Fund managers came back from their summer vacation and decided to put more money to work. They don't get paid to sit there in cash and the performance chase has begun anew. We've been talking about it for weeks (months?) now. Too many money managers were under invested and didn't believe the bounce from the March lows. I don't blame them. Yet now they're trying to catch up and beat their benchmarks and their peers. Everyone wants a correction so they can buy it but it just hasn't happened. I'm not saying it won't happen or it can't happen but there is so much money on the sidelines and with seven weeks left before the year ends for many fund managers I seriously doubt we're going to see any real profit taking.
Last week several sectors broke out to new relative highs. The strength in the transports is bullish for the entire market. Dow Theory suggests that you can't have a sustainable market rally without participation by the transportation stocks. The sector broke out higher and FedEx (FDX) only reinforced it on Friday when they raised their earnings guidance.
This week we will get the PPI and CPI data. As long as the bogeymen of inflation and deflation remain scared of their shadow and stay hidden the markets should run unencumbered. Technically the S&P 500's breakout past the 38.2% Fibonacci retracement of the 2007-2009 market correction has traders looking at the 50% retracement as the next target in the 1,120 zone. However, the 2004 lows around 1,060 might present a little overhead resistance.
Chart of the S&P 500 index:
LONGER TERM OUTLOOK
My long-term outlook has not changed. I still expect the economy to see a double-dip, "W"-shaped rebound with the second dip in 2010. Lousy consumer spending, rising foreclosures, and lagging job growth will be the main culprits. This past week there were some comments out of the U.S. Treasury concerning foreclosures. The Obama administration's HAMP loan modification program can only help a certain number of homeowners and one official said that even if the HAMP program was a total success we should still expect millions of new foreclosures. This only reinforces my own belief that we will see another tidal wave of foreclosed homes in 2010. Some analysts are forecasting upwards of six million foreclosures in the next three years. What is that going to do to consumer confidence and consumer spending? It's not going to help! You can review my long-term outlook here. It's the second half our my "Two Months Left" commentary.
~ James Brown