Stocks delivered one of the best weeks since July with 4% gains for the major averages. Our theory remains intact for now. It appears that fund managers are still chasing performance and used the two-week correction as an entry point to jump back in. However, while our bias is still bullish, I remain concerned about volume. Volume was a lot stronger on the down days during the correction than last week's bounce. This could suggest that the internals or building blocks for last week's rally weren't super strong.
Last week produced some records. The U.S. dollar fell to new 2009 lows and gold futures broke out to new all-time highs above $1,050 an ounce. There are analysts calling for $1,300 and $1,500 for gold. If you look at a weekly chart for gold or the GLD gold ETF I can see an inverse head-and-shoulders pattern that would forecast a rise to $1,300 for gold or $130 for the GLD but it could take months to get there. With the dollar sinking the commodity stocks are back in vogue, which is good news for our LEAPStrader portfolio.
Looking ahead this week we'll see the FOMC minutes from their September meeting. I suspect Bernanke has already let the cat out of the bag with last Thursday's comments about being ready to raise rates when the time is right. Does anyone really expect him to say anything else? Seriously! Why is that market-moving news? The only noteworthy change was in the Fed Funds Futures, which has started to price in a potential 1/4-point rate hike in March/April 2010.
Consumer sentiment and industrial production are the next two big economic reports out this week but I believe they'll take a backseat to corporate earnings. Earnings season begins to hit its stride this week and we have a lot of high-profile announcements. J.P.Morgan (JPM), IBM, Goldman Sachs (GS), General Electric (GE), Google (GOOG), and Bank of America (BAC) are just a few of them. Earnings results and managements' ability to spin these results will be what moves the market. If managements' tone is positive on the recovery then stocks should continue to rally. If we get too many misses or the outlooks come in too cautious then investors could sell first and ask questions later.
Short-term I wouldn't be surprised to see the S&P 500 contract after tagging the 1075-1080 zone again. As long as investors buy the dip at the 1060 or 1040 levels the up trend should remain intact. When the S&P 500 starts to hit the 1120-1135 zone is when I'll start to worry about the market looking a little heavy. Too many investors have been aiming for the 1125 region and could start selling. Furthermore, once the mutual fund fiscal year is over come Halloween there could be more profit taking!
Chart of the S&P 500 Index:
LONGER TERM OUTLOOK
Previous Comments on my Long-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. A few weeks ago 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