• Correction likely over
• New highs by Thanksgiving?
• Feds likely to cut rates at October meeting

The S&P 500 index has corrected 5.5% from the October 11th high of 1,576 to the double bottom lows made October 22nd and 24th at1490. This is a normal pull back in a rising market. The influence of the down cycle is now past and we are within one week of entering the November through April up seasonal time period. The down move was enough to move Bullish investor adviser sentiment off of its 5-year highs and to push short term technical indicators to sharply oversold levels. Unfortunately, it also took out the stops on the three indexes we track for this letter which means we have moved from an ‘up trending’ market to a ‘trading range market.’ With that said, I believe we are at the bottom of the ‘range’ and can expect the market to trade to the top of the range, possibly to new highs, by Thanksgiving.

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Posted by Michael Chapman at 1:59 PM PDT

Excess benefit plans are nonqualified deferred compensation plans maintained by an employer solely for the purpose of providing benefits for certain employees in excess of the limitations imposed by Section 415. The plan may be funded or unfunded.

The advantages to this plan include:

• Allows highly compensated employees who participate in a qualified retirement plan to supplement their retirement savings.
• Taxation may be deferred if the plan is “unfunded”; amounts contributed are generally includable in income when received by the employee (or made available to the employee).

Disadvantages include:

• If the plan is funded, the employee is taxed immediately on all employer contributions unless the benefits are subject to a substantial risk of forfeiture.
• Can be risky; benefits might not be paid in the future if the plan is unfunded.
• ERISA’s safeguards do not apply to unfunded plans, and only partially apply to funded plans.

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Posted by Michael Chapman at 12:00 PM PDT

• Mild correction is sign of more upside to come
• 1st quarter of ‘08 may be hard on the bulls

In my October 2nd posting I was looking for a market correction starting October 11th and lasting through the 26th. The high in the S&P500 cash index was made on October 11 and the index has since corrected about 3%. I am pleased that, so far, this correction has been mild, orderly, and what one would expect in a rising market. We may have to contend with further weakness through the end of October but, at least for now, very little technical damage has been done. The market continues to slough off bad news, and after the October lows are in I look for one more run to new highs by the end of the year.

The bulls may be facing the perfect storm by the 1st quarter of 2008. If the price of oil simply remains constant it will be trading 80% above year ago levels by January. Once oil reaches this relative level, it has predictive value according to Steve Leeb. In his book, The Oil Factor, he shows that it’s this relative level of oil prices that may cause the markets to drop. Additionally, a large number of variable rate mortgages are due to reset January through March. Higher gas and mortgage payments may be enough to slow consumer spending. Add the fact that there is an important 3.3-year cycle low due at that time and we may see our first 20% correction in five years.

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Posted by Michael Chapman at 12:00 PM PDT

• Market approaching short term high
• Focus will shift to earnings and guidance
• Look for more take overs and stock buy backs

The market continues to follow my script (see previous three Bull Bear Reviews), as it has broken to new all time highs on the Dow Industrial and S&P 500 averages and to a new 52-week high on the NASDAQ composite. The S&P 500 is at the low end of my upside target, 1,566 to 1,600, and it’s extended in price and will likely make a short term high sometime between today and next Tuesday (October 16). Following this high look for a two- to four-percent correction down through the end of October. The extent and degree of this correction will give some indication to the amount of upside to expect in November and December.

Third quarter earnings season started this week. Market participants will likely change their focus from economic numbers to the health, or lack there of, of corporate America. Expectations are low so I look for the majority of the earnings “surprises” to be to the upside.

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Posted by Michael Chapman at 12:00 PM PDT