenable is when the Fed in intent on shutting down an overheating economy, not an immediate concern.

This possibility must be considered when mapping out strategy for investing over the next six months to a year.

To-date, most commentary in the financial news and interviews with gurus, analysts and most Fed officials suggests a rise in interest rates is not imminent. I’m not so sure. Do not dismiss the possibility.

George Brooks
sensiblesleuth@gmail.com

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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