Everything's Nice & Rosy?

FUNDAMENTAL ANALYSIS
How can I finish writing about everything that happened today? :) Q3 GDP's up, PCE index's controlled within a nice 2.1%, ADP reports higher private sector employment growth, and most importantly, the Feds cut 25 basis points off the discount and fed fund rate... as expected. Well, the problem today is exactly that the rate cut was way too expected. In fact, the Dow was up nearly 100 points before the release! That was why the Dow went briefly into the red the moment the release was made. A 25 basis point cut in the fed fund rate and discount rate really does very little for the market and the economy in general, however, it really did hurt the dollar really bad, resulting in a new low against the euro. With the Fed release behind us, the real fundamental in the economy takes over... how does the odds stack up? On the positive side, Q3 GDP beat analyst estimates of 3.1% by turning in at 3.9%, driven mainly by exports, jobs are growing in the private sector, particularly in the service sector and core-PCE turned in a remarkable 1.9%. On the negative side, crude oil and heating oil continues to reach for the sky, compounded by coming winter, Chicago PMI index turned in a contractionary number and a dropping dollar (which has a small effect on inflation). Insofar, it seems like the good and the bad are in a deadlock now and the ISM index tomorrow (heavy weight number 1) and the Employment report on Friday (heavy weight number 2) should help investors decide if everything is as rosy as it seems now.

TECHNICAL ANALYSIS
No surprise on the technical front as the Dow continues it journey upwards after bouncing right off its 30WMA. However, it cannot be taken that the Dow is going to continue upwards from this point onwards as it closed within the 30DMA resistance band, which can still take the Dow down for a few days before it muster enough strength to make another break. We saw the Dow doing that back in 8 August where it headed straight down right after entering the 30DMA resistance band. Now, what is this "resistance band" that I am talking? That's what technical analysts have so wrongly deemed to be "resistance levels". Resistance level is never a thin and narrow 1 pixel line, no, every resistance level has effect around the level itself resulting in more of a band than a level. So, is this a good time to accumulate? I would say that this is a good level for a cautious and moderate accumulation, enforced with a sensible stop loss policy.


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Countdown To Fed... 1 Day!

Well, the day is upon us at last! The Feds will release their policy statement tomorrow afternoon after their 2 days meeting is over. Even though a 25bp cut in fed fund rate is what everyone's expecting, there are still plenty of reasons to suggest that the Feds might just hold rates steady! (that is why the fed fund futures are still not pricing in a more than 100% chance of a rate cut)The main reason of all would be the value of the dollar. When interest rates go down, the dollar value goes down too as a supply of new dollar floods the market, which could result in increased inflationary pressure. The dollar has already declined against major currencies in a big way and further decline could have complex consequences. Already, the commodities markets have edged higher across the board. In a nutshell, with a 25bp cut already priced in so far, there is really no telling how the market will react when the policy statement is released tomorrow. Will a rate cut spur a new rally? Not necessarily since much of it has already been priced in and there remains a number of heavy weight releases this week including the Employment report this Friday, which could still change things. Will not getting a rate cut spur a market decline? Very probable, especially since the market is reacting faster and faster to news and new information than ever before (Efficient Market?).

Today, the Consumer Confidence report turned in the worst reading in 2 years, bringing the Dow immediately to its intraday low. The Consumer Confidence report is not a historically important report due to the fact that it measures mainly consumer confidence towards the labor market. The labor market has been slow to react to changes in the economy so far, thus reducing the Consumer Confidence report's value as a leading indicator. However, it remains a good confirmation indicator of what is already known, or rather, already being suspected in the economy. What does a lower Consumer Confidence suggest about what the Fed is going to do? Nothing, as this is not an indicator Uncle Ben watches in his policy making.

Countdown To Fed... 2 days...

Analysts are expecting a 25 basis points rate cut in 2 days time in order to drive recession out of the door. Fed fund futures has priced in a 92% chance of a 25 basis point cut too. Such a rate cut would no doubt be the final one in a long time. The Dow continues to price in the expectation of a rate cut today, abeit on lower than average volume as most investors sit on the sideline. Tomorrow is likely to be another flat day in anticipation of the Fed release.

No matter how the rate cut eventually turns out, danger is already building up secretly in the background as oil price heads for the $100 mark and gold prices continues to surge. Eventually, when investors turn their attention from the fed fund rate, they will notice that oil prices have reached a level which could potentially be threatening to earnings in the short run. Danger continues to lurk in every conceivable corner slamming risk managers like myself with challenges from every front. Life has never been more challenging. Amen! :)

The Week That Really Counts.....

It's here at last! The week that will completely defy technical analysis by the time it is through! Technical analysis reveals sentiments and trends based on historical data, which makes it totally useless in the face of events which cannot be predicted with moral certainty... the Fed's Policy Decision! Any up or downs before the Fed meeting this Wednesday (see economic calendar) will only be speculations and more speculations. Technically, the Dow looks great to start another rally like we last saw in August as it bounces off the 30WMA. However, don't bang on it so much as the Fed meeting can still change everything.

More Good News... Little Gains...

FUNDAMENTAL ANALYSIS
The Dow closed sideways today at 13671.92 after a day of huge intraday swings. Market opened weaker when the unemployment claims report turned in higher than expectation. Unemployment claim report has always been a strong market mover but it was suddenly reversed by a historically less important report, the existing home sales report. Existing home sales picked up in September due to bargain hunting in the foreclosure market, adding points to the possibility that the housing market might have found a bottom at last.

The existing home sales report is a monthly report released by the National Association Of Realtors. It is not a historically important report as existing home sales do not directly correlate nor is indicative of short run GDP performance. However, this report has picked up weight lately due to the housing market slump and the credit crunch. As the outlook sours in the housing market, buyers tend to stay on the sidelines, watching for the "best time to buy". If buying picks up and persists, it could be indicative that a bottom has been found at last. So, I would say we need a couple of months more to confirm this... that's how things are in the Real Estate market... things just don't move as fast as the stock market.

TECHNICAL ANALYSIS
Volume continues to climb, a higher high and a higher low is made, all indicative of bullish undercurrent. However, one element is lacking... a strong positive close. The Dow is again at a dangerously important juncture. If volume continues to climb without significant advances, the Dow may still succumb to selling pressure as buyers are exhausted without significant gains. From the looks of it, the decision needs to be made today if the buyers or sellers would make the next trend. If we do not see a significant gain today, we need to be prepared for the worst.


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Form The Phalanx!

The Dow stood its ground valiantly against the relentless waves of ruthless assualts by sellers, weak existing home sale report, growing oil price and bad earnings release. Wave after wave of sellers slammed into the shields of it's Phalanx but it never gave ground nor gave way, defending the last line of defense around the 13500 hot gate. More than half the day have passed before the waves of sellers exhausted themselves allowing the Dow Phalanx to prouding advance and hold ground. By the end of the trading day, much of the lost ground has been retaken. The King would have wished for more time to push into positive territory but time, as usual, wasn't his ally.

Tomorrow's main mover would definitely be the jobless claim report, or what is correctly known as the Weekly Claims For Unemployment Insurance report. This indicator is released by the Department of Labor since 1967. Increased unemployment dampens spirits and affects spending going forward, that is why it is now an important leading indicator. Investors are definitely looking forward to a drop in unemployment claims in order to paint some optimism into the generally pessimistic picture now.

The King stands fast and the Phalanx looks strong... what do you think?

Buying Interest Returns...

FUNDAMENTAL ANALYSIS
The Dow closed higher for a second straight day since it ditched over 300 points last week. There wasn't any economic releases today so the gains must have been due to bargain hunting along with buying into the great earnings of a few blue chips. Tomorrow's existing home sales number is expected to rock the boat again. Existing home sales measures monthly sales of previously owned single family homes and is published by the National Association of Realtors. Existing home sales didn't used to be an important release before the credit crunch because buying and selling of existing homes adds nothing to the economy despite exising home sales (2nd hand homes) accounting for 80% of all home buying transactions. However, it has gained in importance lately as it is a good indication of the status of the credit crunch. Everyone's waiting for the day existing home sales recovers as an indication that the credit crunch is coming to an end. In fact, bargain hunters are already in the market, sweeping up foreclosure deals. It seems like the worse is behind us... or has it? What's your take on this? post your comments! :)

TECHNICAL ANALYSIS
Not surprising nor extremely encouraging to see a couple of days of bargain hunting after a huge drop. Yesterday's market action formed a small dragon tail formation but it was not backed by a volume surge nor was its tail long enough, making it an extremely weak one. A dragon tail formation is a hammer formation with an extremely long tail, occurring after a series of significant drops. The last dragon tail formation on volume surge started a rally back in 16 Aug 2007 as well as back in 14 March 2007. Right now, the Dow has rebounded off the 50 and 100DMA, but still needs to make a break above the 30DMA before the danger's over. If the Dow should fail again, the next support level would be the 200DMA which the Dow rebounded off the last time in 16 Aug. For now, it is not certain nor is it remotely clear where it might be heading even though the long term trend remains bullish. The question is, when will the rebound happen? Right now? or later at the 200DMA line?


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Rebounding Off 13400...

Well, nothing fundamental about the move in the Dow today. The Dow did exactly what I predicted it to do last week by moving down to the 13400 (ok, 13407.49 to be exact) before rebounding back up. This rebound looks extremely healthy, conforming to all th typical behavior of the Dow. If we see a follow up today, I should speculate a healthy and steady rebound.

LANDSLIDE!

That's the only feeling I got from the market today. And what a great day!

Great day? Yes! Big drops like this are precious times where portfolio managers like us get to really stress test our portfolios! :) No amount of hypothetical tests can exactly duplicate the effects of a real occurrence on a portfolio. The Dow dropped the biggest single day drop since the 387.18 points drop of 9 Aug 07. I must admit that I was really surprised with the magnitude of the drop, especially when the slight pull up at mid day almost convinced me that the market has found a botton. Well, as a faithful technical trend follower, I never act on prediction. I will always look for definite signs before acting on it... and am I glad I stuck with it.

This drop has brought the Dow back almost all the way down to its 30WMA. In fact, the Dow could drop another 122 point or so to land on the 30WMA level at about 13400 before staging a rebound. The Dow always back down to its 30WMA due to regression to the mean (the mean here centered around the 30WMA) caused by the law of diminishing marginal utility of investors. With the market moving towards more and more efficiency (I'm not suggesting that the market is efficient as suggested in the Efficient Market Hypothesis), periods of explosive gains would pullback down to the mean more readily than we have witnessed before the great bear market of 2000 - 2003.

The market outlook has turned slightly sour lately as possibilities of another rate cut sinks below the quicksand, leaving behind the certainty of decelerating economic growth ahead. The Feds continue to look more inclined to a contractionary monetary policy, as they always have since inception. Before any of you throw curses at the Fed, I must say that their job is an extremely difficult and sensitive one, making decisions that nobody likes to make, deserving more praise than curses. On the one hand, they need to combat inflation and on the other hand, they need to make sure what those actions do not result in a depression! It is such a fine balance that these guys literally live their lives on a balancing beam. As Chaos Theory so correctly suggests, that the transition from stability to chaos in a complex system is often occassioned by the change in a single variable. The problem here is, nobody really knows what that "single variable" is until hindsight! That makes the Fed's job look like a man leading a team through a minefield. As investors, it is always prudent to keep a farsight during uncertain times like this.


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Another Mixed Day...

This time, even more bullish indications than yesterday!
Yes, not only did more and more companies are reporting in with profits beating estimates and more and more are our internal indicators showing more and more bullish reversal signals. In fact, to say that today's market ended mixed would be unfair to the effort the Dow took to get back into the green but was cut short by the market hour. All these are taking place despite record breaking oil prices topping $90 per barrel! In fact, with all the attention on core indexes (core-PPI and core-CPI), it is easy to forget the effects of rising oil prices on the economy in the mid term. Well, for now, like Brunnermeier and Nagel of Stanford concluded, "riding a price bubble [in an irrational environment] for a while can be the optimal strategy for rational investors", we will be watching for the first signs of the beginning of yet another of such price bubble. (the market trend is made up of countless tiny price bubbles by the way)

What's your take for the rest of the week?

Bullish Inclined Mixed Day...

FUNDAMENTAL ANALYSIS
What a mixed day today as the Dow ended down marginally by 20.40 while the Nasdaq composite gained by a significant 28.74 points. There are certainly tons of reasons for this mixed action both on the fundamental and technical front, however, why did I say that today is a "Bullish Inclined" mixed day? Well, that's because there are plenty of good news to look forward to versus the "Bad news" so far. The "bad news" is, Consumer Price Index rose 0.3%, the biggest increase since May. This is compounded by the fact that real weekly earnings have gained only 1.3%, lower than the current inflation rate suggested by the core-CPI index of 2.1%. Such an increase certainly reduces the possibility of another rate cut at the end of the month (well, we all know that it is probably not going to happen by now, don't we?) Well, the good news is, as I have mentioned, that the core-CPI has risen only 2.1% over the past year, which is within the Fed's "comfort zone" of keeping inflation within 2.5% (analysts estimates... unofficial). Another good news is that despite this earnings season being widely speculated to be a disappointing one, companies continued to report better than estimated earnings generally (other than a couple of disappointments). If good news continues to roll in from the earnings front, the market could recieve a short term boost. Well, to conclude for today, even though the housing front still looks terrible and Uncle Ben's speculating a slow down in the economy over the next few quarters, there are still plenty of good news and good company performance to keep investors happy for now.

TECHNICAL ANALYSIS
Similarly, the technical front also supports the view of a bullish inclined mixed day. The Dow went all the way down to its critical short term support line, the 30DMA, and then bounced right off to end up significantly higher, forming a huge spinning top formation along with a volume surge. This formation, following a few consecutive drops, signals a possible selling climax (possible because selling climaxes usually takes place after a much more significant pullback). A selling climax suggests that all remaining sellers have jumped in and it is time for the buyers to take over for a bargain. Of significance is also the fact that the Dow has also entered the short term oversold region, giving it all the more reason to be able to stage another run from this point. Our internal screening also turned up significantly more bullish reversal signals than bearish signals across the universe of stocks, increasing the possibility that the market might be staging something. From these indication, I would certainly be preparing my account for the up side. :)


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And So It Begins...

The Dow made a significant drop today by 71.86 points. What made this drop significant is the fact that it is the second consecutive drop on rising volume. In fact, it is rather clear now that the market has begun a pricing in of the possibility of not getting a rate cut, beginning 10 Oct. A lot of analysts attributed the action these 2 days to rising oil prices. Yes, rising oil prices is a concern but, recently, not a concern big enough to move markets. In fact, the market has been rising along with oil prices since this rally begun in August. Tomorrow's CPI numbers is going to be a major market mover. CPI is expected to be lower this time as all other inflation indicators continue to turn up tame. Response to the number is likely to be textbook, but with limited real gains or losses reflected in the market eventually.

What's your take on tomorrow's CPI numbers? Please comment on your thoughts. :)

Oil Rises As Stocks Sinks...

FUNDAMENTAL ANALYSIS
The Dow sheds 108.28 points today to close 15.2 points shy of the 14000 mark. This is also the hardest single day drop since 7 Sep 2007 when the rally just begun. Oil prices has reached high points which nobody has expected, especially with the summer months just behind us. Higher energy always mean higher production prices (which showed up in the PPI index last week) and increases the possibility of inflation. Early optimism in the market futures just before market opens due to a better than expected Empire State Index reading was immediately erased. Well, the Empire State Index has never been a major market moving index. The Empire State Index tracks manufacturing activities in New York on a monthly basis through a survey of a goup of 175 manufacturing CEOs. Well, you guessed it, when did New York's small community of manufacturers become a major or significant determinant of overall economic health? That is why the Empire State Index continues to be one of those index which fails to move markets significantly. Again, no prime market movers tomorrow as we look forward to Wednesday's CPI numbers. More and more analysts are now gloomy about the possibility of another rate cut at the end of the month. However, our dear Uncle Ben continues to be careful and wary about economic outlook in his speech today in Washington. Obviously things are not as rosy as we thought... yet...

TECHNICAL ANALYSIS
Well, can't say I wasn't surprised with the magnitude and eagerness of the pullback today. The only consolation is that the Dow continues to close near the 14000 line, in line with my expectation of trading along the 14000 line until the 30MA catches up with it. Yesterday's action took the Dow off the short term overbought region in one fell sweep but has also started a bearish momentum as our trend indicator turns for the first time since the rally begun. Well, regression to the mean is not just a mean old theory, but a fact in all areas of life, including the stock markets. What has baffled scientists and mathematicians (and to some extend, economists like us) is what constitutes the "mean" under each circumstances. I have my own research and empirical data which are not yet conclusive, however, it seems to have been pretty consistent so far for the Dow. Yes, you guessed it, the 30 days/weeks/month Moving Average. So, what is my take for the next couple of days? No guarantees but I would not be surprised if the Dow decides to visit the "mean".

What is your view? Do you think we will get another rate cut at the end of the month? Please comment to this post with your thoughts! :)


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Another Heavy Weight Week Ahead...

Weekends always feel short. :)

The Dow continues to look good as long as it continue to digest more of its short term overbought sentiment by trading atop the 14000 line for perhaps another few more days. On the weekly scale, the Dow is trading reasonably higher than the 30WMA but not high enough to cause an immediate concern. As long as the 30WMA continues to catch up, the bull run can be expected to continue healthily. (Please see comments to my post on 10 Oct to understand why the gap between the Dow and its 30WMA matters.)

It is going to be another heavy weight week ahead with the CPI (consumer price index) coming up on Wednesday (see economic calendar). The Consumer Price Index is one of the 4 super market moving indexes (the other 3 being the Employment Report, ISM index and PPI). The Consumer Price Index, along with the PPI are closely watched inflation indicators by the Fed and will definitely give investors an indication of the possibility of a rate cut at the end of the month. Certainly, investors are looking forward to a lower than expected inflation number.

So, would my readers care to comment to this post about what your market expectation for the coming week is please? :)

Thus Ends A Sideways Week...

I don't usually write on Friday nights but due to the growing audience to this blog, I have decided to begin Friday night writing. So, thank you for tuning in again and enjoy...

This sideways week has ended on a slightly upbeat note today as core-PPI (inflation) index increased by only 0.1%, beating estimates of 0.2%, further proving that inflation is not a concern in the economy... so, what is? Recession of course! This reading continues to support a rate cut at the end of the month and thus the optimism.

The Producer Price Index (PPI) is an extremely important index and is the first major inflation indicator to be released on the second Friday of every month. The PPI is made up of a group of indexes, measuring the change in price manufacturers pay at various stages of production. Of greater concern to the investment community is the "Core-PPI" index. The core-PPI index takes highly inelastic and seasonally variable elements such as crude oil and food out of the equation in order to arrive at an index that truly reflects market action. The Core-PPI is so important that the investment community often neglect the main PPI reading. A classic case in point is today. PPI was higher than expected due to higher crude and food prices but Core-PPI was lower than expected by 0.1%. Investors chose to act on the Core-PPI, not the main PPI number.

On the technical front, the Dow continues to play by our book by trading atop the 14000 level as expected. There was no conviction and strength behind today's move as the advance was made on much lower volume than the drop of yesterday, so, don't take this as the start of a rally... the Dow's just not prepared for that yet. The Dow continues to look over extended in relation to its 30WMA, so the danger's not over yet.

More Sell Offs...

FUNDAMENTAL ANALYSIS
We witnessed more profit taking today as profiteers bailed out heavily when the Dow reached new historical highs intraday. The profit taking action left the Dow to close down by 62.57 points or 0.45%. The day actually started out extremely well when Jobless claims fell more than expected, allowing the Dow to open up strongly. Well, not strange to see profit taking at this height as the marginal utility of profit pleasure gives way to the fear of loss. (see my article on how the Law of Diminishing Marginal Utility affects markets ) Afterall, the stock market is not totally based on market fundamentals, right? (George Soros calls the over reliance on market fundamentals the "Market Fundamentalism")

TECHNICAL ANALYSIS
The Dow certainly played according to expectations by trading along the 14000 line as I mentioned yesterday. However, today's action is slightly different from yesterday's. Today, the Dow sold off on heavy volume and spurred a ton of bearish reversal signals in the individual stocks. This could mean trouble and a test of the 14000's holding power. Obviously a sell off has started, which is nothing to be surprised about as the Dow is already very over extended in comparison with the 30WMA. (for a detailed discussion on the 30WMA and its significance, please read the comments on my post on 9 Oct.)In fact, for the rally to continue on healthily, I would expect the Dow to trade sideways for many more days to come, or simply make a significant ditch before rebounding back up. However, the danger remains at the 14000 border. If the Dow should ditch below the 14000 line, it might find it a challenge to get back above it again later on. So, I would certainly prefer that the Dow simply trade sideways above the 14000 level and wait for the 30WMA to catch up a bit... However, I won't bet on it as the internals does look awfully dangerous right now.


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Threading The 14000 Water Surface....

FUNDAMENTAL ANALYSIS
Stocks closed mixed today in an extremely turbulent session ending the Dow 85.84 points lower but the Nasdaq composite a marginal 7.7 points higher. Today, a broad based, low volume profit taking drove stocks to into the pit, back where it started yesterday but buying interest soon returned after midday, pushing the Nasdaq composite back up into positive territory. The Dow was making an attempt into positive territory too but time was up before it could do so. With the Dow making new highs recently, it is not unusual to see some profit taking, especially before the sensitive Jobless Claim report tomorrow (which is released every Thursday by the way). Jobless Claim report is an extremely important, forward looking economic indicator and formed part of the leading indicators index. Basically, if jobless claims show a rising and persistently high trend, it could be expected that consumer spending would drop and affect the rest of the economy in a domino like effect. That is why the stock market is sensitive to the jobless claim report. From investors' response to last Friday's employment report, I think investors would want to see some positive indication out of the jobless claim report instead of a gloomy one. Which also means that a positive report tomorrow may allow the market to get back up and probably to new highs. Let's watch and see...

TECHNICAL ANALYSIS
Praise be to the 14000 support level. The Dow rebounded off the 14000 support level once again in intraday trade today. This further reinforced the fact that the 14000 level has indeed become a strong short term support level. Short term momentum is now on the decline on our indicators and with the 14000 level this strong, I would see the Dow moving sideways along this line a little bit before making another upwards attempt. Overall outlook remains bullish as the Dow continues to trade atop a rising 30WMA and investors need to practise discretion when interpreting single day pullbacks like this one today.


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YES!!! Dow Makes It To The Top!

FUNDAMENTAL ANALYSIS
The Dow makes historical high at last closing at 14164.53 points!!! *~Pops Firecrackers~* In fact, the Dow did not just make one historical moment today but 2! The other historical performance is that the Dow made a month to date gain of over 7% since 10 Sep, the strongest single month move since 2003's great rebound! Too much optimism in the market over too little real data? I think so too. The market started out mixed and uncertain this morning but optimism soon flooded the floor and pushed the market straight for new highs after the Fed Minutes was released. The Fed Minutes "seemed" to support yet another rate cut at the end of the month. It is indeed hard to see where the Fed is going with this expansionary monetary policy but as long as it is an expansionary monetary policy, the economy can be deemed to do better in the months to come, starting a huge pricing in of that possibility in the stock markets. An Expansionary Monetary Policy is a policy taken to expand the economy by increasing the monetary base with actions such as lowering of Fed Fund targets. Even though the minutes looks good, Fed Fund Futures are still pointing to a less than 50% chance of a rate cut at the end of the month... are investors heading for a huge disappointment? Whatever the outcome, I would not be surprised.

TECHNICAL ANALYSIS
The Dow is once again in lala land... the land of the unknown where dragons lurk in the dark beyond. The Dow has done well rebounding off the 14000 point, creating a short term support level from which it can pursue higher gains, and it did. A strong bullish momentum is now underway, pushing the Dow at the doorway of being over-extended. In fact, from the Dow's retracement pattern so far, I would not be surprised for the Dow to continue to move further up but retrace back down to around today's level when the inevitable pullback comes. As an trend follower, I never make a judgement before things really happen and I will be peeled at the first indications.


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Slight Profit Taking...

The second week of every trading month usually starts weak and with some profit taking like this. The first week of every trading month is packed with so much important economic releases and excitment that the second week usually starts by taking some of that profit away. So, what are we looking forward to this week? The PPI of course. The only heavy weight release for the week. ( please see http://www.mastersoequity.com/option_trader_hq.php for economic calendar) For now, the Dow continue to trade sideways in a very tight channel around recent highs, with short term overbought sentiments digested quite nicely. It does seem like there are just slightly more upside to come, probably pricing in the PPI results for the week, before the Dow over extends on a weekly time frame, inceasing the probability of a pullback to the weekly 30MA again.

Upsy Tipsy...

The Dow climbed a fairly nice 170.38 points last week. So far, all economic data are supporting the possibilities of more rate cut this time round, probably another 25 basis points. The only surprise I had was the employment report last Friday. I was expecting optimism in the market only if the employment report also turn in a little gloomy BUT NO! :) What happened was a textbook response to the employment report which turned in much much better than expected! :) Equities futures SOARED at 0830am when the report was released and a huge wave of optimism roared through the financial system, lifting equities and the dollar in a response we learnt only in our finance textbooks. :) (ok, for once the textbooks were right!) With the numbers continuing to point towards a rate cut when the Fed release their policy statement end of the month, I would expect further pricing in of the rate cut throughout the month at decreasing velocity.

Investors Eagerly Awaits Employment Report

FUNDAMENTAL ANALYSIS
The Dow ended sideways today as investors eagerly await tomorrow's employment report. The employment report is truly the economic indicator of all economic indicators; The ONE Economic Indicator. This is also the economic indicator most closely monitored by the Feds in concocting their fed fund rate policy. Indeed, the employment report is so highly anticipated that the Job report and factory orders report today hardly matter. The employment report, or also known as the Employment Situation Report or the Uemployment Rate report, is the most direct indication of USA economic well-being. As the saying goes, what matters is the bottomline. The bottomline of every economies are happy, employed citizens who are contributing to the economy! Nothing else matter when the end result doesn't please. That is why this report has such significance, even though it is released every first Friday of the month (versus Mondays for the ISM index). So, what are we looking for in the Employment Situation report? Like all economic indicators, we are looking for a reading which supports investor's expectations. So, what are investors expecting? Investors are expecting data that increases the possibility of another rate cut! :) Which means that the employment report tomorrow should show a slightly higher than expected unemployment but not enough to cause widespread panic about a pending recession. This is a tricky balance which is difficult to predict. That makes for all the uncertainty in the market. Indeed, without uncertainty, there will be no efficient or liquid market and every other day will be boom or bust, making it impossible to invest in. The pricing in of another rate cut has obviously begun and would definitely magnifest as a nice bull run tomorrow if the employment report turns in "favorable". From the data so far... initial claims beating and raising the 4 months average and factory orders declining, employment report cannot be expected to turn in rosy.

TECHNICAL ANALYSIS
The Dow ended it's 2 days fall in an almost neutral day today. These 3 day's corrective action has allowed the Dow to get off the short term overbought region by a slight margin, increasing the possibility that we will see more upside to come. The low of 1 Oct, which I identified yesterday as a critical short term bottomline, continues to hold up safely. In fact, the 1 Oct low of 13893 is as important as the bottom of a baby cradle now! Break the bottom and be ready for a painful fall. Volume was low today as investors await tomorrow's data. A completely neutral day with very low volume is indeed as good as a market holiday. The Dow however continue to look slightly over extended as it trades high above its 30MA on a weekly scale. In fact, the Dow rarely trades more than 10% higher than its weekly 30MA before a significant pullback (this, surprisingly, conforms to the mean/variance theory). Currently, it is about halfway there. This is certainly not the best of times to put on new positions.


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Another Healthy Retreat...

FUNDAMENTAL ANALYSIS
The Dow retreated yet another 79.25 points today as the ISM services index turned in the lowest level since March. The ISM services index is the second monthly index released by the Institute for Supply Management and is the cousin of the more influential ISM manufacturing index. ISM services is released on the 3rd business day of every month and measures the health of the service sector. Similar to the ISM manufacturing index, a reading above 50 suggests a growing service industry and a reading below 50 suggests a contracting service industry. The ISM service index is not a very influential economic indicator due to its relatively short history. There is simply too little data to arrive at a significant emphirical correlation between the index and prevailing GDP performance. That is why I would attribute today's market action more to profit taking than on the ISM services performance as a declining ISM services index should enforce the probability of another rate cut this month, thereby spurring some optimism instead. In fact, contrary to many of the news wires out there saying that today's pullback is due to poor economic data, the market ditched before the ISM services was released and then actually ROSE after the ISM services index was released! This suggests that there was already heavy profit taking prevalent in the market today and the ISM services index actually ENCOURAGED some buying (due to the higher possbility of a rate cut)! (so much for new wires)

TECHNICAL ANALYSIS
The Dow continues a healthy retreat today even though it dipped below the 14000 level once again. The Dow needs to get out of its short term overbought position for a sustainable bull trend to develop. In this sense, 2 days of pullback still didn't do the job. The Dow continues to be short term overbought and more sideways action should digest more of it. I would, however, be placing emphasis on the 1 Oct low. The Dow should not dip below the 1 Oct low in its efforts to digest the current short term overbought sentiment, otherwise, the short term bull pattern will be broken and the 14000 level would once again become a resistance level. Strangely, the markets has been more cautious and wary more than bullish since the fed rate cut. So far, only investors who took a risky speculative position before the rate cut would have benefitted significantly. Even on the weekly charts, it does seem like the Dow is almost due for a pullback to the weekly 30MA before it could muster enough energy to go further.


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Playing By The Book...

The Dow played by the book completely today as it went sideways as I have expected. The Dow closed down by 40.24 point, sitting atop the 14000 level which is slowly solidifying as a support level. This is an extremely healthy move made on a day where the Pending Home Sales turned in terrible... as expected. The credit crunch is far from over even though many analysts seemed to think otherwise. Stock market action does not totally correlate to real economic conditions! Strangely, some analysts still failed to understand that. Well, no surprises today and I would not be surprised with another few sideways days before the bull continues. Let's just hope that this time round, the Dow really gets off the short term overbought region so as to set the pace for even stronger and more sustainable growth.

14000 BEATEN!!!!!!

FUNDAMENTAL ANALYSIS
The market is always full of surprises and just when I thought the 14000 points resistance level is going to pose a bit of a problem, the Dow beat it in one swift stroke today, closing 191.92 points high at 14087.55! Obviously, the pricing in of another quarter point or half point rate cut has begun right now with the ISM index reporting in the lowest since March, marking a 3rd consecutive decline. The weak ISM data increases the possibility of another rate cut this month, encouraging the pricing in that we saw today.

The ISM index or the Institute for Supply Management manufacturing index is the first economic data to be releases on the first business day every month. It is an economic indicator of great significance not only for its timeliness but also for its close correlation to the GDP performance, which is why it maintained its high level of importance since its first inception at 1931. In an over simplistic explanation, a reading above 50 suggests an expanding economy and a reading below 50 suggests a contracting economy. The ISM index hit 52 in today's release, down from 52.9 in the last release. A reading of 52 from 53.9 suggests that the US economy is expanding at a declining rate. If the situation deteriorates further, the economy could fall into a recession. AS point of the index above 50 roughly approximates a 0.3% in GDP growth, as the ISM index falls, the US GDP is also being eroded away. Such a reading definitely increases the possibility of another rate cut and thus the action we saw today.

Today's action is also a reminder of the classical Efficient Market Hypothesis in action. The Efficient Market Hypothesis has been around for decades and has recieved bombardment from all fronts, especially from the real world trading floors of its inaccurate assumptions of a rational market full of rational well informed investors such that stock prices at anytime reflects all known information about that stock. This didn't used to be true during the time Eugene Fama suggested it in 1965 when information exchange was difficult and information is the privilege of the minority. Today, with the information and internet revolution, more and more the Efficient Market Hypothesis is coming to being (although at this point in time, the market remains highly inefficient in many ways). As more and more investors are well versed with the effects of a rate cut right now and have up to the minute information on all economic data, any future gains are quickly priced in way before that future event happens, such that, there are actually little or no gains left when that future event happens. This results in the scenario suggested by the Efficient Market Hypothesis. Certainly, the EMH is alive and well and currently being groomed into being by the world today despite its many short comings.

TECHNICAL ANALYSIS
The Dow made a huge break above the 14000 points level today on a discomforting mediocre volume. In fact, volume was somewhat on the same level as it was yesterday. This makes me wonder if this breakout is the work of a few institutional buyings. The Dow continues to be short term over bought at this time and needs to quickly find a foothold, making 14000 a support level before it can move comfortably further. That being said, looking at a longer time frame, we can see that the bullish channel established since the dragon tail formation I suggested back on 16 August is pretty much intact and goign strong. I would like to see the Dow digest some of the overbought sentiment by going sideways a bit along the 14000 level before moving upwards more as anymore upwards movement will increase the probability of a significant pullback and makes it ever harder for anyone to put on new positions.


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