Monday, October 4, 2010

Price Headley: Last Week's Action May be the Start of a Small Correction

The Crude Oil Trader would like to welcome our newest contributor Price Headley at Here is Price's weekly market report for Monday October 4th....

The four week win streak came to an end last week last week, though barely. Still, all pullbacks start with a small step, and last week's action may well be the beginning of at least a small correction. The dip came despite the much-improved economic news. Nearly all the data not only rolled in better than expected, but showed sustained improvements…. income, spending, sentiment (except for the Conference Board's consumer confidence), GDP, and most of the other data nuggets were pointed higher.

So why the pullback? It's all a matter of timeframes. In the long run, the good economic news should indeed translate into more bullishness for stocks. In the near-term (which is our primary focus from one week to the next), fear, greed, momentum, and excess movement drive the market for option trading. That's what we'll dissect below, after a closer look at the economy.

Economic Outlook
It was a plenty busy week last week on the economic front, with a rough start, but a strong finish. Though still improving, the rate of increase in home values, according the Case-Shiller index – slowed to a pace of 3.18% last month, versus the prior increase of 4.21%. Also on Tuesday, the Conference Board said consumer confidence slumped from 53.2 to 48.5 last month.

From Thursday on, however, it was nothing but good news.

Q2's GDP was revised upward, to 1.7%. Initial claims sank to near-multi-year-lows of 453K, while ongoing claims fell to 4457K… also approaching new multi year lows. The lines in the sand for each are 440K and 4430K, respectively. On Friday, the news got even more compelling. Incomes as well as spending were both up, and better than anticipated (by 0.5% and 0.4%, respectively). And, the prior week's problematic University of Michigan Sentiment number was revised upward, from 66.6 to 68.2.

How does the continued uptrend in incomes as well as spending last while both confidence measures sink? As we've said before, the confidence opinion polls are 'supposed to be' assessments about the next six months. In reality, they are assessments of the prior month. Moreover, in many ways they can be interpreted as contrarian indicators....meaning be bullish when they're most bearish, and vice versa.

Indeed, Friday's latter data confirmed that consumers aren't nearly as mired as they claim to be. Construction spending was up a tad, against the backdrop of an expected 1.4% contraction. And, though the final numbers aren't in yet, auto sales have remained strong this year – and in September – despite worries that things are going to get worse before they get better. It's all below.

Let's take a look at the charts for this coming week.....Price Headley's view for this week.

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