Stock Market Analysis

Monday, October 01, 2012

Dow Gains on Better ISM Index

The Dow gained 77 points today as ISM index beats expectations.

Fundamentals
ISM index turned in much better than expected today, turning in 51.5 vs consensus of 49.7 and prior month's reading of 49.6. This led to an immediate surge in the market following the release. What made this positive surprise even more powerful is that fact that this is the first higher month after 4 consecutive contraction months from May to August. However, the bulls were greeted almost immediately by profit takers that sold off on the news, taking the Dow and S&P500 off their highs and the Nasdaq Composite gradually lower throughout the day until it closed the day negative. Longer term bonds yields were depressed slightly as some investors returned to the safety of bonds and options traders took total equities put call ratio below the uncertain 0.9 range once again. However, total equities put call ratio has been bobbing around the 0.9 area enough recently to still suggest a lot of uncertainty right now. This is the first week of October and a week full of heavyweight economic numbers as well. With the amount of profit taking we saw today, we probably need to see all the economic numbers surprise strongly to upside before this market can be convinced to make new highs.

Technicals
The Dow continued its rebound today with rising short term bullish momentum despite the obvious profit taking and resistance. Interestingly, the resistance set in when the Dow hit the 13,600 points level intraday. That was the level the Dow just pulled back from and it seems like it has made itself the next short term resistance level albeit not expected to be an extremely strong one. The rebound pattern is still healthy with the Dow still a mile away from being short term overbought. This pattern continues to favor the odds to upside. However, no bull trends run up like this all the way. The market could be due a significant intermediate correction once again before it can have the energy to go very much higher. This could also explain the shorter run up to 13,600 points in September and today's profit taking on positive economic data.

For now, the Dow remains in short term neutral trend within an intermediate and primary bull trend.

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