Still More Bullish Than Expected...

FUNDAMENTAL ANALYSIS
What a familar sight!
The Dow held its head up high all day just to get beaten down by the end of the day to close down 76.08 points. The very same thing that happened 2 days ago! However, the Dow was still a little more bullish than most analysts expected. Most analyst expected a close down of at least 100 points reasonably and a pullback of up to 200 points to be consistent with the volatile theme right now.

The Dow got an early boost before market opens when the wholesale inflation data, Producer Price Index, turned in better than expected. The PPI was up only 0.1%, beating analysts estimates of 0.2%. The Producer Price Index measures the price of production at various stages of production. An increase in production prices do not necessarily translate to higher consumer prices in the short run but it does give an insight into the inflation situation. Tomorrow's Consumer Price Index (see economic calendar) is one of the 2 very important indexes monitored by the Fed, the other one being the PCE index. It does seem from the PPI that the higher crude oil of recent months has not begun translating into higher prices in the real economy, that makes me a lot more optimistic about tomorrow's CPI. The data so far seems to point to the conclusion that stagflation does not exist in the US economy like so many economists feared. Stagflation is an extremely dangerous economic condition where inflationary pressure is high while economy growth remains stagnant. However, in order to seal in this low inflationary condition, I would expect another 25 basis point rate target cut next. So how about the weak dollar? Yes, further rate cut's going to hurt the already depressed dollar some more. In the short run, a weaker dollar's going to help the stock market and export growth however, I do see that measures need to be taken to bring the beloved greenback up in the long run after all these uncertainties are in the rear view mirror.

TECHNICAL ANALYSIS
No surprise on the technical front as a huge surge usually leads to a small pullback on a healthy rally. The question remains... is this really the beginning of a rally? With today's market action, I would give the bulls one more thumb up. The Dow has bounced off its 50WMA quite nicely and the market action right now seems to be an exact photocopy of what happened back in August so far. If the photocopy doesn't end here, this may be the start of a short term rallyfrom this point onwards.


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