Since the previous edition of the Sterling Weekly the Dow Jones Industrial Average rose 1,404.23 points or approximately 12.3% to 12,801.23 Over the course of the last 3 1/2 months since I last since I last wrote about the market it has staged a rather impressive rally. As a result, I was fairly surprised when I looked at the performance results of the various indices I track. Sterling Investment Services tracks roughly 39 various sector indices. Of these indices, 3 are interest rate indices that track the movement of interest rates, and the other 36 indices are stock based indices that either track the broad market or are designed to track specific market sectors.

The 3 interest rate indices I track obviously did well as the Fed manipulated interest lower, sending bond prices higher in the process. It is tough to get any message from a manipulated market. However, what I do see is a bubble forming that I am very concerned will be far more damaging to the US and world economy when it bursts than the housing bubble was when it burst. Of the 36 stock indices I track, 13 managed to show positive gains for 2011, however it should be noted that 2 of these indices, the S&P 100 ‘OEX’ and the M.S. Consumer Index ‘CMR’ both posted a gain of less than 1% and could have easily been negative on the year. Two (2) more indices, the Amex Oil & Gas Index ‘XOI’, and the Amex Natural Gas Index ‘XNG’ both had gains of less than 2%, which is pretty poor performance in my opinion. It is also interesting to note that many of 2011’s top performing stock indices. Also interestingly enough, almost all of the indices that posted positive returns for 2011 were among the poorest performers last year.

I always like to look at these year end results and see what I can find in the performance results of the various sector indices. I generally find it pretty interesting to see what the market it telling us. This year it is a tough message. I look at these results and I see a slowing broad economy. I know the market rallied late this year, but the broad market results indicate a combination of slowing profits growth and rising inflation or interest rates. I just do not see economic growth in the results of these sector indices. Maybe things will change as we get closer to the election, but I see a declining market between now and then.

It should be noted that this week has a rather heavy economic calendar for news release;and late in the week the government releases inflation numbers at the wholesale and consumer level. The inflation numbers should have some attention paid to them. We are currently seeing the year over year change in consumer price index at around 2%, which is slightly above the current yield on the 10-year Treasury bond, and about 1% below the current yield on a 30-year T-bond. For a long time I have expressed my concern that the Fed is creating a bubble in the bond market that could be extremely damaging when it bursts. My concerns are that if we see a continued increase in the year over year Consumer Price Index, which in effect pushes the yields on these bonds into negative territory, then the greater the damage will be when the bond bubble finally bursts.