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Brad Reinard is Editor-in-Chief of Monthly Cash Thru Options LLC, a leading index credit spread & iron condor options advisory newsletter, which has the following track record: 92% in 2009; 33% 2008; 63% 2007; 42% 2006; 50% 2005. We focus on a non-directional, income generating options... More
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  • How Healthy is the US Economy? Let's Look at the Data

    Below are a selection of macroeconomic indicators that have been released over the last two weeks, as of October 1, 2010, that provide us a big-picture, fundamental view of the health of the US economy.  If/when the US economy and corporate earnings begin to weaken we'll be able to monitor the gradual deterioration of the economy and this information will help us  1) reduce our downside exposure by opening fewer bullish trades;  2) trigger us to open a long term hedge to protect some of our trades; 3) alert us to possibly start opening bearish directional trades; and 4) tell us when it's time to move to the sidelines. 

    The Chicago PMI increased to 60.4 in September from 56.7 in August, showing that the Mid-West region continues to expand at a healthy pace and is bucking the negative trend found in most of the nation.  Any reading over 50 tells us that manufacturing and business activity is in an expansion mode.

     
    The 3rd and final reading of Q210 GDP (annualized) came in at 1.7%, a little better than expected.  Overall, the US economy continues to grow, but very slowly.  The deflator (orange line) came in at 2%, which was good since it indicates that deflation is not yet a problem.

    The S&P/Case Shiller National Price Index using data through July 2010 shows that housing prices in 20 major US markets have remained stable and/or are slightly increasing, which is good news.  Any reading above the 0% horizontal line tells us that housing prices are increasing.


     

    The ISM Index came in a little under expectations for September at 54.4, but it still remains above 50 telling us that US manufacturing activity nationwide continues to expand.




    Initial Unemployment Claims
    came in at 453k and continues to remain stuck above 450k. Because this number fluctuates widely from week to week, economists monitor the 4 week simple moving average (SMA) that is represented by the orange line.  The economy will not start to add appreciable jobs until this number drops below 400k new claims.  The second chart shows the same 4 week average, but going back to 1992 to provide insight on how the initial claims number behaves before, during and after recessions.

     

      
     

    Personal Income
    rose 0.4% in August, up from 0.2% growth in July, which was a good number.  However, most of this income growth was not from the private sector, but was from the US government extending unemployment insurance.  Therefore, this number cannot really be trusted yet.




    The headline number for Durable Orders showed that it decreased month-over-month by 1.3%.  However, and more importantly, after stripping out volatile transportation orders, Durable Goods Orders increased by 2.0% in August and every sub-component showed solid growth.  This strong result reduces the chance that the US economy will go into a double dip.




    Month-over-month personal spending came in at 0.4% growth, better than consensus of 0.3% growth, telling us that consumers are still pulling their wallets out, which is good news.

    Below is the US treasury yield curve showing that it is still sloping upward, telling us that the economy will continue to grow and interest rates on treasuries are expected to rise in the future.  However, the slope of the yield curve has been flattening a little, especially since the FED announced that they will inject further quantitative easing into the economy (i.e. print more money), so this is something we need to monitor.

    PCE Inflation (personal consumption expenditures) came in at 1.4%, just below the FED's target range of 1.5% to 2.0%.  The 1.4% level is actually optimum because it's just below the FED's target range, but not too low telling us that deflation is not yet a problem, inflation is not yet a problem, and that the FED will still probably intervene with further loose monetary policy (i.e. turn on the printing presses) to reflate the economy.  (aka quantitative easing)  Overall, this scenario is bullish for stocks




    The Conference Board Leading Economic Indicator (LEI) -  The Conference Board is a highly respected independent economic research house.  One of their closely watched indicators is the Leading Economic Indicator, or LEI, which comprises 10 economic components. 

    Conclusion for LEI Index:   The LEI increased 0.3 percent in August to 110.2 following a 0.1 percent increase in July, and a 0.2 percent decline in June. According to Ken Goldstein, an economist at The Conference Board, "While the recession officially ended in June 2009, the recent pace of growth has been disappointingly slow, fueling concern that the economic recovery could fade and the U.S. could slide back into recession. However, latest data from the U.S. LEI suggest little change in economic conditions over the next few months. Expect more of the same – a weak economy with little forward momentum through 2010 and early 2011."


    Conclusion from the Macro-level Fundamental View of US Economy's Health -  The US economy took a pause, but will continue to grow slowly and unevenly and most likely will not enter into a double dip recession.


    About The Author
    Brad Reinard is Editor-in-Chief of Monthly Cash Thru Options LLC, a leading index credit spread & iron condor options advisory newsletter, which has the following track record:  92% 2009; 33% 2008; 63% 2007; 42% 2006; 50% 2005.  For more on our returns please go to http://goo.gl/trcd.  The MCTO advisory focuses on a non-directional, income generating options trading strategy using the DJX, SPX, SPY, OEX, RUT and QQQQ indexes and ETFs.  For more information on the robust technical, fundamental & macroeconomic analysis that the MCTO team performs weekly to help guide our credit spread and iron condor trades, please visit www.monthlycashthruoptions.com or call Brad directly toll-free at 877-248-7455.  Brad has a B.S. in Electrical Engineering from Columbia University and an MBA from the University of Chicago Booth School of Business. He resides in the San Francisco bay area with his wife and 3 children.



    Disclosure: not applicable
    Oct 07 6:58 PM | Link | Comment!
  • Weekly Analysis of the Major Indexes and Prediction of Where the Market is Heading - DJX, S&P 500, Russell 2000

    Below we look at the charts of the major indexes as of the close on Friday, October 1, 2010, and make a prediction of where the stock market is heading in the next 2 to 3 weeks.  

    Below is the daily DOW showing that successfully broke above 10,700 representing the Aug high, and it's showing strength by holding above the 10,700 level.  However, it's now looking "toppy and choppy" as it's hitting resistance at the 10,900 level, a past resistance level in May, and near the top of its 2 std. deviation linear regression channel.  The accumulation/distribution line and the On Balance Volume indicators are maintaining reasonable strength telling us that money will continue to flow into the 30 DOW stocks, which will help support this rally, or at least help it stay above 10,700.  The next target is 11,000 representing a major psychological level.

    daily chart of DOW Jones Industrials DJX INDU

    The daily SPY, shown below, successfully broke above 113 and is holding above this level demonstrating some reasonable strength.  The SPY is now hitting resistance at 115 representing the January high, and the top of the 2 std. deviation linear regression channel.  However, the On Balance Volume indicator continues to look weak telling us that a suboptimal level of cash is flowing into the 500 large-cap stocks that reside in the S&P 500 index.  If the SPY successfully breaks up through 115 then the next target is 117.5, the May high, and then 120, which is a major psychological level.  The second chart shown below is the same daily SPY chart, but zoomed out.

    Below is the daily QQQQ, an ETF that tracks at 1/40th of the NASDAQ 100 Index - NDX, representing 100 of the largest non-financial companies, many in the technology sector.  We can see that the Q's broke above 48.6 representing the May high.  However, the Q's are consolidating putting us at a crossroad.  Either it's going to pull back a little and continue to consolidate near the 48.5 and then continue to rally on the next round of good news, or it's going to sell off and drop to 46 near its 50 day SMA (simple moving average) if we get some bad news.

    Below is the daily S&P 400 Midcap index, MID.   We can see that it broke out over the 780 level after two attempts, which is bullish.  In general, when an index makes a 2nd attempt to break above a particular resistance level, many times it will be successful and then the index will continue to rally as momentum traders will "go long" to ride the wave.  The next target is 820, and then 850. 

    Below is the daily IWM, an ETF that tracks at 1/10th the value of the Russell 2000 index.  In the last few trading days it finally closed above 67, a past major resistance level.  Note also how the linear regression channel is now flat, telling us that investors are gradually moving more money into small cap stocks, but in general small caps have been lagging the market.  Investors avoided small caps in the last 5 months because of fear of a double dip recession in the US.  Because small-cap companies generate most of their revenues from the US, their revenues would get impacted the most if the US went into a recession again, thus the reason that the linear regression channel of the IWM is flat.  (it was sloping downward just recently) 


    Prediction of where the market is heading over the next 2 to 3 weeks from the analysis above:   The market reamains in a confirmed UP trend, and many traders will continue to buy stocks and Call options to "ride the trend" until it runs out of steam.  However, the market is looking "toppy and choppy", the rally is getting tired and we're at a crossroad. The market will probably trade sideways this week until Alcoa kicks off Q3 earnings this Thursday, October 7th, and after the unemployment numbers are released this Friday.  After this week, the market will probably pull back possibly back down to the 50 day simple moving averages (SMA) of the major indexes for the following reasons:  1) The QQQQ was the first to lead the rally and now looks overextended and tired;  2) The On Balance Volume for the SPY and QQQQ is looking weak; 3) The MID had several Doji and shooting star like candlesticks in the last 4 trading days telling us that this index is getting near a short-term high; 4) The McClellan oscillator (not shown) is attempting to rise again, but it's on its last leg, at least for the short term;  5) The VIX is not dropping fast enough (not shown) - it got stuck at 22 to 23;  6) All of the sub-indexes on the volume flow analysis (not shown) have been weakening; 7) The MACD on the advance/decline volume data (not shown) has been slowly weakening and now is neutral.  8) The IBD (Investor's Business Daily) top 100 rated stocks are not rallying like they should be, but are getting choppy.


    About The Author
    Brad Reinard is Editor-in-Chief of Monthly Cash Thru Options LLC, a leading index credit spread & iron condor options advisory newsletter, which has the following track record:  92% in 2009; 33% 2008; 63% 2007; 42% 2006; 50% 2005.  We focus on a non-directional, income generating options trading strategy on the DJX, SPX, SPY, OEX, RUT and QQQQ indexes and ETFs.  For more information on the robust technical, fundamental & macroeconomic analysis that we perform weekly to help guide our credit spread and iron condor trades, please visit www.monthlycashthruoptions.com or call Brad directly toll-free at 877-248-7455.  Brad has a B.S. in Electrical Engineering from Columbia University and an MBA from the University of Chicago Booth School of Business. He resides in the San Francisco bay area with his wife and 3 children.



    Disclosure: hold credit spreads and iron condors on the SPY, OEX and RUT indexes and ETFs

    Disclosure: have open credit spreads on the RUT, SPX, SPY, OEX indexes and ETFs
    Oct 07 2:44 AM | Link | Comment!
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