Market Clues

Traders continued to take profits on the last trading day of November Wednesday, but overall it wasn't a bad month at all. The Semiconductor Index SOX finished the month with a gain of 11.33%. The blue chips of the Dow and S&P 500 had more modest gains of about 3½% each, but the NASDAQ-100 finished the month with a gain of 5.91%, followed closely by the S&P 400 MidCap Index with 4.75%. Even the recently-weak S&P 600 Small Caps managed to beat the blue chips with a gain of 4½%.

Good economic news has been ignored by this market as it consolidates gains ahead of what is expected to be a good yearend rally. If the leaders which got us here are any indication of future trends, the uptrend is alive and well:

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posted by Bob Carver  # 10:03 PM

Tuesday, the first day of this month's Buying Spree, was relatively weak, but considering the huge gains of the past 7 weeks, a few days of rest should allow the big trend up to reassert itself. In fact, the last trading day of the month will see the broad market advance 70% of the time on average.

Yesterday's interpretation of Microsoft as poised to plunge brought a few dissenters. That was, of course, fully expected -- no one is right 100% of the time and we could certainly be wrong. But, we're reading the indicators as very bearish on Microsoft and, no matter how hard we try, we just can't find much positive to say about the stock.

However, taking the longer term view, a thrust to cut the stock in half is actually bullish on the long term. The reason is that it would put the stock in a solid value category and position if for substantial gains in 2007 and beyond. Instead, if we see a thrust rally now, it would limit the ultimate upside for Microsoft and the stock would likely head much lower toward the end of the decade.

Now, whether Microsoft is a bellwether for the market is something to consider. We are basically bullish on the market as a whole, so when one of the largest stocks is heading south, that does call the bullish trend into question. Of course, if the action in General Motors were known in advance -- a solid, bearish slide toward oblivion this year -- would that have suggested the market would follow? No, of course it wouldn't. The reason is that while the fate of General Motors is important to its employees and retirees, stronger companies are providing the growth in this economy. And, in the same way, Microsoft was a major growth stock of the Twentieth Century, not the 21st, and even a 50% decline in its shares isn't going to hurt the economy (although it may give severe heartburn to some large institutional investors).

In fact, one can make the case that Microsoft's huge profits have represented a tax on the economy's productivity. A removal of that tax via open source software as companies and individuals find that free software can get the job done will liberate extra cash that can be spent on growing the overall economy and boosting shareholder returns for the thousands of companies which formerly used expensive closed source software. Thus, a decline in Microsoft can be interpreted very bullishly for the rest of the market.

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posted by Bob Carver  # 11:02 PM

The stock market was subject to modest profit-taking Monday as most indices dipped slightly.

We've been watching Microsoft, the old century's darling of tech stocks, trading essentially sideways for the past 8 years. The pattern has been an Elliott Wave contracting triangle. When five internal waves are completed within the triangle (labeled A-B-C-D-E), a thrust move occurs. That thrust occurs in the same direction the security had going into the triangle, usually covers the number of points of the widest part of the triangle, and ends at the time of the triangle's apex. Triangles are indeed incredibly useful in forming price and time targets. The implication is that Microsoft is about to get cut in half:

The old guard is passing while the new guard takes its place:

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posted by Bob Carver  # 10:59 PM

While the bears keep warning of an impending crash, the train just keeps chugging up the mountain. We suspect that the bears will soon:

1. be forced to cover their short positions near the next intermediate top;
2. turn bullish to catch the last few percentage points up;
3. turn bearish again on the next dip and sell the market short just as the next correction ends.

As long as the market can climb this "Wall of Worry", stocks are in good shape.

Back in early 1995, our OEX Dollar-Weighted Call-Put Ratio registered readings well into the overly-bullish category on several January days. Instead of being a contrary indicator, that was a sign that the crowd had finally recognized just how wrong they had been to be bearish on stocks. The crowd is always right on the market in the middle of the move.

This market is about to reach that stage at some point in the next month or two. That's the stage where the bears realize just how wrong they have been. At that point, they will be forced buyers of stocks due to the fact that the only way they have of stopping their losses is to buy back stocks sold short. When the bears start buying, sending the market running to new highs, cautious investors who have parked their investment money in money market funds or Treasury instruments will decide that they are missing out on the big bull market and will transfer those funds into the stock market. That's called the Point of Recognition and it will mark the center of the bull market. Since the bull market is just in its third year right now, that will strongly suggest that we have about three more years to go.

If one had bought just one S&P 500 contract at the beginning of the last Point of Recognition in 1995 (margin requirement of about $3,000) and had held it for the next four years (rolling the position over at each quarterly expiration), it would have had an accumulated profit of $4,000,000 over that period of time -- $1,000,000 per year. Compare that to the day-traders who have to claw and fight their way into the market each day to try to make money. We don't know of any of them who made a cool million dollars a year just by putting their position on auto-pilot.

Is stock market history repeating? Probably not, but it seems to be rhyming very well!

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posted by Bob Carver  # 4:22 PM

The thrust rally in stocks continued to advance non-stop on Tuesday as investors insist on finding reasons to buy. Fed minutes gave a hint that the rate hike campaign would soon stop, giving stock investors reason to celebrate. Of course, the bond market had already figured this out a couple of weeks ago, but that's standard operating procedure for bond traders to lead stock traders at figuring out what's happening to interest rates.

Speaking of interest rates, the 10-year Treasury Note rate closed below the lower trading band on Tuesday. That's a hint that rates are going to continue lower even if they detour upward temporarily, and that's a sign that the bond market will continue strong on the short term. Although we think the bond bear market is well-entrenched for the larger trend, this rally in bond prices could last several more weeks and continue to support the stock rally.

Wednesday will be a light volume partial day with insignificant trading. So will Friday. All US markets are closed Thursday for Thanksigving Day. Our next update will be made on Saturday.

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posted by Bob Carver  # 11:05 PM

A month ago, few believed that a big turnaround was coming, but we told you how bullish you should be on the October fakeout dip. Here's an updated chart of the Dow which shows that this rally is actually the culmination of the large trading range contracting triangle which had been under development since February 2004:

This is the big reason why maintaining a position is so important, even for traders.

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posted by Bob Carver  # 11:57 PM

The stock bull market which began in late 2002-early 2003 is now almost three years old. The average bull market in the US usually runs from 3-7 years, with the midpoint, 5, being fairly standard. That suggests a potential rise into 2008 if this is an average bull market. But, since 2008 is a Presidential Election Year in the US, and the party in power tends to stimulate (and over-stimulate) the economy during election years, it wouldn't be beyond reason for the bull market to continue until close to the actual election in November 2008. Then, depending upon which party is likely to see their candidate take over in January 2009, the market would pass judgement on what they are likely to do to the economy. If the market likes what it sees, the bull market could continue. Otherwise, a bear market like the 2000-2002 affair is possible.

So far, this bull market is putting bullish investors on the road toward great profits. While there have been mini-bear markets (corrections or retracements) punctuating the overall bull market, the gains for bullish investors have been and are likely to dwarf the gains for the bears, who have been enduring a market which provides them with fleeting gains and substantial losses when it rallies.

Pickings for the bears have been mighty slim compared to the bullish investors. For example, a bullish investor in the S&P 500 Equally Weighted Index fund with ticker symbol RSP who bought shares in April 2003 has seen gains of 61% so far. Futures investors in the Value Line Index have seen their profits soar almost $90,000 per contract in that same period of time -- an astounding 2200+% return on margin. Bears might have been able to pick up some profits on minor dips along the way, but they have found their gains very fleeting -- those who didn't use stops have lost money on their short positions as the market has rallied back to exceed previous highs every time.

Last week, for instance, most market indices achieved higher highs once again, but the bears can only ruefully complain about how bad things are and about how bad things will be in the coming "depression". While touting how good they were at selling the market short at the last "top" and making a minor trading gain, smart investors were using those dips to buy cheaper shares which are now at new highs. After warning us for the last three decades about how bad things are going to be, it's truly amazing that (1) they are still this bearish, and (2) anyone still listens to them. But, apparently fear is a stronger motivating factor than hope and the bears still garner an audience. Unfortunately, if you listen to these bears, you have missed out on some rather nice gains in this bull market.

Of course, we hasten to add that we definitely do not favor a "Buy and Hold" investment stance. The 50% haircut in the S&P 500 Index in the last bear market should convince anyone with more than a thimblefull of brain that such a strategy is loaded with hazard. However, we do believe in being fully invested when the intermediate term trend is up and in the right sectors of the market. While the S&P 500 Equally-Weighted Index was advancing 61%, the regular S&P 500 "Unequally-Weighted" Index only gained 36% -- and still has not made a new all-time high while the Equally-Weighted version did so long ago. So, yes, we favor holding for the uptrend in the leading sectors, but no, we don't favor holding the laggard sectors either through the uptrends and especially not during severe downturns.

In any case, after the big runup we've seen and the holiday week coming up, a week of rest seems to be on tap for the markets as profits are taken and most professional traders will be taking the week off to spend time with their families. This week, we will have updates on Monday, Tuesday and Saturday as Wednesday and Friday sessions are likely to be very light volume sessions which are not conducive to short term trading and immaterial to trend-following longer term investors.

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posted by Bob Carver  # 8:50 PM

Despite options expiration, stocks rallied very well. Since the days preceding expiration tend to be relatively flat, the fact that the market can mount a good rally is yet another sign of the underlying bullish trend in this market. The NASDAQ-100 Index was particularly strong, which is not surprising considering how that sector has been performing in the last couple of months:

Although the market may go into another consolidation here, dips are still buying opportunities. Bonds and the metals have also been strengthening as most markets are now reflecting the power of the rapidly-growing, but non-inflationary, global economy. And, the tech sector's strength is a sign that the recovery has staying power behind it. After the bell Thursday, Hewlett-Packard (HPQ) announced earnings that exceeded expectations, sending it up more than 6%. And, we've noted here in recent weeks that the money flow line into Dow stalwarts GE and IBM reflected intense buying activity in these major blue chips, both of them strong bellwethers, boding well both for the economy and for the stock market as a whole.

The only potential negative to Thursday's action involved our sentiment numbers, which showed option traders getting overly-bullish again. However, when the move is powerful, even the option traders are right for the most powerful part: the Point of Recognition, or the "3rd of a 3rd" center in Elliott Wave terms. We may be near that powerful place where the whole market goes up without any overt reason whatsoever, leaving the bears wondering why they ever stepped in front of that freight train.

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posted by Bob Carver  # 10:37 PM

Stocks are stalled out due to being overbought and buyers sitting on their hands this week, although the leaders found a way to advance a bit on Wednesday. After the rally we've had, the market needed a breather to burn off some of the overly-bullish sentiment that appeared late last week. Wednesday's OEX sentiment was dead neutral, so this slackening of the uptrend is just the medicine the market needs.

Although crude oil and associated fellow travelers like Heating Oil, Gasoline and Natural Gas, have been getting the most attention in the last few months, there are certainly other commodity bull markets. One of the strongest of these has been Sugar, which had been extremely strong from May to October, rising approximately 38%. Now, in the futures market where leverage can be high, this represented a more than $3000 per contract gain on a minimum margin of only $700, so this was definitely a big gainer for commodity investors.

One way to identify long term bull markets in the commodities is by noting whether there is "backwardation" in the commodity. This means that a near term contract is trading at a big premium to a distant contract. Now, normally, more distant contracts trade at a higher price than the near contract due to storage costs. When the difference between the near contract and the far contract (known as the "spread") is rising, it indicates the commodity is in high demand for some reason or another. In the case of Sugar, this backwardation was a clear sign that demand was outstripping supply, something we learned was the case months later as a report out Wednesday from ED&F Man predicted a world Sugar production deficit of 3.8 million tons for the 2004-5 crop year. But, that's exactly what the spread chart was telling us several months in advance:

As you can see from the spread chart above, the recent correction is over and Sugar prices are soaring again. While the energy markets are still enduring their correction, Sugar has taken the lead on the upside once again.

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posted by Bob Carver  # 10:35 PM

"The Fed chief wields enormous power over the economy and the portfolios of millions of investors, large and small. The chairman carries much influence in shaping the Fed's decisions on interest rates. His words can move markets." ... from an AP story quoted by Bob Prechter, who commented, "Crap, crap, and more crap."

The Associated Press got it right, however. The Fed chief does wield enormous power over the economy. That's why we have an independent Fed. Otherwise, corrupt politicians would be able to debase the currency at will. In our system, the Fed chief stands in the way. It's part of our "checks and balances" and one of the strong points to our way of government.

But, there are a few aspects about the new Fed Chairman-to-be which are a bit puzzling, such as:

• Mr Bernanke is personally short the US Dollar via his ownership of Canadian bonds. The primary duty of a country's central banker is to preserve the value of that country's currency. Sounds like a conflict of interest to us.
• His goal of setting an inflation target sounds good on the surface, but is this a case of the fox guarding the henhouse? After all, few can agree on a definition of inflation, much less a way of measuring it. Setting a target band on a quantity that is so easily manipulated by the Executive Branch (i.e., President Bush) sounds like, at the very least, an abdication of the Fed's independence, if not a wholesale sellout.
• What kind of deal did Bernanke strike with Bush in the White House for this plum of a job? A more independent central banker would certainly have had the appearance of independence. Bernanke looks more like a hand puppet at this point, but it's possible that once he takes office, all deals are off. We shall see.

As for the news, our government reported that wholesale inflation was missing in action (i.e., unchanged) last month if you ignore food and energy. The bond vigilantes accepted that statistic at face value and bid bonds up to their highest prices in weeks. Stock investors were quite bullish, too, but the rally failed and stocks closed near their lows of the day.

The movement in stocks was expected around here, both up and down, of course. We mentioned last week that the stock market often peaks two trading days after the OEX options traders pass the overly-bullish level. That milestone was reached in Friday's session. No indicator is perfect 100% of the time. This one gets pretty close.

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posted by Bob Carver  # 11:13 PM

Stocks and bonds consolidated within trading ranges Monday after big rallies last week. This is options expiration week and the big gains of the past few weeks in stocks have generated overly-bullish readings which need to be "bled off" before the market can continue higher. Options expiration week tends to see that happen and Monday is probably only the first in a series of lower range days in the stock market.

The economy took a licking from the hurricanes, but is coming up ticking, as our Repo Index illustrates:

Most Wall Street observers pay special attention to the Semiconductor Sector because that sector is a great leading indicator for the health of the economy. Although overall breadth has been poor in the last few days and supports the case for a correction/consolidation of the rally, the fact that the Semis are strong relative to the other parts of the market continues to confirm the uptrend.

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posted by Bob Carver  # 11:30 PM

Friday's session was marked by low volume. Normally, a market which advances on low volume is not bullish. However, since the day was a bank holiday, we can ignore any bearish implications for this one day.

We can't ignore the fact that option speculators are too bullish. On Friday, we got the first reading in quite a while that OEX speculators had reached the overly-bullish condition which often precedes trading tops by a couple of days. If that relationship holds this time (remember, no indicator is right 100% of the time), Tuesday is likely to bring a trading top into the market.

On the longer term, the market is in great shape, as the chart below illustrates:

Dips continue to be great buying opportunities since we know the larger trend is up, which limits the depth to which the bears can push the market. Just look on each selloff as an early Christmas present from the bears as they distribute gift cards allowing you to buy stocks at a discount!

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posted by Bob Carver  # 11:57 PM

The bond market rallied sharply higher Thursday, helping to light a fire under stocks. The leading sectors continued to lead and we even saw some strength from a blue chip leader, General Electric, as well. CNBC is a unit of GE and is doing a series on the lagging blue chips this week. From the looks of things, those laggards appear likely to regain their status as leaders in the near future:

This, in fact, is the normal progression in a bull market. The early stages are led by small and mid cap stocks and are characterized by rapid earnings gains across the board from depressed levels due to the recession which caused the preceding bear market. In this phase, breadth is excellent and the market as a whole moves steadily higher. The blue chips lag the broad market, though, and are seen as undesirable due to their slower growth rate.

As earnings growth slows down and the Fed tightens interest rates, those multinational blue chips start to come back into favor since they can generate growth even in the face of higher interest rates. Earnings are often far more predictable in the blue chips, causing many smaller stocks to be sold as earnings growth disappoints and investors are quick to take profits at the first hint of trouble. This transition point often marks the midpoint of the bull market.

It appears we have arrived -- at or near the midpoint of the bull market. Now, if you see that as a glass half-empty, you may be disappointed. It's far better to see the glass as half-full.

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posted by Bob Carver  # 9:59 PM

The market continued to build a trading range Wednesday that should serve as a strong base from which to launch the next leg up in the bull market. We noted that, despite the fact that the tech stocks of NASDAQ have been stronger than almost every other sector, usually a very bullish sign, sentiment amongst QQQQ option traders favored puts on Wednesday by a 2:1 dollar-weighted margin, which is quite appropriate at this stage of the cycle. A tendency to try to call tops is usually a formula for short covering which can provide some fuel for rally once the upside breakout of the range occurs. OEX traders were slightly bullish, but not overly-bullish.

Bonds, despite the likelihood of being near a turn to the upside, gave back some of their recent gains Wednesday, but did not break below last week's low. Apparently, there is still some nervousness over the outcome of the Treasury bond auctions. The typical pattern is for bonds to be weak going into the auction and strong coming out of them due to dealer short covering. We should see bonds make a decisive move to the upside sometime this month.

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posted by Bob Carver  # 10:28 PM

On Tuesday, Wall Street reacted to negative Toll Bros. earnings news with disappointment and sold off modestly. This is likely to be a very temporary reaction and it came at a time when a correction to the big rally was expected to occur. In fact, the leaders didn't even go down -- they just slowed their rate of growth, which is a very bullish sign that the underlying trend is still accelerating to the upside.

The Fed may have finished their tightening sequence now that the housing "bubble" has been popped. If they take their cues from the Australian Reserve Bank, they will stop now to assess the outcome of their long campaign. In Australia, a similar "bubble" was successfully popped without causing a recession. Hopefully, our Fed is as smart as Australia's. The bond market seems to be taking the Toll Bros. news as a strong indicator that the Fed may be finished raising rates.

The US Dollar has been showing great strength on the back of news from Europe of riots by disenfranchised youths. This is a good example for all of us to take to heart. When a group of people are marginalized and discriminated against, there is an ultimate price to be paid. And, it's time for Europe to pay the piper. The Euro seems to be on its way to parity with the US Dollar.

Nervousness about the stability of Europe is causing a flight to safety to the US to take place now. Of course, higher interest rates on savings, a strong military and a growing economy and stock market make the decision to move money into the US very easy for most foreign investors. This influx of money initially goes into interest-bearing accounts. Later, when the stock and bond markets have made substantial gains, some of it will go into stocks. We call that the "Point of Recognition" and it will be quite a sight to behold.

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posted by Bob Carver  # 11:15 PM

Anyone who has been paying attention to the NASDAQ since those heady days of the last millenium knows that that market has been in a severe bear market since early 2000. The chart below shows that the QQQQ, the stock which performs in line with the top 100 NASDAQ blue chip stocks, lost over 81% of its value going into its 2002 low.

What you may not have realized is that anyone who bought a fixed dollar amount of QQQQ shares at the beginning of each month since April 12, 1999 (that's where our database of prices for this stock begins) is showing a profit. Now, that's a result that is not obvious to the naked eye, but if you just do the math, that's how it works out. We assumed that our hypothetical investor bought $1000 worth of QQQQ shares on the first trading day of each month and paid a $7 commission. After 80 buys for a total amount invested of $80,000, our investor would own approximately 2009 shares now worth $80,259.55. Though the paper profit is small and we certainly wouldn't recommend blindly buying in a strong bear market like this hypothetical example illustrates, the key point here is that a regular program of investment actually showed a profit despite a bear market virtually as bad of the Great Depression of the 'Thirties.

By the way, the methodology our hypothetical investor used is called "averaging down" and it actually works if you can divorce your feelings of being a loser as your account dwindles down and you keep buying more. That's why we like to buy only when the overall market trend is up -- it makes it much easier, plus it's far more profitable. Determining when the trend is up, however, is the difficult part.

Additional stock market commentary -- for subscribers only -- can be found here: Subscriber Notes (if you're reading this in plain text format, visit the MyClues Home Page and click on "Subscriber Notes" in the Quick Links section at the top of the page).

For additional chart commentary for subscribers only, please use this link: Daily Chart Comments (comments there may be posted by the next US trading session).

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posted by Bob Carver  # 7:51 PM

Last week's surge higher in the stock market confirmed that the mid-October low was the end of a brief, two-week correction, and that the trend is pointed up. We have solid indications that this trend is likely to last for a specific period of time (exact projections from three different methods which agree with each other for the end of this uptrend reserved for subscribers only in our Subscriber's Notes section of the website).

Monday, according to Mike Burk at Guranteed-Profits.com, is seasonally an up day, so the trend is likely to continue to work in the bulls' favor. Of course, bullish investors have outpaced bearish investors over almost any investment period longer than a week for most of recorded history, so that's not saying anything's likely to be different in the future than it has been in the past! Certainly, the bears like to think they've done well, but if you look at investment performance on an objective basis, such as percentage return on capital, bears do very poorly most of the time because they fail to take the bullish side until the trend is almost over.

And, math is in the bullish investors' favor. For instance, when the S&P 500 Index, arguably one of the weakest measures of stock market performance -- a real Straw Man Index designed to underperform the stock market in order to make mutual fund managers look good -- declined from its Bubble Peak of 1532.50 in 2000 to its bear market low of 760.63, it lost half of its value -- 50%. But, since then, it has gained 58%, so while the index itself is below its peak, bullish investors who bought index funds such as SPY (the S&P 500 index stock) on a regular basis are showing profits without even timing the market! And, by use of market timing, those returns could have been far higher as we have demonstrated day after day, week after week, month after month and year after year right here. Then, if you add in the factor of being in the stronger index funds, like RSP (the Rydex S&P 500 Equally-Weighted Index stock), IWM (the Russell 2000 Index stock), MDY (the S&P 400 MidCap Index stock), or IJR (the S&P 600 SmallCap Index stock), your returns would be well into triple-digits while your bearish compatriots are calling every top the "End of the World as We Know It!" Somehow, the bears would rather moan and complain about how bad things are while the bulls are the ones making the big bucks.

A word to the bears: it's not too late to make money in this bull market. But, you're going to have to change your game.

Additional stock market commentary -- for subscribers only -- can be found here: Subscriber Notes (if you're reading this in plain text format, visit the MyClues Home Page and click on "Subscriber Notes" in the Quick Links section at the top of the page).

For additional chart commentary for subscribers only, please use this link: Daily Chart Comments (comments there may be posted by the next US trading session).

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posted by Bob Carver  # 12:28 AM

Stocks continued their rally from mid-October on Thursday, but breadth narrowed and traders were locking down profits in the afternoon session. Most likely, the Employment Report for October, to be released at 8:30 am EST Friday morning (13:30 GMT) by the US Labor Dept will roil the market as the Monthly Buying Spree expires.

In fact, the stock market has done all of this move up on its own, with no help from the bond market. We're due for a bottom in the bond market in the near future, but that has yet to arrive. So, with stocks substantially overbought, it appears that the bears may have room to rejoice for a little while at least.

Don't forget, though, that when the bond market forms a bottom and moves up, it is likely to ignite a real fire under stocks.

Additional stock market commentary -- for subscribers only -- can be found here: Subscriber Notes (if you're reading this in plain text format, visit the MyClues Home Page and click on "Subscriber Notes" in the Quick Links section at the top of the page).

For additional chart commentary for subscribers only, please use this link: Daily Chart Comments (comments there may be posted by the next US trading session).

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posted by Bob Carver  # 10:41 PM

The market showed surprising strength Wednesday as the broad market powered above resistance and closed above its upper trading band. It appears that the stock market is still maintaining a bullish trend since surprises are usually in the direction of the underlying trend.

The Value Line Index, representing the broad stock market and showing gains of 80% so far this decade, continues to outpace the blue chips. While the Dow Industrials are down 9% since the beginning of 2000 and the S&P 500 Index is down more than 17%, gains continue to mount in all sectors of the market except for the blue chips. We expect that the transition from the broadly-based bull market advance to a narrowly-focused blue chip bull market will take place sometime in the next year, it appears there's still a lot of life left in the broad market:

An ETF, the Rydex Equal-Weighted S&P 500 (RSP), tracks a similar index.

While this advance is likely to be retraced (the Monthly Buying Spree is basically over today), the larger uptrend is still in progress, probably until at least 2007. That doesn't mean there won't be pullbacks -- it wouldn't be a bull market without deep and scary pullbacks which shake investors' confidence enough to make them sell out just when they should be adding to their positions on dips. This Friday's Employment Report could very well initiate some selling in stocks if it shows the economy didn't grow due to the triple hurricanes. That could setup yet another buying opportunity to put new cash to work on the dip.

Additional stock market commentary -- for subscribers only -- can be found here: Subscriber Notes (if you're reading this in plain text format, visit the MyClues Home Page and click on "Subscriber Notes" in the Quick Links section at the top of the page).

For additional chart commentary for subscribers only, please use this link: Daily Chart Comments (comments there may be posted by the next US trading session).

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posted by Bob Carver  # 11:16 PM

Stocks fell modestly on Tuesday as the market digested recent gains. This was as expected and did not change the underlying trend, which remains up.

The Fed raised short term rates again on Tuesday. According to their press release, they are still removing accomodation, which means that they think their policy is still relatively loose. We suspect that they are likely at the neutral rate policy level right now and are in danger of overshooting with further rate hikes. Whether they realize that or not, it may be up to the bond market to send them a signal. If bonds bottom in price (peak in rates) right now and start rallying (lowering longer term rates), it would send a strong message to the Fed that they have gone far enough in raising rates. Whether they listen or not is an open question, especially considering that a shift in leadership will take place in the coming months as Ben Bernanke takes over from Alan Greenspan.

It's certain that rising rates are a concern to the stock market. Tuesday's announcement, although as almost everyone expected, boosted selling pressure into the close and very likely is causing some big hedge funds to consider moving assets out of stocks and into intermediate term bonds to take advantage of the higher rates. Funds are constantly being reallocated to stocks and bonds, but intermediate term rates are getting some serious attention from asset allocators right now.

The Employment Report due out this Friday is likely to induce a trend change in the market. We believe it will show the economy was hit hard by the hurricanes and that the Fed's confidence that the economy will recover may be called into question at that time. This could produce a retest of the recent stock market low if a substantially larger number of jobs were lost -- whether permanently or temporarily -- than expected. In fact, the market may be anticipating just such a report as buyers seem to be backing away until the direction of the economy becomes clearer. That leaves the market open to downward pressure from sellers in the interim.

On the other side of the coin, if the market is factoring in a punk report and it turns out to be better than expected, it could generate a relief rally of some power. It should be an interesting week by the time it's over.

Additional stock market commentary -- for subscribers only -- can be found here: Subscriber Notes (if you're reading this in plain text format, visit the MyClues Home Page and click on "Subscriber Notes" in the Quick Links section at the top of the page).

For additional chart commentary for subscribers only, please use this link: Daily Chart Comments (comments there may be posted by the next US trading session).

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posted by Bob Carver  # 10:53 PM