Daily State of the Markets 
Tuesday Morning – August 11, 2009

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Good morning. With no economic news, no major earnings news, and some big data on tap in terms of Wednesday’s FOMC decision, retail earnings from the likes of Wal-Mart (WMT) and Macy’s (M), and the monthly inflation data, traders were left to their own devices yesterday. Thus, after a month-long rally which took the S&P up nearly 15%, it was time to do a little profit taking. And I do mean a ‘little’ profit taking as a loss of 32 points on the DJIA is hardly anything to get upset about after such a stellar run.

Although there wasn’t an overriding theme to yesterday’s little pullback, there was some negative chatter that may have prompted the selling. First, influential fund manager Mark Mobius of Templeton suggested that global stocks could face a stiff correction – as much as -30% – this year. And then there was the Bloomberg report that shows options traders are increasing their bets that stocks will pull back in a meaningful fashion during the September/October period.

The concept of a pullback at this stage of the game is hardly surprising. After all, stocks are up nearly 50% from the March 9th lows and the recent run has been a one-way affair. However, part of the reason that options traders may be looking ahead to September is the fact that the September/October period is historically weak.

The two month stretch has earned its reputation for being a good time to do things other than invest in stocks. It is safe to say that October has seen more than its fair share of difficulties and September is one of the year’s worst months historically. In addition, Ned Davis Research does some interesting work on cycles, which also projects some trouble in the next couple of months.

NDR combines its one-year seasonal cycle, the four-year presidential cycle, and the 10-year decennial cycle to create the firm’s annual cycle composite. While they claim such work is “just for fun” and should not be used to forecast prices, my experience with NDR’s cycle composites over the past 18 years shows that when they are “on,” they tend to be pretty darned good. So, where are we now? Cutting to the chase, the cycle composite did correctly predict the big run up from early March and does show that we could see some further upside from here. However, beginning in September, the composite suggests a substantial correction that could run into early November.

In light of the fact that the market can and usually does do whatever it darn well pleases, using predictive tools to manage money in the market is a very quick route to the poor house. However, when the cycles are in sync, like they are now, it doesn’t hurt to keep them in the back of your mind. So, while we might still have some fun in the summer sun yet to come, if things start to get ugly when we flip the calendar next month, it might be best to take it seriously.

Turning to this morning, the government reported that Nonfarm Productivity rose a higher-than expected 6.4% in the second quarter versus the consensus of 5.5%. This means that the factory workers still on the job are being much more productive. Compare this to Q1’s revised level of 0.3% and the picture becomes quite clear. On the cost side, Unit Labor Costs were down much more than expected at -5.8% vs. -2.5%, which is a positive from the inflation perspective but not so great if you are the one getting paid less.

Running through the rest of the pre-game indicators, the major overseas markets are mixed by region as Asia was higher and Europe is down a smidge. Crude futures are moving higher with the latest quote showing oil trading up by $0.52 to $72.12. On the interest rate front, we’ve got the yield on the 10-yr trading at 3.77%, while the yield on the 3-month T-Bill is trading at 0.17%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a flat open. The Dow futures are currently about even; the S&P’s are up by less than a point, while the NASDAQ looks to also be within a point of fair value at the moment.

Make the decision to have a great day and until next time, “may the bulls be with you!”

David D. Moenning
Founder TopStockPortfolios.com

For more “top stock” portfolios and research, visit TopStockPortfolios.com

 


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