Stocks are correcting. The question is where will money managers step in to buy the dip. The third quarter ends on Wednesday, September 30th and the markets are poised to deliver one of their best quarters in decades. We've come a long way from the S&P 500 lows near 870 in early July. With the S&P 500 at 1,044 we're up about 20% from the July lows and up about 13.6% for the quarter thus far. Did the end of quarter window dressing already occur or will the next three days see a bounce?
Last week I warned readers that stocks were overbought and looked ready to relax. We were watching potential support at 1,040 and 1,020 on the S&P 500 and the index hit 1,041 on Friday morning. Our hypothesis hasn't changed. Money managers should still be chasing performance through the end of October, which is year-end for many funds. That should keep the pull backs shallow. A dip toward 1,020 on the S&P 500 is close to a 5.5% decline form its recent highs. That's not too serious and could provide us a new entry point for longer-term LEAPS positions.
We are going to need to see another round of positive economic data to reinforce the market's current optimism for the economic rebound. Fortunately this week has plenty of data to help re-ignite the rally. Monday will bring the final look at Q2's GDP numbers. Analysts are expecting a slight revision down from -1.0% to -1.1%. On Wednesday we'll get the Chicago ISM report, which will prep the markets for the national ISM figures on Thursday. Of course the real focus will be on Friday's non-farm payrolls data. Everyone remains worried about the labor market and while we're hopeful about seeing improvement the general consensus is that unemployment will reach more than 10% before labor conditions improve.
I would not be that alarmed by all the technicians pointing at last Wednesday's bearish reversal pattern. Yes, it's a reversal but we were due for a correction. A one or two week pull back would be healthy. The correction might last until Q3 earnings begin in the middle of October. As long as the S&P 500 holds above the 1,000 level we should be fine. Imagine this pull back as a cooling off period before stocks make a run at the holidays.
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