Economics

The Good News -Across the world there are stimulus packages (many better than the one we have) that are moving stocks higher. Worldwide recession is a global problem which started right here with the unregulated Credit Default Swaps market. Another stimulus package that helps create jobs for the private sector would be a positive for US stocks.

The Bad News – Durable goods (see yesterday’s Updates), rising unemployment, a longer term recession, and the continued decline in housing.

The unemployment number for October come out on Friday.

The housing stats look really bad. Right now 18% of Americans have negative equity in their homes. Their mortgages are bigger than the value of their homes. If/when home values fall more than 5% this number will turn into into 23%. "How Many Homeowners Owe More Than Their House is Worth "

Polls

Most compilations of polls show the race now closing. They range from 5.4% to 7.3% for Obama. RealClearPolitics this AM has its compilation reduced from +6.9 to +6.4 for Obama. The end result will be a closer. (Because Gallup just came out this RCP number has changed back to Obama +6.9)

Zogby is the first poll to come out each AM and it actually has an increase to 7.1% for Obama

The two really big polls that have the largest samples and have been around longer than the other polls are Rasmussen (+5%)(comes out at 9:30 EST) and Gallup (+11 just out). Their final numbers come out today.

The real state to watch is VA, PA, & CO. Virginia closes early at 7:00. VA – Obama’s once big lead has fallen to +3.8%.
PA shows Obama with a 7.3% lead and CO show Obama with a 5.5% lead. Obama had been falling but things have flattened in PA and CO has remained consistent throughout.

Other sizable states that matter are FL (4.2% Obama)OH (4.2% for Obama) that McCain has to win. Some compilations show Obama up only 2% in FL. and there is one poll in OH that shows McCain +2.

These polls do not take into account the blizzard of McCain’s negative adds. (see below), Obama’s supposedly superior ground game, and undecided/persuadable voters .

"It’s the Economy Stupid"(part 2)

John McCain has thrown the kitchen sink of negative adds at Obama. His 527′s and far right wing media outlets are hammering Obama with guilt by association adds. Everything from a national adds on Reverend Wright to Obama causing a holocaust to Jewish and Christian voters. The McCain/Palin campaign is doing the same negative labeling – Obama as a "socialist," "palling around with Terrorists," someone you "can’t trust" to do what he says he will do.

In the past this type of fear mongering, demagoguery, and dividing Americans has been money in the bank for Bush. Actually its worked throughout history.

Obama’s focus has been on the economy and the fact that McCain voted with Bush 90% of the time. Obama has had his share of negative adds but it pales in comparison. Barack’s closing speech continues to be about unity " this is not about red states and blue states but the United States."

Stocks.

AS ALWAYS DO YOUR OWN RESEARCH BEFORE INVESTING

Index % Change Volume

Dow +1.57% flat
NASDQ +1.32% flat
S&P500 +1.54% flat
Russell2000 +4.54% –

Headline – Amazing Rally Part 2 (again)

US Market & Foreign Markets -

Technicals – There was no one day Amazing Rally (Part 2 ) – but when you combine Thursday and Friday you get about a 4% rally on the 3 major indexes and a 9% rally in small cap stocks.

Over night Asian markets rallied Hong Kong +2, Korea (new stimulus package (+5) ) and Japan closed (for holiday?)

USVolume was basically flat and average. There was slight gains and losses. Therefore volume is not really confirming the price move. However, The fact that we held above the massive move higher early last week is an overall bullish confirmation of the move.

Small caps (Russell 2000) are leading the charge higher because they are the ones that took the biggest hit.

Fundamentals – Earnings season is winding down. Emotions have taken over trading and fundamentals do not seem to have the impact they normally do..

Historically November starts a usually very bullish period for stocks.

Elections – The markets here and across the world have probably factored in an Obama win. If the Democrats win 60 seats in the Senate or McCain wins the election you could see a radical one day move. (Lower if Dems win Senate and higher if McCain beats Obama)

Long term election results – Remember historically since 1920 stocks have done better under Democrats than Republicans. Latest example – Under Clinton the Dow went from 3,000 to 11,000 and under Bush 11,000 to 9,000 ending in a huge recession.

Outlook for the week (relatively positive) from CNBC LINK

Unemployment numbers come out on Friday and They are going to be bad.

Chart of the benchmark S&P 500

Chart of the Russell 2000

Chart of the NASDQ

Chart of the Dow

Three Month Treasury Bill & LIBOR

Credit markets are the dog and the Stock Markets are the tail. Without credit the the tail won’t wag.

The 3 MTB rose +16.00% yesterday to an interest rate of +.435% The spread between the 3MTB (which measures investors fear) is still closing. Good news for bulls.

The lower the gap between the 3MTB and LIBOR the more it shows credit markets returning to normal. What started out as a dramatic lowering of the spread on the announcement of coordinated rescue plans throughout the world has slowed dramatically. This shows that the original euphoria that launched a 10+% rally is slowing

According to CNBC this AM LIBOR was down 0.48% last week and add another 0.17% this AM= Good news for Bulls.

3 MTB chart

LIBOR chart (3 month)

Bottom Line – Banks are not leading to other banks, but the commercial leading market is slowly opening up. This helps Main Street’s access to credit cards to adjustable mortgage rates.

OIL

Basically stocks go up so does oil. Oil also has an inverse relation to the dollar. Oil prices fell +2.80%

Chart of oil (WTIC)

The Dollar

Dollar and Yen are rising. (More on this later)

Chart of Dollar

The dollar rose sharply Friday (+1.05%). But notice the dramatic spike in oil over two and three days ago was inversely correlated with the big fall in the dollar.

The VIX

The VIX (measures amount of fear/volatility in S&P) . The VIX was at or near its highest levels ever early last week and is now dropping like a stone = bullish

Chart of VIX.

Short Term Outlook = Rally goes on until it hits resistance Resistance Levels.

This market is a short term traders dream and a long term investor’s nightmare.

Reading The Tea Leaves –

Best guess- traders should lock in (sell) gains at or near technical resistance levels of 9764 or 10,000 and wait for a dip to buy. Holding stocks through Tuesday is risky because of the elections according to CNBC’s Jim Cramer. Traders these resistance levels look like a time to lock in gains and wait for the next dip.

Longer term investors buy the big dips. Personally my long term investments are now 10% stocks. I am trading a lot on dips and will probably sell at 9764 or 10,000 depending on the volume figures. Breakouts through these resistance levels in big volume would be bullish and a reason to hold on to short term trades.

The fundamental that could stimulate a rally is a second stimulus package that creates more private sector jobs.

Economically, Main Street is no where near out of the woods, but the stock market is oversold and emotionally ready to rumble.

AS ALWAYS DO YOUR RESEARCH BEFORE INVESTING

Long Term Outlook -Cautiously Bearish

Changes to Bottom Line Section Bolded

Technicals – Double bottom has formed, advance in strong increased volume, and a new high on VIX . Technically all this = at least a short term rally and maybe a long term bottom. Reading tea leaves – Look for range between 7800 and 10,500 for rest of year. Dow closes above 9764 (in strong volume) = NEUTRAL Long Term Outlook.

Fundamentals – Financial mortgage transparency problem (credit default swaps $50 to $70 trillion) is far far far far far far far far far bigger than anyone thought. New worldwide rescue plan offers hope, but this rally is going to be a bumpy ride because retail investors trust has been shaken. Global growth is obviously slowing

We are in a recession. The actual strict definition – 2 quarters of negative GDP growth has not occurred . How bad/long the worldwide recession will be is be is the major question. It’s beginning to look like the recession might last through 2009 – perhaps longer

Asset Allocation/Recommended Sectors (long term)

* 60% to 95% Cash – This depends on your risk tolerance

*10%+% US Index Funds
UWM (ETF that does 2x what Russell 2000 does) & QLD (ETF that does 2X the NASDQ ) DDM (ETF that does 2X the Dow ) SSO (ETF does 2X the S&P 500)
*5%+ Emerging Markets
EWZ (Brazil) should out perform other emerging markets in a rally and under perform in a fall – highest risk
*5%+ Alternative Energy
GEX(Alternative energy ETF) (If Obama wins you will see this sector flourish)

Chief Strategy – Buy the DIPS of trending sector – This is not your fathers market- over the 8 Bush years the Dow has gone from 11,000 to 9,000 and uncertainty clouds the future. The major trend now is volatility.

Traders who have a strong tolerance for risk jump in on dips and invest more. Sell or go short into major rallies. Long term Investors who can tolerate risk and are 100% in cash nibble just a little on big dips. (5% on each big dip) Do not buy into rallies.

Shorting – Three ETF that short 2x what the the major indexes do -
TWM – ultra short Russell 2000
QID – ultra short NASDQ
SDS – ultra short S&P 500

As Always Do Your Own Research Before Investing

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