"The Stock Market Pulse"

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October 27^th, 2008 Edition

Weekly review of the markets

Last week, we talked about a double bottom that could represent a bullish figure but also that it could also be the formation of a symmetrical triangle which if not breached could mean we are going back down , hard…

Monday, the double bottom looked good in terms of its potential effect and we recorded a nice positive day across the board. The “TED spread” ( intra bank rates ) went down to 296 from 434 a little while ago which is still not cheap but still confirms we might be stabilizing a bit. It’s worth nothing that the “normal” spread is about 25 points; so it’s still very expensive at 296…

Tuesday the oil price continued its slide pressured by the slowing global economy. 77 companies announced their earnings and the results are average but the forward statements are bleak. We had a down day and the high of our triangle wasn’t even tested…

Wednesday once again saw its share of earnings and again, the forward statements are continuing to announce difficult times ahead. Before when oil prices were rising, the markets were reacting negatively for obvious reasons but now that the oil prices are down, big time, we’d expect it to help but no, the markets are now seeing this incredible turn of event as a very bearish sign since it confirms the global economy is moving into a recession… Just can’t win these days…

Thursday the day started much lower and at one point even got lower then the day before. The negative forecasts and the announcements of job cuts by GM, Xerox, Yahoo, Goldman Sachs and Merck to only name a few were the main cause for that bad start. When the low, reached on October 10^th , was within reach the bargain hunters got out of their hiding place and started a buying frenzy which bringing us back within our triangle although the base is not much weaker…

Friday another lower open confirmed a breach of the base of this triangle we were hoping would support the price at least until we tested its higher portion We still managed to stay over the October 10^th low. It wasn’t easy though because the over seas markets had taken a beating closing lower by as much as 9.6% ( Nikkei). As if we needed more proof, it is now more an more evident the recession is worldwide. The fact is that the magnitude of it continues to surprise us given all the efforts the world’s governments are making to control it. The institutions are diminishing their margins and the individual investors are simply getting out of the markets all together! The American currency is benefiting from the flight to security syndrome and people are buying US treasury bills. Oil price went below 65$. 34% of companies have now announced their earnings results and their profits are, in average, 11% lower vs. last year’s . The “TED spread” is around 256 points. The S&P500 and the Dow had similar days closing slightly over their respective openings The NASDAQ opened much lower, even lower then the October 10^th low and struggled all day to get back over it and finally succeeded . We can say, for the Dow and the S&P500, that the October 10^th support is still alive but for the NASDAQ it\s not as clear…

This Week is not looking too good: Out triangle base has been breached and we are now hoping the October 10^th low acts as a strong support level from which the markets will bounce from or at least stabilize on . if it doesn’t we have to go as far as 2002 to find the next support level…

On the economic front, more an d more statistics point to a generalized recession. This week we’ll get the consumer confidence report the Chicago and Michigan PMI. The GDP for this last trimester is also coming but it will reflect the economy before the crisis. On the 29^th, the FED is meeting and it will be interesting to hear what they have to say. Most expect another interest rate cut. Likely a quarter of a point.

Technically, last Friday’s triangles were breached and are no longer valid figures. We are now seeing new figures:

Check out the S&P500 chart and notice we are now seeing the formation of a bearish triangle and (maybe) a new double bottom forming itself from the October10th low.

Now the Dow; a new symetrical triangle can be traced using last week\s low and the October 10^th low. We also can talk about a the potential of a double bottom here.

And the Nasdaq: forget about the potential for a double bottom, it\s game over on that front… Wha”could” be happening is the formation of a bullish pennant.

If we end up lower after this week’s trading, the next support levels will be:

· S&P500 : 800

· DOW : 7 250

· Nasdaq : 1 300

The VIX saw new record highs last week so volatility is all time highs…

Economic calendar
(Reports I consider will impact the market the most with definitions and expectations)

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Monday October 27^th

New Home Sales

08:30ET
Consensus 450,000

Definition

New home sales measure the number of newly constructed homes with a committed sale during the month. The level of new home sales indicates housing market trends and, in turn, economic momentum and consumer purchases of furniture and appliances.

Why Do Investors Care?

This provides a gauge of not only the demand for housing, but the economic momentum. People have to be feeling pretty comfortable and confident in their own financial position to buy a house. Furthermore, this narrow piece of data has a powerful multiplier effect through the economy, and therefore across the markets and your investments. By tracking economic data such as new home sales, investors can gain specific investment ideas as well as broad guidance for managing a portfolio.

Each time the construction of a new home begins, it translates to more construction jobs, and income which will be pumped back into the economy. Once the home is sold, it generates revenues for the home builder and the realtor. It brings a myriad of consumption opportunities for the buyer. Refrigerators, washers, dryers and furniture are just a few items new home buyers might purchase. The economic "ripple effect" can be substantial especially when you think a hundred thousand new households around the country are doing this every month.

Since the economic backdrop is the most pervasive influence on financial markets, new home sales have a direct bearing on stocks, bonds and commodities. In a more specific sense, trends in the new home sales data carry valuable clues for the stocks of home builders, mortgage lenders and home furnishings companies.

Tuesday October 28^th

ICSC-Goldman Store Sales

7:45ET

W/W change Consensus 0.7%

Y/Y Consensus 1.0%

Definition
This weekly measure of comparable store sales at major retail chains, published by the International Council of Shopping Centers, is related to the general merchandise portion of retail sales. It accounts for roughly 10 percent of total retail sales.

Why Do Investors Care?
Consumer spending accounts for more than two-thirds of the economy, so if you know what consumers are up to, you'll have a pretty good handle on where the economy is headed. Needless to say, that's a big advantage for investors.

The pattern in consumer spending is often the foremost influence on stock and bond markets. For stocks, strong economic growth translates to healthy corporate profits and higher stock prices. For bonds, the focus is whether economic growth goes overboard and leads to inflation. Ideally, the economy walks that fine line between strong growth and excessive (inflationary) growth. This balance was achieved through much of the nineties. For this reason alone, investors in the stock and bond markets enjoyed huge gains during the bull market of the 1990s. Retail sales growth did slow down in tandem with the equity market in 2000 and 2001, but then rebounded at a healthy pace between 2003 and 2005.

The ICSC-Goldman index is one of the most timely indicators of consumer spending, since it is reported every week. It gets extra attention around the holiday season when retailers make most of their profits. It is also a useful indicator when special factors can cause economic activity to momentarily slide. For instance, it was widely watched in the aftermath of Hurricanes Katrina and Rita which hit New Orleans and the Gulf Coast in 2005. The ICSC-Goldman Sachs store sales series previously was known as ICSC-UBS before Goldman Sach's involvement with ICSC. The name change took place with the September 30, 2008 release.

Redbook
08:55 ET

Definition

A weekly measure of sales at chain stores, discounters, and department stores. It is a less consistent indicator of retail sales than the weekly ICSC index. It is also calculated differently than other indicators. For instance, figures for the first week of the month are compared with the average for the entire previous month. When two weeks are available, then these are compared with the average for the previous month, and so on. It might be more useful to compare year-over-year figures since these are indeed compared to the comparable week a year ago. This index is correlated with the general merchandise portion of retail sales covering only about 10 percent of total retail sales.

Why Do Investors Care?

Consumer spending accounts for two-thirds of the economy, so if you know what consumers are up to, you'll have a pretty good handle on where the economy is headed. Needless to say, that's a big advantage for investors.

The pattern in consumer spending is often the foremost influence on stock and bond markets. For stocks, strong economic growth translates to healthy corporate profits and higher stock prices. For bonds, the focus is whether economic growth goes overboard and leads to inflation. Ideally, the economy walks that fine line between strong growth and excessive (inflationary) growth. This balance was achieved through much of the nineties. For this reason alone, investors in the stock and bond markets enjoyed huge gains during the bull market of the 1990s. Retail sales growth did slow down in tandem with the equity market in 2000 and 2001, but then rebounded at a healthy pace between 2003 and 2005.

The Redbook is one of the more timely indicators of consumer spending, since it is reported every week. It gets extra attention around the holiday season when retailers make most of their profits. It is also a useful indicator when special factors can cause economic activity to momentarily slide. For instance, once again, it was widely watched in the aftermath of Hurricanes Katrina and Rita which hit New Orleans and the Gulf Coast in 2005.

Consumer Confidence

Consensus: 52.0

Definition
The Conference Board compiles a survey of consumer attitudes on present economic conditions and expectations of future conditions. Five thousand consumers across the country are surveyed each month. While the level of consumer confidence is associated with consumer spending, the two do not move in tandem each and every month.

Why Do Investors Care?
The pattern in consumer attitudes and spending is often the foremost influence on stock and bond markets. For stocks, strong economic growth translates to healthy corporate profits and higher stock prices. For bonds, the focus is whether economic growth goes overboard and leads to inflation. Ideally, the economy walks that fine line between strong growth and excessive (inflationary) growth. This balance was achieved through much of the nineties. For this reason alone, investors in the stock and bond markets enjoyed huge gains during the bull market of the 1990s. Consumer confidence did shift down in tandem with the equity market between 2000 and 2002 and then recovered in 2003 and 2004. Consumers became more pessimistic in 2005 when gasoline prices surged.

Consumer spending accounts for more than two-thirds of the economy, so the markets are always dying to know what consumers are up to and how they might behave in the near future. The more confident consumers are about the economy and their own personal finances, the more likely they are to spend. With this in mind, it's easy to see how this index of consumer attitudes gives insight to the direction of the economy. Just note that changes in consumer confidence and retail sales don't move in tandem month by month.

Wednesday October 22^nd

MBA Purchase Applications
07:00ET

Definition

The Mortgage Bankers' Association compiles various mortgage loan indexes. The purchase applications index measures applications at mortgage lenders. This is a leading indicator for single-family home sales and housing construction.

Why Do Investors Care?

This provides a gauge of not only the demand for housing, but economic momentum. People have to be feeling pretty comfortable and confident in their own financial position to buy a house. Furthermore, this narrow piece of data has a powerful multiplier effect through the economy, and therefore across the markets and your investments. By tracking economic data such as the Mortgage Bankers Association purchase applications, investors can gain specific investment ideas as well as broad guidance for managing a portfolio.

Each time the construction of a new home begins, it translates to more construction jobs, and income which will be pumped back into the economy. Once a home is sold, it generates revenues for the home builder and the realtor. It brings a myriad of consumption opportunities for the buyer. Refrigerators, washers, dryers and furniture are just a few items new home buyers might purchase. The economic "ripple effect" can be substantial especially when you think a hundred thousand new households around the country are doing this every month.

Since the economic backdrop is the most pervasive influence on financial markets, housing construction has a direct bearing on stocks, bonds and commodities. In a more specific sense, trends in the MBA purchase applications index carries valuable clues for the stocks of home builders, mortgage lenders and home furnishings companies.

Durable Goods Orders
10:00 ET
Consensus -1.1%

Definition

Durable goods orders reflect the new orders placed with domestic manufacturers for immediate and future delivery of factory hard goods. The first release, the advance, provides an early estimate of durable goods orders. About two weeks later, more complete and revised data are available in the factory orders report. The data for the previous month are usually revised a second time upon the release of the new month's data. (Bureau of the Census, U.S. Department of Commerce)

Why Do Investors Care?

Investors want to keep their finger on the pulse of the economy because it usually dictates how various types of investments will perform. Rising equity prices thrive on growing corporate profits - which in turn stem from healthy economic growth. Healthy economic growth is not necessarily a negative for the bond market, but bond investors are highly sensitive to inflationary pressures. When the economy is growing too quickly and can't meet demand, it can pave the road for inflation. By tracking economic data such durable goods orders, investors will know what the economic backdrop is for these markets and their portfolios.

Orders for durable goods show how busy factories will be in the months to come, as manufacturers work to fill those orders. The data not only provide insight to demand for items such as refrigerators and cars, but also business investment such as industrial machinery, electrical machinery and computers. If companies commit to spending more on equipment and other capital, they are obviously experiencing sustainable growth in their business. Increased expenditures on investment goods set the stage for greater productive capacity in the country and reduces the prospects for inflation.

Durable goods orders tell investors what to expect from the manufacturing sector, a major component of the economy, and therefore a major influence on their investments.

FOMC Meeting Announcement

Consensus: 1.0% ( Federal Funds rate)

Definition
The Federal Open Market Committee consists of the seven Governors of the Federal Reserve Board and five Federal Reserve Bank presidents. The FOMC meets eight times a year in order to determine the near-term direction of monetary policy. Changes in monetary policy are now announced immediately after FOMC meetings.

Why Do Investors Care?
The Fed determines interest rate policy at FOMC meetings. These meetings occur roughly every six weeks and are the single most influential event for the markets. For weeks in advance, market participants speculate about the possibility of an interest rate change -- or a change in the wording of the post-FOMC announcement that suggests a shift in policy -- at these meetings. If the outcome is different from expectations, the impact on the markets can be dramatic and far-reaching.

The interest rate set by the Fed, the federal funds rate, serves as a benchmark for all other rates. A change in the fed funds rate, the lending rate banks charge each other for the use of overnight funds, translates directly through to all other interest rates from Treasury bonds to mortgage loans. It also changes the dynamics of competition for investor dollars: when bonds yield 10 percent, they will attract more money away from stocks than when they only yield 5 percent.

The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the financial markets, while lower interest rates are bullish.

EIA Petroleum Status Report
10:35 ET

Definition

The Energy Information Administration (EIA) provides weekly information on petroleum inventories in the U.S., whether produced here or abroad. The level of inventories helps determine prices for petroleum products.

Why Do Investors Care?

Petroleum product prices are determined by supply and demand - just like any other good and service. During periods of strong economic growth, one would expect demand to be robust. If inventories are low, this will lead to increases in crude oil prices - or price increases for a wide variety of petroleum products such as gasoline or heating oil. If inventories are high and rising in a period of strong demand, prices may not need to increase at all, or as much. During a period of sluggish economic activity, demand for crude oil may not be as strong. If inventories are rising, this may push down oil prices.

Crude oil is an important commodity in the global market. Prices fluctuate depending on supply and demand conditions in the world. Since oil is such an important part of the economy, it can also help determine the direction of inflation. In the U.S. consumer prices have moderated whenever oil prices have fallen, but have accelerated when oil prices have risen.

Thursday October 23^rd

Gross Domestic Product

08:30 ET

Real GDP-Q/Q change- SAAR -0.5%

GDP price index -Q/Q change- SAAR 3.8%

Definition

Gross Domestic Product (GDP) is the broadest measure of aggregate economic activity and encompasses every sector of the economy.

Why Do Investors Care?

GDP is the all-inclusive measure of economic activity. Investors need to closely track the economy because it usually dictates how investments will perform. Investors in the stock market like to see healthy economic growth because robust business activity translates to higher corporate profits. Bond investors are more highly sensitive to inflation and robust economic activity could potentially pave the road to inflation. By tracking economic data such as GDP, investors will know what the economic backdrop is for these markets and their portfolios.

The GDP report contains a treasure-trove of information which not only paints an image of the overall economy, but tells investors about important trends within the big picture. GDP components such as consumer spending, business and residential investment, and price (inflation) indexes illuminate the economy's undercurrents, which can translate to investment opportunities and guidance in managing a portfolio.

Jobless Claims
08:30ET
Consensus 475K

Definition

New unemployment claims are compiled weekly to show the number of individuals who filed for unemployment insurance for the first time. An increasing (decreasing) trend suggests a deteriorating (improving) labor market. The four-week moving average of new claims smoothes out weekly volatility.

Why Do Investors Care?

Jobless claims are an easy way to gauge the strength of the job market. The fewer people filing for unemployment benefits, the more have jobs, and that tells investors a great deal about the economy. Nearly every job comes with an income that gives a household spending power. Spending greases the wheels of the economy and keeps it growing, so a stronger job market generates a healthier economy.

There's a downside to it, though. Unemployment claims, and therefore the number of job seekers, can fall to such a low level that businesses have a tough time finding new workers. They might have to pay overtime wages to current staff, use higher wages to lure people from other jobs, and in general spend more on labor costs because of a shortage of workers. This leads to wage inflation, which is bad news for the stock and bond markets. Federal Reserve officials are always on the look out for inflationary pressures.

By tracking the number of jobless claims, investors can gain a sense of how tight, or how loose, the job market is. If wage inflation threatens, it's a good bet that interest rates will rise, bond and stock prices will fall, and the only investors in a good mood will be the ones who tracked jobless claims and adjusted their portfolios to anticipate these events.

Just remember, the lower the number of unemployment claims, the stronger the job market, and vice versa.

EIA Natural Gas Report

10:35 ET

Definition
The Energy Information Administration (EIA) provides weekly information on natural gas stocks in underground storage for the U.S., and three regions of the country. The level of inventories help determine prices for natural gas products.

Why Do Investors Care?
Natural gas product prices are determined by supply and demand - just like any other good and service. During periods of strong economic growth, one would expect demand to be robust. If inventories are low, this will lead to increases in natural gas. If inventories are high and rising in a period of strong demand, prices may not need to increase at all, or as much. During a period of sluggish economic activity, demand for natural gas may not be as strong. If inventories are rising, this may push down oil prices.

Friday October 24^th

Employment Cost Index

08:30ET

Consensus: 0.7%

Definition
A measure of total employee compensation costs, including wages and salaries as well as benefits. The employment cost index (ECI) is the broadest measure of labor costs. Why Do Investors Care?
The employment cost index is an easy way to evaluate wage trends and the risk of wage inflation. Wage inflation is high on the Federal Reserve's enemy list. Fed officials are always on the lookout for the prospects of inflationary pressures. Wage pressures tend to percolate when economic activity is booming and the demand for labor is rising rapidly. During economic downturns, wage pressures tend to be subdued because labor demand is down.

By tracking labor costs, investors can gain a sense of whether businesses will feel the need to raise prices. If wage inflation threatens, it's a good bet that interest rates will rise, bond and stock prices will fall, and the only investors in a good mood will be the ones who tracked the employment cost index and adjusted their portfolios to anticipate these events.

Personal Income and Outlays
08:30ET
Personal Income –M/M change 0.1%

Consumer Spending – M/M change -0.3%

Definition
Personal income is the dollar value of income received from all sources by individuals. Personal outlays include consumer purchases of durable and nondurable goods, and services.

Why Do Investors Care?

The income and outlays data are another handy way to gauge the strength of the consumer sector in this economy and where it is headed. Income gives households the power to spend and/or save. Spending greases the wheels of the economy and keeps it growing. Savings are often invested in the financial markets and can drive up the prices of stocks and bonds. Even if savings simply go into a bank account, part of those funds are typically used by the bank for lending and therefore contribute to economic activity. In the past twenty years, personal savings have diminished rapidly as consumers have spent a greater and greater share of their income.

The consumption (outlays) part of this report is even more directly tied to the economy, which we know usually dictates how the markets perform. Consumer spending accounts for more than two-thirds of the economy, so if you know what consumers are up to, you'll have a pretty good handle on where the economy is headed. Investors can see how consumers are directing their spending, whether they are buying durable goods, nondurable goods or services. Needless to say, that's a big advantage for investors who determine which companies' shares they will buy.

NAPM-Chicago

09:45ET
Consensus 48

Definition

The National Association of Purchasing Management - Chicago compiles a survey and a composite diffusion index of business conditions in the Chicago area. Manufacturing and non-manufacturing firms are both surveyed, but until recently, market players have believed that the survey primarily covers the manufacturing sector. Readings above 50 percent indicate an expanding business sector. The NAPM - Chicago is considered a leading indicator of the ISM manufacturing index.

Why Do Investors Care?

Investors should track economic data like the NAPM - Chicago to understand the economic backdrop for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers a moderate growth environment that won't generate inflationary pressures.

The NAPM - Chicago gives a detailed look at the Chicago region's manufacturing and non-manufacturing sectors. Many market players don't realize that non-manufacturing activity is covered in this index and tend to focus on the manufacturing side only. Consequently, market players consider this as a leading indicator for the ISM manufacturing survey. On its own, it can be viewed as a regional indicator of general business activity. Some of the NAPM - Chicago's sub-indexes also provide insight on commodity prices and other clues on inflation. The Federal Reserve closely watches this report because in its long history, it has proven to be a good indicator of business activity as well as inflation. As a result, the financial markets can be highly sensitive to this report.

Consumer Sentiment
10:00 ET
Consensus 57.5

Definition

The University of Michigan consumer surveyquestions 500 households each month on their financial conditions and attitudes about the economy. Consumer sentiment is directly related to the strength of consumer spending. Consumer confidence and consumer sentiment are two ways of talking about consumer attitudes. Among economic reports, consumer sentiment refers to the Michigan survey while consumer confidence refers to The Conference Board's survey.

Why Do Investors Care?

The pattern in consumer attitudes and spending is often the foremost influence on stock and bond markets. For stocks, strong economic growth translates to healthy corporate profits and higher stock prices. For bonds, the focus is whether economic growth goes overboard and leads to inflation. Ideally, the economy walks that fine line between strong growth and excessive (inflationary) growth. This balance was achieved through much of the nineties. For this reason alone, investors in the stock and bond markets enjoyed huge gains during the bull market of the 1990s. Consumer confidence did shift down in tandem with the equity market between 2000 and 2002 and then recovered in 2003 and 2004. Consumers became more pessimistic in 2005 when gasoline prices surged.

Consumer spending accounts for more than two-thirds of the economy, so the markets are always dying to know what consumers are up to and how they might behave in the near future. The more confident consumers are about the economy and their own personal finances, the more likely they are to spend. With this in mind, it's easy to see how this index of consumer attitudes gives insight to the direction of the economy. Just note that changes in consumer confidence and retail sales don't move in tandem month by month.

Farm Prices

Definition

The Department of Agriculture releases the index of prices received by farmers at the end of the month for the current month. It reflects changes through the middle of the month. The index is not adjusted for seasonal variation. It includes crop prices and livestock & product prices. Analysts monitor farm prices in order to see early warnings of inflation or deflationary pressures in the economy.

Why Do Investors Care?
Farm prices are a leading indicator of food price changes in the producer and consumer price indices. There is not a one-to-one correlation, but general trends move in tandem.

Investors need to monitor inflation closely. An individual investor who understands the process of inflation and how inflation influences the markets will no doubt benefit over those investors that don't understand the consequences of inflation.

Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how data such as farm prices influence the markets - and your investments.

If someone borrows $100 dollars from you today and promises to repay it in one year with interest, how much interest should you charge? The answer depends largely on inflation, because you know that the $100 won't be able to buy the same amount of goods and services a year from now, as it does today. If you were in a country where prices doubled every couple of months, you might want to charge 400% interest for a total payoff of $500 at the end of the year. In the United States, farm prices tells us that food prices were falling through the summer of 2005. This represents only one sector of the economy though. At the same time, the CPI was rising 3 to 3.5 percent during this period. You might want to add in one or two percentage points to cover default risk and the opportunity cost, but inflation remains the key variable in what interest rate you would charge.

Inflation (along with default risk and opportunity cost) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates accordingly. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.

By tracking the trends in inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform.

That's it for the economic calendar this week and for this outlook on what we can expect in the markets this week so use it wisely, and prosper… :-)

Yours truly,

Eric LeRiche

http://www.InvestorRules.com

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