Erasing October’s Fright

After some Sturm und Drang, the markets have now returned to their October 1st levels. Momentum has come back into vogue, with sector rotation – and a bit of short covering – driving equities. Given the big move off of the October bottom, we would expect the market to begin consolidating the recent gains.

A little backing and filling would be healthy, as would a modest test of the of last week’s pop. Indeed, the chart watchers amongst you might also take note of the several gaps formed recently. Historically, these are best filled before the next leg up can begin in earnest.

Once the present period of consolidation is resolved, the markets can set their sights higher. With a little luck – and perhaps with less sturm and milder drang – we can return to the levels last seen in March 2005, when the Dow was spitting distance from 11,000.

Where does this leave us? Shorter term, the most recent rally was mostly a technical bounce off of oversold levels. Sometime between now and Thanksgiving, we contemplate a continuation of this move upwards into 2005 years end.

Notwithstanding our recent Bullishness, we remain uneasy about the market’s longer-term prospects. The lack of traction in the face of good earnings, increased dividends, and huge buybacks is certainly disconcerting. The Market is still only where it was back on August 2001. To paraphrase Jeff Saut, despite 14 straight quarters of double-digit earnings growth, the S&P 500 has gone virtually nowhere for 3½ years.

This multi-year consolidation will eventually break. The resolution of this is likely to be a major move on the indices, one way or the other. Some strategists are hoping that the positives cited above, and the recent Dow Transport breakout, will lead to a big upside surprise. They hope it might set off a new multi-year Bull cycle.

I am less sanguine, keying on the slowing economy, rising inflation, declining Real Wages, creeping interest rates, high energy prices, negative consumer sentiment, mediocre hiring and anemic CapEx (yes, I know, I am a ray of sunshine).

While those issues may govern the markets in 2006, we find that many asset managers are more concerned with what will occur over the next 8 weeks. To that crowd, we suggest buying the dips as the SPX pulls back towards 1195-1200. 

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