Every time a major stock index approaches a new high, invariably we can find calls that "a major top has already been made". We have seen several such articles in recent weeks. While these incessant calls for a major top may be 100% accurate at the present time, a review of historical major tops gives little support for such a claim. A short-term top within a major bull market can occur at any time, but major tops do not occur very often.

Fundamentals Are Improving: We also have to consider improving fundamentals when constructing a case for a major top in stocks or the lack thereof. Thursday’s unemployment report came in better than expected, but more importantly the four-week moving average of jobless claims dropped to its lowest level in almost a year. Third quarter earnings that came in above expectations, beat those below expectations by a ratio of 6-to-1. Admittedly, earnings estimates in Q3 were conservative, and employment will remain weak for a time, but recent data does suggest some economic improvement.

The wise man sees in the misfortune of others what he should avoid.

~ Marcus Aurelius; 121-80 AD, Roman Emperor, Philosopher

The entire nation followed the news story with great trepidation as it unfolded dramatically before our eyes. What harrowing heights he had risen to! With anxious hearts, we feared the little chap might crash down hard after climbing too high too fast. We are, of course, speaking of the Dow Jones Industrial Average, and its burst above the symbolic 10,000 mark. The Dow broke 10,000 this past week, revisiting the mark for the first time in over a year. Like an old pal last seen on October 3, 2008, we greeted our once earthbound friend with affection. Still, just as soon as we had soared to cloud nine with him, acrophobia set in.

Through the close of trading Friday, the Dow's heroic climb had taken the poor balloon boy 55% above the intraday low he marked on March 9. Year-to-date, the index is up 13.9%, which clearly illustrates the V-shaped market turn from those shaky days we survived in February and March. What is disturbing though is that despite lessons learned, the naive child has seemed to gain courage from his own momentum, rising 377 points the week before last. Yes, he's come quite far, but also quite fast. Therefore, we must ask, is his strange vessel sturdy enough to survive the harsh conditions of the upper atmosphere?

Most people grow old within a small circle of ideas, which they have not discovered for themselves. There are perhaps less wrong-minded people than thoughtless.

- Marquis De Vauvenargues, 1715-1747, French Moralist

The International Council of Shopping Centers (ICSC) - Goldman Sachs (GS) produced its preliminary report for September's Chain Store Sales on Thursday. According to the ICSC, those sales inched higher by 0.1% in September, offering what its Chief Economist Michael P. Niemera called, "the beginning of recovery."

Retail Chain Store Sales Recovery in Question

We switched to "Red Flag Flying" mode, expecting lower prices ahead.

Mid-week we entered inverse positions in both the standard and leveraged portfolios and have unrealized gains/losses ranging from -0.8% to +5.3%.

Saturday's Wall Street Journal has an article titled "Investors Pull $2.1 Billion out of Leveraged ETFs." What's going on?

The article says assets in ETFs increased by $20.1 billion in August but declined in only two asset classes: leveraged and inverse ETFs.

Many pundits are saying that the dollar is ready to crash and burn, signaling a time of mounting inflation. But some reputable sources disagree. Robert Prechter, president of Elliott Wave International, is calling for a long-term rally in the U.S. dollar. He's entitled to his opinion, but his track record gets my attention.

Prechter, famous for such important calls as the 1987 crash, the 2007 top in stocks, and the 2008 peak in oil prices, says he sees significant evidence the dollar has put in a major bottom and should rally for the next year or two, bringing down most other asset classes in the process. He thinks that the biggest risk to the economy is deflation, not inflation.

We all know that in an inflationary environment oil and other real assets are good places to invest. It is easy to find asset classes which keep pace with inflation. Gold, oil, real estate, stocks, collectibles, maybe even your car and your boat. Your choices seem endless.

But what about in today's deflationary environment? Investments that do well in a deflationary environment are much more difficult to find. Here are some possible candidates with my comments in italics.

By Don Friedman

After spending part of my career as a commodities broker and securities/futures trader, I find it fun once in awhile to scratch my more adventuresome side.

Near the end of 2008, Eaton Corp (ETN) guided investors with its expectation of earnings between $3.80 and $4.80 a share for 2009. A couple months ago the company lowered that guidance to $3.60 - $4.20 per share. If you bought either time based upon a low expected Price/Earnings Ratio (PE ratio) you were out of luck. The company declared its current earnings for the most recent quarter plunged 92% -- and it now projects that it might maybe earn "up to" $1.85 this year.

But since results topped “analysts' estimates” – which had themselves been reduced two, three, four or more times in just the first six months of the year – the stock gap-opened up 4 points (10%) in one day.

Quoting the Conference Board, publisher of the Leading Economic Indicators Index,

All in all, the behavior of the composite indexes suggest that the recession will continue to ease and that the economy may begin to recover in the near term.

Our ETF Update typically takes a sector-based look at the market, and spotlights a particular choice. This week is a bit different. Last week's signal to go short was a big loser. It calls for deeper consideration. We have whimsically called this a trip to the couch with Dr. Brett Steenbarger. (While we enjoy an occasional meeting for coffee with Brett, the advice given here comes from his blog, not a specific consultation:)

It took place in a cracked village that lay in ruins, perhaps symbolic of the economies of the Group of Eight developed nations that met there. What resulted was a mix of the usual clichés saturated with big statements for unity, but also some common sense and direction from the new kid on the block, one Barack Obama.

Earthquake shattered L’Aquila, Italy hosted this latest meeting of the G-8, and offered a meaningful change from the usual pomp and circumstance these gatherings tend to display. Not for one minute could the leaders of the wealthiest nations on earth forget the state of their own countries’ affairs, nor that of the global economy. All they had to do was look out the window for a reminder.

Ups and downs on financial markets were plentiful during the past week, but investor sentiment, on balance, brightened on the back of constructive financial and economic data - capped by a better-than-expected US non-farm payrolls report on Friday.

“It appears that the global economy has finally found the ripcord,” said Rebecca Wilder (News N Economics) in her weekly review of global economic reports.

As posted previously in my blog, ETFs are some of the safest securities to purchase when planning on investing. An even more conservative way to invest with ETFs is to write covered calls on them once purchased. Writing call options allows you to get some of your investment back immediately (gives you some downside protection), however if the stock takes off you cap your upside.

The buy/write option strategy seems ideal when purchasing diversified ETFs. This is because diversified ETFs are less volatile than purchasing specific stocks (however leveraged ETFs are extremely volatile and click here to see why I don't believe they are investment vehicles).

How bad are inverse exchange-traded funds (ETFs) at returning the inverse movements of the indexes they track? Frank Elston and Doug Choi tell us in a paper published in the Proceedings of the Academy of Accounting and Financial Studies (Volume 14, Number 1: 2009). It turns out out they can be so bad in replicating implied returns that Elston and Choi conclude investors would be better off in many instances shorting the long or double-long ETFs instead.

There's an old saw out there that when short term momentum subsumes long term momentum, you tend to see a change in price trend. Why? Because traders place more transactions than investors, and, thus, set prices. When a short term average overtakes a longer term average, what you're seeing is this fact in action. Over longer periods of time, investors tend to throw in the towel and stop arguing with traders, and once both are on the same page, so to speak, you've got yourself a trend.

Many traders look at moving averages to monitor these developements, using a fifty day exponential moving average (or EMA) to measure short term trading momentum, and the two hundred day EMA to measure longer term investing momentum.

If I knew the definitive answer to that question I would make this article about one paragraph long and we'd all go out, mortgage the farm (if we could qualify for a mortgage) and then get filthy, stinking rich. By the way, don't miss my secret, short-term profit-making strategy at the end of this article.

Monday's 3% rally in the three major US stock indices gives the impression that the future looks very bright for stocks and the market in general.