Market Condition Summary: Improving, but Remain Cautious

Equity Markets: DJ-30 Industrials +889.35 @ 9065.12; SP-500 +91.59 @ 940.51; Nasdaq +143.57 @ 150.590; Russell 2000 +34.15 @ 448.40; VIX -13.10 @ 66.96

Credit Markets: Fed Funds Target: 1.50;  10 Yr Tsy Yld: 3.82;  TedSpread: 2.71;  2-10 Yr Yield Curve Spread: 2.25;  Tips Spread: 0.82;  Top Commercial Paper: 0.78

Economic Bellweathers: Real GDP: Q2 @ +2.8%;  Unemployment Rate: September @ 6.1%;  Industrial Production: September @ -2.8%; Purchasing Managers Index: September @ 43.5; Consumer Condidence: October @ 38.00;  Consumer Prices: September @ 4.9%;  Producer Prices: September @ 8.7%;  Housing Starts: September @ 817k; Existing Home Sales: August @ 4.91mm;  Trade Deficit: July @ $62.2bn;  Baltic Dry Index: -66 @ 982

The Man on the Street Says: Consumer Confidence: Positive 4% vs. Negative 82%; Economic Conditions: Excellent/Good 10% vs. Poor 57%; Economic Outlook: Getting Better 11% vs. Getting Worse 86%; Job Market: Hiring 30% vs. Not Changing 44% vs. Letting Go 22%

ETF Sector Patrol: Consumer Discretionary (XLY) +9.78%; Consumer Discretionary (XLP) +6.89%; Energy (XLE) +15.25%; Financials (XLF) +15.71%; Health Care (XLV) +6.30%; Industrials (XLI) +10.26%; Basic Materials (XLB) +12.59%; Technology (XLK) +13.90%; Telecom (IYZ) +10.96%; Utilities (XLU) +10.08%

Market Breadth: NYSE A/D: 2542 / 666; Nasdaq A/D: 2032 / 871

NYSE & Nasdaq 52 Week New Highs vs. 52 Week New Lows: 11 / 779

Industry Group Breadth: 235 Positive  /  4 Negative  / 0 Unchanged

1) Trend Analysis: Blue chips and utilties, i.e. DJ-30; SP-500; and DJ-15, initiated short-term uptrends and provided broad market leadership. The Nasdaq and Russell 2000 are close to breaking their downtrends. Othewise, equities trends remain down for their intermediate and primary trends. Bond yields for 5, 10, & 30 year yields changed to short-term uptrends. Short-term, intermediate and primary trends for commodities in energy, agriculture, and precious metals are down. The dollar and yen uptrends are losing momentum and the oversold euro is close to breaking its short-term downtrend. Volatilty is also losing momentum as its uptrends are losing momentum.

2) Price Volume Analysis: Buyers stepped up ferociously as Accumulation (price up & volume up) dominated yesterday's categories with a 71% reading. The weakest category was Bearish (price down & volume down) with a 1.6% reading. Although it is early to call an end to the bear market, the bears seem to have temporarily thrown in the towel and abandoned selling of stocks.

3) Market Sentiment Analysis: Volatility is receding and beginning to accomodate conditions for a rally.

4) Market Strength Analysis: A combination of 41% oversold stocks and 81% postive power meter signals may be just the formula for a sustainable bull rally.

5) Market Momentum Analysis: Momentum made a sharp upward reversal, especially in the short-term. The market will need to see more of this in order to sustain a rally.

6) Summary Analysis: Yesterday was significant in that the market had every reason to sell off and it did just the opposite. Consumer sentiment came in under expectations and reached an recored low of 38.00.  Maybe the market is telling us that it does not get any worse than this. Who knows? The Shiller-Case Home Price index for the top 20 metro-areas dropped -16%. Apparently traders and investors decided that enough was enough as Asian and European markets rebounded strongly and passed on this bullish momentum to the U.S. equity markets. This time today’s rally was confirmed with a 21% increase in volume on the NYSE and Nasdaq.

One big positive for the market was Boeing’s (BA) termination of a strike with its machinists’ union. Another was the positive earnings from Occidental Petroleum (OXY) and BP which enabled the energy sector it to be one of yesterday's strongest groups.

Although the market condition is showing significant improvement, caution is still urged. A confirmation of transportation stocks reversing their downtrends and volatility index initiating a new downward would help. When the bear market ends will only be known in hindsight. However, if a legitmate new bull market begins, there will be plenty of time to capture the majority of its upside.

Observing the currency markets shows that the Yen’s run may have stalled. If so, this could be bullish for equities as it would stop the hemorrhaging of capital flight. Meanwhile, the Fed and central banks are definitely winning the battle against the TedSpread and commercial paper rates and this is starting to lubricate a seized up credit market. In the long run, the battle against higher rates cannot be won by the Fed or central banks as the hyper surge in monetary liquidity is inflationary. Treasury yields are starting to turn up and may be interpreting the same conclusion.