- Trading range market
- Economy seems to be muddling through
- Intermediate lows now in for financial stocks
As I said last week, the S&P 500 index is in a trading range from 1,480 on the down side to 1,580 on the upside. We are at the bottom of this range and I look for us to trade out the topside by Thanksgiving.
Early in the week third quarter GDP numbers came in at up 3.9%. This made two quarters in a row at that level and raised concern that the economy was too strong and that we wouldn’t get a rate cut at the Fed meeting on Wednesday.
The Fed did cut its rate 1/4 point but made it clear that the economy seemed to be on solid footing. They were most concerned about inflation. On Thursday an analyst put out a sell recommendation on a prominent bank stock and the markets, fearing that “the other shoe in the credit markets? was about to drop, sold off sharply. The Jobs reports this morning gave a little good news to every one. Larry Kudlows’ sound bite, “The greatest story ever told” is ringing in my ears as I see that we added 166,000 new jobs in October, the street was only expecting 80,000, and at the same time had only a .23% increase in wage growth. The jobs growth number should ease concern about the economy going into the abyss and the Fed should be pleased, given their inflation concerns, that the wage growth rate came in less then expected. Do I hear Goldilocks knocking at the door?
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Posted by Michael Chapman at 2:13 PM PDT
- 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
- 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
