Broadmarket analysis is presented here courtesy of Cashflow Heaven.
WHICH WAY THIS MARKET IS HEADED
The S&P-500 put in a bullish week with a 45 point
rebound off the week's lows. Much of this late week gain seems to be in
anticipation of a Fed rate cut this coming Wednesday. Further cuts by
the Fed will help financials--they are the biggest percentage of the S&P
and they are also the sector that benefits most from lower interest
rates.
The Nasdaq also put in a bullish week closing at
2804 due to strong gains in Microsoft, Yahoo and Google. The index was
also buoyed by monster moves in BIDU at +19 and DECK at +31.
In spite of some all star performers all was not
light and laughter with the Nasdaq—the index is a composite of 3078
stocks and one third of them were down on Friday. That is a problem that
has been typical of the indexes over the last week. Volume has been
strong but fairly evenly weighted between advancers and decliners.
Bullish conviction cooled early in the week but
returned with a vengeance on Friday. Chances are good that if the Nasdaq
can continue pushing over resistance it will pull the broader markets
higher.
The two-day FOMC meeting ends on Wednesday and they
are expected to cut rates by an additional 25 points. The Fed funds
futures are showing a 110% chance of a 25 point cut.
However some analysts feel the Fed will cut another
50 points and cut the discount rate as well—just like they did last
time. This is about the only thing that will produce a material post Fed
bounce since 25 points is already priced in--in fact a 25 point cut
could actually produce a sell the news event.
There are some good arguments for another 50 point
cut--the next FOMC meeting is Dec-11th and the Fed historically avoids
any rate moves in December. After that the next meeting is Jan-29th—too
long to wait for another rate cut suggesting the Fed might hit it hard
this Wednesday and then back off for the next three months.
Officially, inflation is tame even with the higher
oil and commodity prices in the mix. That gives the Fed plenty of room
to move without any material risk. There is no downside to another
50-point cut but there is risk if they don't cut and have to wait 90
days to make another move.
Reportedly the activity at the discount loan window
for member banks has risen to the highest level since the first discount
rate cut. This suggests liquidity in the credit markets is drying up
again after the major financials reported larger than expected losses
and higher levels of subprime exposure. Another rate cut here would be
an insurance move to improve sentiment rather than improve the
economy---and it is a sentiment move that would make a big impact. If we
see another 50 point cut expect some strong upside this coming week.
The economic reports continue on Thursday with the
ISM Index the major report and a clear view into the possibility of a
coming recession. The ISM headline number in September was a drop to
52.0---the 3rd monthly drop from the 56.0 cycle high in June. Estimates
are for another small drop to 51.8 however if we get a plunge below 50
and into contraction territory it could be very negative for the
markets. The Fed will have access to the ISM number before they make
their rate cut decision so it will be an influence.
The last major report for the week is the NonFarm
Payrolls on Friday with estimates for a gain of +85,000 jobs. There was
a surprise downside disaster in August but all that was erased with
strong upside revisions in the September report. The market collapsed
after the August report and then rebounded strongly after the September
revisions---September saw gains of +110,000 jobs.
Current estimates are for job gains of +85,000 but
the whisper numbers are beginning to trend lower. This is going to be
another critical report and one that the Fed will see before they make
their rate decision. This suggests that whatever happens at the Fed
meeting they will already have these reports factored in and that will
diminish their individual impact "IF" the Fed cuts 50 points. A 25-point
cut would indicate a strong ISM and Jobs report to come. As you can see
we’ve got some potential for big moves either way this week but the
current evidence suggests a continued climb to the upside.
In a new development in the ongoing
housings/mortgage correction Countrywide Financial (CFC) surprised the
markets with an optimistic outlook and a comments that the worst was
over for them and the mortgage market. Countrywide reported $1.2 billion
in losses mostly on write-downs related to bad loans. They currently
have over 500,000 loans in default!
This was the first quarterly loss for Countrywide
in their 25 year history--however they promised that changes made in
their business would return them to profitability in Q4 shocking nearly
everyone. Morgan Stanley said they were "substantially more confident in
the company's liquidity." Many had been concerned that Countrywide would
not be able to remain solvent given their number of defaults.
Despite Countrywide's claim of a return to
profitability they did predict that defaults would increase and the
housing market would not recover until 2009. Pretty bearish predictions
but not much worse than what the rest of the sector has been saying.
Some think we could see a rebound in 2008 but that outlook is not
widespread.
As we’ve stated the direction this week looks to be
up but will depend on the economic reports and the Fed decision on
Wednesday. Since the markets are expecting a rate cut they should
continue to creep higher into that decision as long as nothing appears
in the news or earnings to sour sentiment.
We have had a run of bad earnings and also some
very good results. Unfortunately with about 50% of the S&P already
reported the Q3 earnings growth is actually negative at -4.1%.
The good news is earnings expectations for Q4 are
still in double digits at just over 10%. The Q4 scenario is
clear--assuming earnings guidance does not suddenly decline sharply it
appears Q3 will go down as a one time event triggered by the subprime
implosion. If Q4 expectations remain around 10% we should see a decent
Q4 rally assuming the Fed and economics continue to be positive. Current
targets for the major indices are still very position and with the most
historically bullish three months of the year before us traders are
liable to keep fueling the markets higher—especially with some
cooperation from the Fed—the question is…
HOW DO WE MAKE MONEY ON IT?
We’ve got two plays lined up this week and they are
both bullish. The first is on a niche retailer that announced excellent
earnings and is poised to really jump going into the holiday retail
season. The stock ‘V’ bottomed this past Monday and has been
consolidating since--but on Friday it jumped above resistance indicating
more upside to come—a ride we’ll be hopping aboard first thing Monday!
Our next play is on a specialized player in the
wireless network sector whose earnings are going up like a rocket. The
stock blasted higher this past week as earnings more than doubled—but
then traded back down to resistance—otherwise known as ‘the launching
pad’. We’ll be taking our position first thing Monday for what looks to
be a very energetic ride higher!
We’ve got a market poised to jump and two excellent
bullish plays to ride it so let’s get moving…
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