Optimism Ahead Of CPI...

FUNDAMENTAL ANALYSIS
The better than expected Empire State Index number today totally erased the worse than expected Producer Price Index numbers, leading the Dow higher by 60.41 points. The Producer Price Index (PPI) or sometimes known as wholesale inflation measures inflation at the wholesale level felt by manufacturers through higher raw material cost. Today's PPI showed that most of that inflation at the wholesale level was due to higher crude oil prices, which we already know and that will only get worse as the dollar gets beaten down further. Does this mean a higher CPI number tomorrow? Not necessarily. Even though corporations can transfer these higher costs down to consumers through price hikes that raise CPI, most don't do that. Most corporations raise prices only when it starts hurting their bottomline significantly. That is why PPI never translate directly into higher CPI, even though it may do so years down the road if the trend persists.

The Empire State Index is designed as a forward looking indicator of economic sentiments and outlook through a survey done on executives in New York. It is gaining importance lately due to its uncanny ability to lead the ISM index, which is an extremely heavyweight index. In fact, the Fed looks at the Empire State Index as part of their list of considerations as well. A healthy jump in the Empire State Index always helps lift stock prices especially near bottoms and the Empire State Index jumped by 23 points today! That is the BIGGEST jump in 5 years! Yes, you know what I am going to do next... I am going to add it to my list of signs of the bottom!

On the negative side, crude oil continues to push past the point of capitulation into new highs due to the ever weakening dollar. Not so long ago, Washington held an emergency economic meeting simulating and exploring the effects of $150 a barrel oil. Obviously, $150 a barrel is a scary thing which has widespread economic impact. Crude oil is trading at $113.53 at the time of this writing and we are definitely in uncharted territory right now. Can the market rally with oil rising? Definitely it can but oil needs to be rising at a moderate rate at a moderate price and we are certainly at the top end of that range right now.

Its been a while since we last recap my list of signs of the end of the correction, so, let's look at it again, adding the new sign today and amending some of the old ones:

1. Recovering ISM index

2. Gold getting beaten like dogs

3. Consumer Sentiment index collasped (its always grimmest before dawn) 3. Consumer Sentiment index collasped (its always grimmest before dawn)

4. Fed bailout of BSC is demostration of their resolve not to allow the financial system to sink.

5. Existing home sales rising suggests possible start of the bottom in housing market.

6. Extremely steep bond yield curve suggests that smart money needs to move back into value stocks soon. (which is already rising as money moved back to equities from bonds)

7. GDP has not gone negative despite widespread speculation on an academic recession.

8. Capitulation in the job market with an 80,000 loss in March.

9. Biggest jump upwards in the Empire State Index in 5 years.

Remember that these are signs of the bottom of the market, not signs that the economy is going to recover immediately. The stock market is a predicting mechanism, not a reporting mechanism and it usually recovers first before the economy does. Of course, there is reflexivity at work in this complex relationship as well which might actually make an economic recovery a self fullfilling prohecy of a recovered stock market.

TECHNICAL ANALYSIS
The Dow closed largely sideways with a bit of positive bias by the end of the day along with healthy after-market futures activity. It seemed to have found a strong support along its 30 days moving average as well, which is a good sign. Short term stochastics are now going into oversold territory and could muster enough momentum for the Dow to make a break to upside very soon. All my indications still point sharply bullish suggesting that there are definitely more upside than downside potential. As a smart trader, you always want to be on the side of the winners no matter how grim it looks right now.

Recession Out & Inflation In?

FUNDAMENTAL ANALYSIS
I have spent so much time over the past month trying to convince the world that the US market is far from going into a recession and today's PPI numbers proved that the balance of fear is swinging gradually from recession fears to inflation fears. PPI, the Producer Price Index, posted the BIGGEST gain since 1973! The last time PPI was this high, the market went into a 2 years bear market! Very simply, Producer Price Index or what is commonly known as the wholesale inflation, measures the cost of producing goods, which is inflation experienced by producers. The PPI is an important number but not as important as the CPI number that comes next. Producers do not adjust prices monthly, passing on inflation to the consumers. Most producers "bite the bullet" and ride out wholesale inflation without raising prices in order to maintain competitiveness. The CPI or Consumer Price Index is due tomorrow (see stock market calendar) and would definitely rock the market. Obviously we are going to see slightly higher numbers with the series of rate cuts over the past months and Uncle Ben will see for the first time the consequence of giving short term pots to the market and losing sight of what he is really supposed to do.

TECHNICAL ANALYSIS
Another sideways, high volatility day in the Dow. What usually follows a series of such movements is one big committed move to either upside or downside and so far, pessimism still seems to be the name of the game and the balance still weighs to downside as the Dow trades comfortably within its linear regression channel pointing downwards. Interestingly, the 30MA is now crossing the 200MA once again, indicating an extremely oversold condition. Most of the time when 30MA crossing 200MA from the top, the Dow makes a rally... at least a short one. If this works out this time, it could help the Dow break above its regression channel and establish a new trend.


Dow Technical Chart By Best Charting Software TC2007!

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.


Dow Technical Chart By Best Charting Software TC2007!

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.