Bull or Bear? Dealer's Choice

The bulls and bears fought to a standoff on Friday and next week could be a significant turning point in the course of the markets this year. Bull or bear is "dealer's choice" because this market feels much more like a poker game than a stable platform upon which to make investing and trading decisions.

Here are the current cross currents and arguments for each side:

Bulls

Fundamentals:

• Continued "better than expected" economic reports
• FedEx (FDX), a bellwether transportation company upped its guidance on Friday
• Consumer confidence came in higher than expected on Friday and highest since June

Technicals:

• Major indexes broke out to new yearly highs last week
• 91 % of all stocks above 200 Day Moving Average
• 87% of all stocks above 50 Day Moving Average

Bears

Fundamentals:

• Fed Beige Book reports sluggish spending, downward pressure on home prices, weak labor markets, weak loan demand and tight credit
• Highest unemployment since Great Depression
• Recent weeks money supply in decline
• Corporate revenue in decline, earnings up only due to cost cutting
• P/E Ratios well above historical highs
• Best Buy downgraded on Friday by Oppenheimer from "outperform" to "perform."
• Wall Street Journal reports that median household income fell -3.6% last year, steepest drop in 40 years, poverty rate highest since 1997, and 2008 median income, adjusted for inflation, lowest since 1997.
• Wall Street Journal reports Chinese Premier in speech at World Economic Forum that "the pickup in China's economy remains unstable, unconsolidated and imbalanced."

Technicals:

• S&P 500 unable to breach 1044 significant resistance
• All major markets extremely overbought and indicating short term correction likely ahead.
• XRT, SPDR Retail ETF declines -1.2% on Friday in spite of positive consumer confidence report.

So next week will be key as some significant economic reports are due on Tuesday with August Retail Sales and Wednesday with Industrial Production, Building Permits and Housing Starts.

A break higher from here would indicate that this rally has further to run while consolidation and downward pressure would indicate that demand has dried up.

Next significant upside targets would be 1100 or approximately 6% from here on the S&P 500. Initial downside target would be 995-1000.

My signals remain mixed. Most sectors are on P&F buy signals while most are overbought and major index short term oscillators point to a correction ahead.

The View from 35,000 Feet

The Harvard Endowment reported a year over year loss ending June 30th of -27% which is significant because this investment organization has long been hailed as being the best and the brightest and even they have been unable to sidestep the carnage of this bear market.

Tuesday marks the one year anniversary of the Lehman Brothers collapse which touched off the financial firestorm and led to a -46% decline on the S&P 500 in 6 months to the March, 2009, lows and leaves the index -17% below its level one year ago.

Friday marked the 8th anniversary of the 9/11 terrorist attacks and the Dow closed Friday at 9605 which is uncanny because that's exactly its level on 9/11; so in eight years, this major index is flat while the S&P which is still trading below its 9/11 levels.

The Week Ahead

Tuesday: August Retail Sales, CPI

Wednesday: August Industrial Production,

Thursday: Weekly Jobless Claims, August Building Permits, Housing Starts

Sector Spotlight

Leaders: Real Estate, Oil and Gas Exploration, Energy

Laggards: Bullish Dollar, Utilities, Mexican Peso

Disclosure: None

Comments

[Mad Hedge F...:]

oon The dinosaurs of the market, like myself, are collectively being struck by the similarity of the current stock market and that of September 1987, just before the one day, 25% plunge in the Dow. That was when I tied to buy stock with the index down 300 from a payphone in Paris, only to have the trader at Morgan Stanley burst into tears and smash the phone down on the desk (remember that David G.?). My new guru is Gluskin Sheff’s strategist David Rosenberg, who says that stocks have already discounted two years of recovery and now carry a lot of risk. It is priced for 40% EPS growth and a “V” shaped recovery, which we have zero chance of getting. GDP this year will come in at negative 2.5%, and will claw back a listless 1-2% rate in 2010. Stocks are discounting a 4% GDP growth, compared to only 2% for bonds, so he’d much rather own those. With a deflation rate of minus 2% and high yield returns of 12%, junk now offers a 14% inflation adjusted yield, not bad. The secular 25 year bull market in credit expansion is over. Rent still accounts for a third of the CPI, and they are falling for the first time in 17 years. Sure, we’ll see ephemeral sugar highs like those for cash-for-clunkers and the tax credit for first time home buyers. But at best, it will only add up to a series of small “W”’s, or what I refer to the as the “square root” shaped recovery. With the price of everything stretched, you better start reeling in some of that risk.

Sep 14 11:22 AM

[Richard R:]

What do you mean, terrorist attacks? Don´t be ridiculous.

Sep 14 02:08 PM