Stock market volatility has declined somewhat over the past two weeks, and stocks have traded essentially sideways.
Investors have been digesting the likely impact that more interest rate cuts and the government's economic stimulus plan could have on the U.S. economy during the months ahead.
Stock prices nevertheless rallied sharply yesterday, after Standard & Poor's announced that it maintained its AAA bond rating on MBIA, the world's largest bond insurer.
Yet I expect volatility to increase significantly this week in response to the release of several important economic statistics, including the latest statistics on the housing market, inflation, consumers' confidence in future economic conditions, and consumer spending.
On Monday, the National Association of Realtors (NAR) reported that sales of existing homes in the U.S. fell during January to their lowest level since February 2005. The inventory of unsold homes spiked higher in spite of falling home prices.
According to the NAR, the current supply of existing homes for sale is expected to remain on the market for approximately 10 months, which compares to a historic norm of around four months.
Tomorrow morning, the U.S. Department of Commerce will release similar data for sales of new homes.
In December, sales of new homes had declined 41 percent, compared to the same period a year ago, and fell to their lowest level since February 1995. Meanwhile, the inventory of unsold new homes for sale rose during December to its highest level since October 1981.
A key indicator of economic activity in the manufacturing sector will be released Friday, as well as the latest statistics on consumer incomes and consumer spending.
According to the Institute of Supply Management, manufacturing activity improved in January, after contracting in December. Although the rate of growth in consumer spending has slowed over the past few months, consumers have not yet cut back significantly on spending.
However, I expect this trend to change during the months ahead in response to falling home values, high consumer debt levels and declining consumer confidence in their expectations of future economic conditions.
This morning, inflation statistics on wholesale prices will be released by the U.S. Department of Commerce. The prices of oil, raw foodstuffs, and various other commodities have risen sharply over the past month. I expect we'll see a big up-tick in wholesale prices as a result.
I urge you to not get overly confident in yesterday's rally in the major stock market indices. However, if you're interested in learning how to profit during both bull and bear markets by investing in exchange-traded funds (ETFs)
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