Monday, November 02, 2009

Monday Morning Musings

The market finished on a nasty note last week. I thought we would see more month-end buying, but instead it looks like it was month-end selling on the part of mutual funds, most of whose fiscal year ends occur in October.

For its part, the Nasdaq suffered its worst weekly decline since the March lows. Many leading growth stocks on the Nazz had been holding up well, but finally succumbed to heavy selling late last week. That said, the chart below shows that the Nasdaq has not been this oversold since March, and that likely means we are due for that oversold rally I have been looking for.

There were some positive economic reports this morning, and that is helping the market forget about Friday's woes. I said last week that the postive Chicago PMI should lead to stronger national manufacturing numbers. Today, the ISM Manufacturing Index for October rose for a third straight month to 55.7. This was better than the 53.0 expected, and well above last month's level of 52.6. A rising ISM has a strong correlation with job growth, so maybe we'll see a further decline in job losses this Friday.

Another solid report was the pending home sales report, which rose for an eighth consecutive month, up +6.1% in September vs. expectations that growth would be flat. This is a very strong number, but it is likely set to weaken when the first-time homebuyer tax credits expire.

The dollar is lower today, which as we have said has led to days when stocks and commodities rise together. Oil is bouncing back above $78, while gold has topped $1060 again.

Asian markets were mostly lower overnight; the 10-year yield is up slightly to 3.41%; and the VIX is -5.8% lower today to 28.90, after closing well above the 30 level for the first time since early July.

Trading comment: In my next post, I hope to take a look at the technical picture, and show you what all the technicians are currently worried about. The major indexes have broken their 50-day averages, which could now act as near-term resistance. Many corrections last in the 4-6 week are, so even if we bounce this week, the market still could need to put in more time before it is ready to run again.

We are in the midst of a correction, and one of the things I watch for is to see how sentiment turns during a correction. I am already seeing signs of rising bearishness in the indicators. I will continue to monitor these signs, and that may help give us some clues as to the duration of this correction. But big picture, this is a dip I would like to use as a buying opportunity into year-end.


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