Indicator Watch

(September 30th) Last week stocks edged higher to finish a tumultuous third quarter with solid gains. Climbing for the third straight week, the Dow added 75 points to reach 13896 and is now just 104 points off its record 14000 peak. The S&P 500 ticked up a point to 1527 and the Nasdaq Composite Index rose 30 points to 2702. The Dow ended the month of September up 4%, with the S&P 500 up 3,6% and the Nasdaq up 4%. For the third quarter, the Dow gained 3,6% and has rallied in eight of the past nine quarters. The S&P 500 added 1,6% while the Nasdaq jumped 3,8%, with both seeing their ninth gain in the past 10 quarters. There are now too many bulls around for our liking and the Stock Trader's Almanac, for example, sees the Dow hitting 16000 by the year-end or in the first quarter of 2008. When we look at charts of the major market indices, we see breakouts across the board and that's certainly a good sign. But the number of stocks making fresh 52-week highs each day versus those making fresh 52-week lows have thinned. It is normal that the number of new lows will swell in a bear market or during a major correction such as the one seen this summer. What does not make sense, after nearly six weeks of rally since the August low with the Standard & Poor's 500 gaining over 8% on a closing basis, is that new lows are starting to outnumber the new highs again. Chart watchers like to keep tabs on the participation by all stocks, also known as market breadth, by using the advance-decline line, which is simply a running total of stocks that go up minus stocks that go down on each day. When the market is rising, typically the indicator rises, too. The real power of the indicator comes when the market is rising and the indicator is not. Right now, the advance-decline line on the New York Stock Exchange is lagging a bit behind price action and that suggests some stocks are not keeping pace with the rest. This concerns the daily and the weekly advance-decline line. Smart money is now selling into the rally and our Smart Money Flow Index is lagging again. We also expect strong resistance around the 14000 level of the Dow. Stay tuned.

(October 7th) The Dow Jones Industrial Average hit an intraday record of 14125 before ending the week up 170, or 1,2%, at 14066 and short sellers scrambled for cover. The Standard & Poor's 500 rose 31points, or 2%, to reach a record 1558. The bulls took out the intra-day high of 1552,87, set on March 24, 2000 and there must have been also an incredible amount of stop-loss orders around this level. We would like to mention that NYSE members have been long, and most of the short covering was therefore done by public investors and odd-lotters (dumb money). Billions worth of stocks are now in weak hands and all these small guys are now probably waiting desperately for someone who will buy their expensive shares. Since the NYSE Member Report is published by the SEC two weeks after the applicable date, we have to wait two more weeks in order to see how much short covering was done. Our Smart Money Flow Index is now outright bearish after the Dow reached a new high and the SMFI didn't. It is of course possible that the short squeeze will last for a while but we believe that the market is due for a correction very soon. The number of new lows indicates also that the rally is technically not in a very good shape (Charts of Interest). We might even hear the first growl of the bear already this week when the x-week crash cycle is due (week of October 12th).

(October 14th) The Dow Jones Industrial Average closed Friday at 14093,08, up 33 points on the week. It hit an all-time high of 14164,50 Tuesday. The Standard & Poor's 500 finished at 1561,80, up 0,3% from last Friday, with an all-time high of 1565,15 notched Tuesday. The Nasdaq Composite Index gained nearly 1% to 2805,68, with most of that coming Friday. The x-week crash cycle appeared on Wednesday, when a big sell-off in technology shares wiped out a strong stock market rally. The reversal was quite large - about 183 points for the Dow, for example. About 3:15 p.m., the Dow had been down nearly 130 points. The selling came after the Dow and S&P 500 had hit intraday highs of 14198,10 and 1576, respectively. At the close, the Dow Jones industrials were down 63,6 points to 14015, and the Standard & Poor's 500 Index slipped eight points to 1554. The next few days will be interesting because some 85 companies in the S&P 500, including 13 of the 30 companies in the Dow, will report earnings next week. An additional 141 companies, including six more Dow companies, will report the week of Oct. 22. Most analysts now see the S&P 500 companies reporting lower overall earnings per share compared with a year ago, based on earnings warnings so far from the likes of Citigroup, Allegheny Technologies, home builders and a number of retailers. In addition, several important economic reports will hit the markets, including industrial production on Tuesday and the Consumer Price Index and housing starts, both on Wednesday. The CPI will get a lot of attention because food and energy costs have jumped of late. Crude oil moved higher last week, reaching an intraday record high of $84,05 a barrel Friday morning. Crude closed at a record $83,69 a barrel on Friday, up nearly 3% for the week. But there is a correction ahead in our opinion, no matter how good all these news might be. There could of course be some more panicky short covering on good news, but the bearish message of our Smart Money Flow Index is very clear. Other signs of bearish non-confirmations come from the Advance-Decline Line, the Upside-Downside Volume Line and the Dow Jones Transportation Average. Gold bugs are advised to take a closer look at the ever widening spread between the price of gold and the Barron's Gold Mining Index.

(October 21st) For the week the Dow finished down 571 points, the Standard & Poor's 500 fell 61 points and effectively gave up all of its past month's gain. The Nasdaq Composite Index suffered its first decline in six weeks, closing down 81 points. Most of the selling was done on Friday, when stocks suffered their worst daily loss since summer. All the major indexes ended down more than 2,5% on the 20th anniversary of Black Monday. The Dow Jones Industrial Average dropped 367 points to 13522, the S&P 500-stock index lost 39,45 to 1500,63, and the Nasdaq Composite Index was down 74,15 to 2725.16. The steep decline was blamed on a spectacular spike of crude oil above $90 a barrel by Wall Street "experts". Crude-oil futures briefly touched a new high - $90.02 a barrel - in electronic trading as the weak dollar, supply fears and a bomb attack on the former Pakistan prime minister helped to push prices higher. Needless to say that we do not share this view, because it is most unlikely that "Smart Money" knew about any bomb attacks when we got the first bearish message three weeks ago from our Smart Money Flow Index. The outlook for the near-term remains bearish in our opinion and it will take a while until the dust settles. October has the reputation as the scariest month of the year and the media is certainly making a big deal about the 20th anniversary of the Black Monday market crash. Much of next week will also be devoted to talk on how much the Federal Reserve will cut rates when it meets on Oct. 30-31. The betting now is that the Fed will trim its key federal funds rate to 4,5% or lower. Besides this, around 1400 companies are reporting quarterly profits next week, including smaller banks and brokerages, which were among Friday's weakest stocks. Reports on existing home sales on Wednesday, and new home sales and durable goods orders on Thursday might also rattle the markets.