Its your money!

These year end rallies are always good times to reassess financial goals since markets are at a peak very often around then. A look at the long term charts will show that at some point the markets always come back to face reality and fall back to a long term moving average ( the 200 sma usually ).



Live link to the chart above

I've been thinking real hard about whether S&P500 can get over 1120 to 1140-50 by Jan-Mar 2010 and how the Leading Economic Indicators and valuation will play out along with the other headwinds coming in 2010. Also the S&P is still well above 200 day sma and 2011 earnings will probably not be a lot higher than 2010 with the possibility of downward revisions around this next earnings season for Q4. The market will need to be quite convinced that valuation, LEI's, and earnings estimates are inline or it isnt headed over 1150 for sure. Hitting 1140-50 is still on the table, but I figure that at 1110, the market is within 3-5% of any gains that will be made over the next 4 months. It will depend on how S&P holds this 1084-1113 range in early Decemeber but with $USD clearly headed up toward 77-80 (maybe as high as 80-82) it will be tough row to hoe getting there by Jan (not to mention the geo-political front and all the indicators pointing to a top likely being in here). It is quite possible to test those Oct/Nov lows before it breaks over 1120. Prudence tells me to sit back and let it come in before getting very bullish again. It could easily rally back up in Jan to 1120 only to fall back to 950-1000 in Mar-July 2010 2011 earnings not likely to be much higher than 2010 and LEIs all need to move up together, not just a few good jobs reports here and there. It takes all 4 moving up about the same time or we will see a double dip.

Wholesale Trade Report at 10am EST is lagging in that it reports data a month old, but the market is still looking for an improvement there. Last report was not so impressive so I expect today's high may coincide with its release. Also, if futures are only up on the back of a little $USD pull back today, then this rally today in stocks will be short lived. A little pullback in $USD before heading north again should be expected at this point sending S&P back to 1085 by next week or sooner IMHO. A key question raised in the Wholesale Trade Report is: Will sale grow and reduce inventories? This is what will spur business to restock shelves and boost production. IMO We are not there yet, and considering other factors, it is hard for me to see that happening soon, maybe before mid 2010.

Where will it peak?

The recent out performance of the $DJIA is due to the fact that it was undervalued below 10,000. It is still early to get an accurate revision on S&P500 valuation, but I expect it is still overvalued. The outlook for 2010 should be clearer after the Wholesale Trade Report @ 10:00 am Wednesday. Recent options activity suggest the recent move up is purely speculative but I expect the next dip to 1060-1075 will be bought up again quickly. The $USD rally will likely be limited to 80-83 and hence should not have an adverse affect on stocks.

So, unless institutions start selling aggressively soon, the market should continue its drift upward into Jan when the economic picture for 2010 becomes much clearer as indicated by the LEI's. Also we will be at the doorstep of the next earnings season which will paint the picture quite clearly. We could very well see another run up ahead of that earnings season with profits being taken ahead of the reports as we saw in the past because it is hard to imagine them being able to surprise or ratchet up the estimates significantly again. The real clincher will be if earnings for S&P500 get revised lower. In that case, look out below, since there are other major headwinds coming in 2010.

This fits with what I have been saying all along, that is: the best shorting opportunities will be after the January highs are in. be patient and let the market moves play out. They are illogical and overvalued much of the time!

Some food for thought.

The market got a lift on Friday from The Employment Situation Report, also known as the Labor Report, but the next one to watch will be the The Monthly Wholesale Trade Report which is due on the 9th.

In the Monthly Wholesale Trade Report is the inventories-to-sales (I/S) ratio, which is very closely watched. The Durable Goods Report is also watched almost as close and sheds some light on the durable sales figures. Any more good news like we saw Friday could easy send this market higher into Jan 2010. Stay on your toes, and watch the charts close knowing what to expect on the reaction to this next report and you will make some good coin! And don't get married to any one idea or EWT count, that is a recipe for disaster.

Below are links to explanations of other reports

Personal Income and Outlays

Industrial Production

Economic recovery occurs when these four indicators turn higher at about the same time. If the four indicators are not rising, then a normal recovery will not occur. If a complete recovery of these four indicators is far in the future, then the current gains in the stock market cannot be sustained just like in 2001. The market appears to be bracing for this one a little but, since it did not close near the highs Friday even after such a good Employment report.

Do some dd and get a handle on what these reports are really saying, and THEN you will know whether you should choose the bullish count or the bearish count.
Happy & prosperous trading to all!