Sterling Market Commentary for September 20th, 2011

A Look at Monday’s Activity:  The overall market was moderately lower yesterday in a relatively broad based move that saw the majority of the indices I track move lower as well.  The weakest sectors were the Broker/Dealers,  Banking, Insurance, Commodities,  Oil Services,  Airlines, Cyclicals, High Tech,  Oil & Gas,  Healthcare related, Chemicals, and Transports.  There was strength in the Nasdaq 100 ‘NDX’ and the Amex Computer Index ‘XCI’.  Oil was lower by $2.37 to $85.81 per barrel, and Gold was lower by $35.80 to $1,776.70 per ounce.  Wheat was lower by $0.152 to $6.73 per bushel, and Corn was higher by $0.002 to $6.922 per bushel, while Soybeans were lower by $0.194 to $13.336 per bushel.

A Few Thoughts Before the Open:  In looking at the charts from yesterday’s trading activity I do not see anything that really stands out as being significant.  However there are two things worth noting.  The 1st being that the NASDAQ 100 ‘NDX’ looks to be stronger than the other major market indices. In comparing the charts of the Nasdaq 100 to the Dow Jones Industrial Average there appears to be a divergence in their performance over the course of the last year.  However other than the fact that the Nasdaq 100 declined significantly more following the bubble bursting and therefore has a greater amount to recover, I can’t find any significance to this.

The other thing that I noticed was that it looks like the health of the Financials and Healthcare related indices are still looking weak. I think this a point of concern if you are expecting a major rally anytime soon in the overall market.

Finally,  I would like to urge a word of caution on any expectations that the European financial crisis is going to be solved anytime soon.  The solution to the problems is Europe is going to take a cultural change that may take several generations to fully implement.  The model of the European Social Entitlements has been under development since the end of World War II, basically 70 years.  It will probably take almost as long for those countries to get their spending and debt under control, and enter a political climate is where the voters don’t try to vote their benefits (and the deficit/spending problems) back every couple of years.

I think  the net result of this is that the European sovereign debt crisis is here to stay for the next several years,  it is going to effect the world economy; and as a result we are going to see a discount applied to international companies that results in an overall lower Price to Earnings (P/E) ratio. If I am correct, then the market will trade at a lower level, and annual returns will be less than we are used to.