Current Market Analysis

The tremendous rally that began in September continued in October. There is a saying: "Don't fight the Fed". Investors should heed that advice right now. Anyone trying to short this market right now is getting crushed. The Federal Reserve has decided to do anything and everything in it's power to help increase asset prices in an attempt to stimulate the US economy. As a result, the Dow Jones Industrial Average has elevated by about 1,450 points, or about 15%, from the August 26th low.

We've broken above significant resistance levels (see below) and there is a little bit of optimism about the economy. Personally, I believe a lot of the better feelings in the country that have translated into the market are due to the spill in the Gulf being capped. That was such a disaster, and coverage of it was so gloomy and so all-encompassing, that now that the well has been "killed" people can focus on the slightly better, and improving (albeit slowly) economy. I wrote in July that "it would be very constructive if the market could rise above 10,600 without falling to a new low. If so, a floor may have been set. If not, 9,400 could be the next support level." Well, the market has indeed broken above both 10,600 and 10,700.

The midterm elections are over and the voters have returned the House of Representatives to Republican control while allowing the Democrats to retain a razor's edge control of the Senate. Now we get to witness (at least) two years of gridlock and posturing in Washington as each party tries to block the other from getting anything done. Yeah for America.

I have been writing for months that more than anything else we need the employment picture to improve and until that happens, there can't be any meaningful, broad-based, economic recovery. With job growth would come improvements in housing, retail and banking. Well, recently, as I'll describe below, there have been subtle indications that the employment picture may indeed be improving. If so, it is hugely bullish for the overall market going forward.

So what do the charts tell us now? It tells me to be long stocks!! The Industrial average has broken above the May high and has returned to the level set before the collapse of Lehman Brothers in October '08. In the last newsletter I wrote that "the next big resistance level is around 11,258. If that level can be surpassed, then we could be in for a really huge rally." Well, so far so good. Also bullish is that the Industrial index is now trading above both moving averages and the 50-day average is back above the 200-day average. I'm sure there will a pullback sometime soon, but the big picture looks pretty good right now.

Like the Industrial average, the Transportation average has broken to new highs, confirming an interim bull signal according to Dow Theory. The index is also trading above both moving averages and the 50-day is higher than the 200-day average. All of this is bullish.

From May '09 to June '10 the yield on the 10-year treasury traded between 3% and 4%. Each attempt to break above or below the range failed. Then as the market turned negative in the second quarter, and investors fled stocks for Treasuries, the yield started to fall, culminating with an unbelievably low yield of around 2.4% for most of the third quarter. As the market has rallied strongly, treasuries have sold off a bit, nudging rates back up. I would expect yields to continue rising back towards 3%.

Last Month's Results

• According to the Department of Labor, the figure for seasonally-adjusted initial jobless claims for the week ended October 30 was 457,000, an increase of 20,000 from the prior week's revised figure. The four-week average was 456,000, which is holding relatively steady right now. The actual, unadjusted, initial claims were lower at 419,351. There is really no improvement in the job market right now, but at least it isn't getting any worse.
• Non-farm payroll employment increased by a better than expected 151,000 in October, and another 110,000 were reported as added through upward revisions to August and September. 159,000 private sector jobs were actually added in October. Average hourly wages for blue collar workers were up to $19.17, and the average work week inched up to 33.6 hours. This picture is improving.
• In October, the total number of workers counted as unemployed remained at 14.8 million. The unemployment rate held steady at 9.6%. The more comprehensive U-6 rate dipped to 15.9%, down from 16.2% last month. 6.2 million people continued to be unemployed longer than 27 weeks. The seasonally adjusted number of people who could only find part-time work jumped to 9.2 million and the number of marginally attached workers increased to 2.6 million. The number of people holding multiple jobs rose to 6.8 million. Overall, the employment picture remains poor and but seems to be improving just a bit; there is a glimmer of hope.
• The Congressional Budget Office (CBO) estimated that on a net present value basis, the Treasury reported a federal budget deficit of $32 billion in September, leaving us with a deficit of just under $1.3 trillion for fiscal 2010, which is $125 billion less than the record shortfall from 2009. An increase in corporate tax revenues were the main reason for the slight improvement.
• The Census Bureau reported that the U.S. had a trade deficit of $46.3 billion in August. After remaining stable for most of the year, the trade gap seems to be widening again. And the deficit with China is now a staggering 60.5%.
• The Census Bureau reported that privately owned housing starts were flat in September after a robust 10.5% increase in August, and were up a modest 4.1% from a year ago, to a seasonally adjusted annual rate of 610,000 units. New building permits were down 3.6% from last month and 10.9% from last year. Housing remains very weak.
• The National Association of Homebuilders/Wells Fargo Confidence Index rose 3 point in October to 16, its highest level since June. While this is nothing to write home about, there appears to be "flickers of interest" among home buyers.
• The Census Bureau reported that on a seasonally adjusted annualized basis, sales of new homes in September increased 6.6% from the prior month, but remained down 21.5% from the same period last year, to 307,000 units. The estimate of homes for sale was 204,000, which represents 8.0 months at the current rate of sales. The median sales price was a higher $223,800, which is above the 12-month moving average price of $219,258.
• The National Association of Realtors reported that on a seasonally adjusted annualized basis, sales of existing homes increased 10.0% in September, following a 7.3% increase in August, but remained 19.1% lower than a year ago, to a projected 4.53 million units. The estimate of homes for sale, at 4.04 million represents a whopping 10.7 months of supply at the current rate of sales. The median sales price fell to $171,700, which is slightly lower than the 12-month average of $172,775. The lower prices certainly reflect the amount of short and distressed sales.
• The S&P/Case-Shiller Home Price Index (10-city index), which uses a three-month moving average to track the value of home prices across the US, fell slightly in August, ending a five month streak of increases. It's likely that prices were negatively impacted by the expiration of the first time home buyer tax credit and the huge inventory of distressed and foreclosed properties.
• According to RealtyTrac, the number of foreclosures in September increased 2.5% from the prior month, but were up only 1.0% from a year ago. “Lenders foreclosed on a record number of properties in September and in the third quarter, taking a bite out of the backlog of distressed properties where the foreclosure process was delayed by foreclosure prevention efforts over the past 20 months,” said James J. Saccacio, chief executive officer of RealtyTrac. “We expect to see a dip in those bank repossessions — and possibly earlier stages of the foreclosure process — in the fourth quarter as several major lenders have halted foreclosure sales in some states while they review irregularities in foreclosure-processing documentation that has been called into question in recent weeks."
• The Institute for Supply Management (ISM) index of manufacturing activity was 56.9 in October, up from 54.4 in September. This marked the fifteenth month in a row in which the manufacturing sector expanded. The ISM index of non-manufacturing activity was 54.3, up from September. This marked growth in the service sector for ten consecutive months.
• The Federal Reserve reported that after 14 consecutive months of increases, capacity utilization in the industrial sector fell marginally in September, to 74.7%. Capacity utilization is now 4.2% higher than a year ago and only 5.9% below the average level of the period from 1972 through 2008. We'll see if this number is revised higher in future months.
• The Conference Board reported that it's index of Leading Economic Indicators increased by 0.3% in September, following increases of 0.2% in July and 0.1% in August. “The LEI remains on a general upward trend, but it is growing at its slowest pace since the middle of 2009. There isn’t any indication of a relapse into another downturn through the end of the year.” Says Ken Goldstein, economist at The Conference Board: “More than a year after the recession officially ended, the economy is slow and has no forward momentum. The LEI suggests little change in economic conditions through the holidays or the early months of 2011.”
• According to the Bureau of Economic Analysis, the "advance" estimate of GDP growth in the third quarter was a lethargic 2.0%, slightly higher than the disappointing 1.7% rate of growth in Q2 and 3.7% in Q1. The slight increase this quarter is due in part to increased government spending and a reduction in foreign imports.
• The Federal Reserve reported that in August the amount of outstanding consumer credit decreased at an annualized rate of 1.75% from the prior month, to $2.414 trillion. This continues the trend of decreases in the use of consumer credit that has been in place for more than a year and a half.
• According to the Census Bureau, retail trade and food service sales increased 0.6% in September, and were 7.3% higher than a year ago. While the past few months have shown some modest improvements in retail sales, I continue to believe that until the employment numbers show some sustained growth, retail sales will continue to lag.
• The Federal Reserve reported in that in August the supply of M-2 increased slightly from the prior month and was up only 4.4% during the prior six months. The supply of M-1, on the other hand, rose a slightly faster 6.1% over the same six months. It appears that the rate of monetary expansion is again increasing. Now the country needs to demonstrate that this money will begin to circulate through the economy more quickly in order to stimulate business.
• The Conference Board Consumer Confidence Index increased slightly in October to 50.2. The bad news is that this remains at historically low levels. It's all about the labor market.
• According to the BEA, the personal savings rate in September fell to 5.3% from 5.6% in August. As I expected, the savings rate is trending lower thanks to a rising stock market and historically low interest rates on savings.
• According to the FDIC, 139 banks have failed so far this year, through October 30. It's virtually assured that the number of failures in 2010 will eclipse the mark of 140 banks that were either closed or merged into healthier banks in 2009. By comparison, 26 failed in 2008 and only 3 failed in 2007. I would expect this trend to continue into 2011 thanks to the mortgage crisis.

Trends To Watch

In July I wrote that since "everyone is betting against the Euro...I expect the dollar to take a breather sometime soon and confound the herd." And that's exactly what happened. After a 19.5% increase over six months, the dollar has now dropped hard and fast, breaking through numerous resistance levels, and over three months has given back almost all of the prior gains. Given the stimulus plans of the Fed, it's possible that the dollar could retrace all the way back to the historic lows of around 72. And if that happens, look for an even bigger rise in equities.

After a brief summer respite, the bull market in gold has resumed with a vengeance. The price of the yellow metal has blasted through all resistance levels to hit a new all time high price (unadjusted for inflation) of about $1,400 per ounce. I wrote in July that "any price under $1,200/oz is an opportunity as I believe the next target for gold will be $1,300." I hope you took advantage of that advice. Again, I suggest investors take advantage of any brief pullback as a buying opportunity.

While gold gets most of the headlines, silver continues to do equally well, if not better. Indeed, after consolidating for most of 2010, the price of silver has exploded to a new high of about $26/oz. In July I wrote that "I look for silver to move above $20 per ounce before year-end." Well that didn't take too long. In September I then asked if "silver [would] rise to $25/oz?" Now I think that silver is headed north of $30/oz and, like with gold, I suggest investors use dips to build a position.

The price is copper has broken above a year-long trading range. Like all commodities, copper is benefiting from a weak dollar and strong international demand. Remember, copper is often thought of as a proxy for economic growth. So this chart is telling us that the prospects for future growth look good.