Monday, October 23, 2006

Daily bits

I am working on a new stock call but found some conflicting footnotes so I will have to put that off to another day.

Some Market Tidbits (with contributions from various sources):

---=== Top o' the Mountain ===---

The Nasdaq gained 13 points to 2356, the S&P 500 gained 8 points to 1377 and the Dow Jones Industrial Average tacked on 114.54 points to close at 12116.91, another record high. As of now, all of the top 10 Dow closings ever have taken place this month.

Believe it or not, it was the first triple-digit gain for the Dow since Oct. 4, though the blue-chip average gained about 96 points on Oct. 12. In fact, there have been only six triple-digit moves for the Dow since it bottomed in mid-July, and all of those were positive. The last triple-digit losses for the blue-chip average came on July 12, 13 and 14, in one final spasm of selling before the current record-setting rally.

Today's leg in that rally was inspired by optimism about corporate earnings, with a little boost from tumbling oil prices. In the background, though, the Fed could keep rates higherthan people now expect. That may especially be the case if policy makers now believe, as Bloomberg reported today, that the economy's speed limit -- above which inflation is spawned -- is much lower than it was in the past decade.

---=== More optimistic than me ===---

In a note to clients on Friday, Goldman economist Jan Hatzius joined the chorus of observers suggesting the worst may be over for the U.S. housing market. "The sharp downturn of the past year seems to have brought total housing starts -- single-family starts, multi-family starts, and mobile-home shipments -- close to the level justified by the underlying demographics (as best we can measure them)," he wrote.

He warned that new-home construction was likely to keep slowing down in coming months as too-high inventory levels fall back to something reasonable. He also warned that the housing slowdown's impact on the economy was likely still to be felt throughout next year.

But he said it seemed unlikely the slowdown would drag the economy into recession. In fact, the third quarter may have marked the worst of housing's effects on the broader economy, Mr. Hatzius suggested. "The fact that the U.S. economy has bent but not broken during the fiercest onslaught of the housing downturn is encouraging," he wrote. "It suggests that real GDP growth probably bottomed for the cycle at the 1% (annualized) pace that we now estimate for the third quarter of 2006. While the headwinds from the direct and indirect effects of the housing bust will remain substantial, a sequential pickup in real GDP growth is now likely."

One long-time bear, though, is sticking to his guns when it comes to housing and the economy: Merrill Lynch chief North American economist David Rosenberg told clients today that the housing market's negative impact on the earnings of such notable companies as J.P. Morgan Chase and Caterpillar in the third quarter was "probably just the thin edge of the wedge."

I would make the observation that the optimism spreading into the market on even some of the worst off sectors suggests we may finally be reaching a market top. Remember that the top generally doesn't form until people have given up on worry.

---=== From the land of the strange and paranoid ===---

Jeffrey Saut, chief investment strategist at Raymond James, finds something very fishy about the Dow's record-setting run.

In his weekly Web-site commentary, Mr. Saut notes that the Dow, defying precedent, has risen steadily from its bottom in July with hardly a correction. Most suspiciously, whenever a correction has seemed imminent in recent months, he says, "mysterious buyers materialized in the futures markets," forcing a higher opening and resulting in big days for the Dow.

[I looked into this and found what looked like standard behavior for bear capitulation - that late stage where the pessimists finally decide they want to board the rising market]

He cites Robert McHugh of, who points out that 1155 points of the Dow's 1200-point run since July (excluding today's rally) have been gained in just nine big days of trading: July 19, 24 and 28; August 15 and 16; September 12 and 26; and October 4 and 12. "[O]n ALL of those nine trading days, according to our notes...the aforementioned 'mysterious' futures buyers were at work," Mr. Saut writes.

In his commentary today, he notes that futures buyers again seemed to step in this morning, followed by another 100-point Dow rally. He also vows he is not a conspiracy theorist -- he believes Lee Harvey Oswald acted alone, for example, and that Tom Cruise and Katie Holmes really did have that baby. But he says the "mysterious" futures-market action has him and many floor traders "mysteriously cautious," afraid to bet against what he calls an "overbought" market.

But he still believes the end of the Dow's run could come with the end of the fiscal year on Oct. 31, when money managers have no more need to pretty up their portfolios by buying blue chips that have enjoyed solid gains since July. Or perhaps the end could come after the election, he suggests, if those "mysterious" futures-market buyers are politically motivated.

---=== What does it all mean? ===---

Mysterious political cabals aside, it looks like a pretty conventional market top. The pessimists are finally explaining away their worries and becoming optimists, the market has strong days with odd behavior, and so on. The wall of worry is going away... and a contrarian mindset would tell you that rough roads may lay ahead.

Time to position yourself for a roughening of the market.

Invest well,


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