With all of today’s positive economic news, it was a little surprising to see a less-than-enthusiastic reaction from the markets. While the Dow continues to plug along, the Nasdaq has not been able to keep pace. The good news today came from several sources:

• The Labor Department reported that 2006 inflation was just 2.5%, the best since a 1.9% rate in 2003.
• Jobless claims fell to their lowest level in 11 months.
• December new housing starts rose for the second straight month.
• Oil prices fell to a 20-month low on reports of growing oil and gas inventories.

But gloom and doom hit the markets  when Federal Reserve Chairman Ben Bernanke warned Congress that major changes are needed in Social Security and Medicare to avoid serious damage to the U.S. economy. His concerns relate to the pending influx of retiring baby boomers. “The longer we wait, the more severe, the more draconian, the more difficult the objectives are going to be. I think the right time to start was about 10 years ago,” he said.

Bernanke explained that Federal spending for Social Security, Medicare and Medicaid will total about 15 percent of the gross domestic product by 2030, compared to roughly 8 1/2 percent of GDP in 2006.

“In the end, the fundamental decision that Congress, the administration and the American people must confront is how large a share of the nation’s economic resources to devote to federal government programs, including transfer programs such as Social Security, Medicare and Medicaid,” he said.

A week ago the Nasdaq finally looked to be renewing its advance. But this week, it has given back all of those gains and is again sitting right at key support levels. On the chart below you can plainly see the index’s attempt to break out last week. The gold line is a 50-day moving average and the index is now resting right on that line again.

The bottom portion of the chart is a moving average convergence divergence (MACD) and it also confirms the picture of an index starting to move up but then pulling back.

Traders have short memories when it comes to comments by Fed officials. So we can hope that Bernanke’s remarks will not continue to be a drag on stocks in the days to come. Although his comments are significant and valid, this is a long-term problem and it is unlikely that Congress is going to take any action in the near future. Nevertheless, we still find ourselves in a position of having to carefully monitor market movements over the next few days and to be wary of any growing weakness.

F.S.