MASTERING
THE TRADE
ORIGINAL, INTERACTIVE SEMINAR ON TRADING USING
TECHNICAL ANALYSIS 

 SEC FILINGS

With a wham, bam, thank you Alan, the stock and bond markets closed out the week in a rollicking fashion, turning down trend to parabolic uptrend, and rate hike jitters to New Era euphoria.

The bond market continued its sharp relief rally, with yields on the long bond slammed down to 6.15%, ending the day resting on a critical support level.   If yields break below current levels, we would expect yields to quickly move down to 6.04%.

For the stock market, the post-ECI world is a wonderful place: breadth has improved, with weekly advancers leading weekly decliners by a 2 to 1 margin last week, and short-term sentiment has done an about face, with the market's Euphoria-meter approaching levels last seen during July's premature "presumed end of rate hike cycle" celebration.  The Dow Industrials, S&P 500, and Russell 2000 have all reversed downtrends, with the short, intermediate, and long term trends for all 3 average now solidly up.  Even the downtrodden have been rejuvenated, with the transports, utilities, and small caps all posting solid gains during the recent rally.

The one negative is a philosophical one, the age old question of whether a bull market can be called a bull market if the trend of the average stock is down.  Despite the recent rally, 57.7% of stocks are still trading below their 200 day moving average, 62.9% are below their 100 day moving average, and 56.6% are below their 50 day moving average.  This minor detail is unlikely to deter the market's current skyward bound trajectory, however, at least not until euphoria suffers a setback.

Euphoria has received few setbacks of late however, quite the opposite in fact.  After celebrating the death of inflationary pressures on Thursday, the markets received a triple dose of good news to power them higher yet again on Friday.

Alan Greenspan, in a speech before The Business Council in Boca, provided the first injection of euphoria-booster with a bit of FedSpeak that aimed to please and appease: a little bit for the doves here, a morsel thrown in for the hawks over there, but nothing that hadn't been said before.  With euphoria already in the driver's seat, middle of the road translated into the glass is more than half full.

Newly minted Dow component Intel provided the second blast of feel good news with a pep talk that eradicated investor's few remaining reservations about the health of the tech sector as the new millennium approaches.  Intel said it sees few signs of a Y2K related slowing in spending by its customers, a statement that quickly removed the few remaining Y2K jitters that IBM had introduced into the market.

A favorable economic report, this time from the housing sector, gave the markets their third good tiding of the day.  New home sales slumped 12.8% in September to a 22-month low, raising hopes that the Fed's recent rate hikes were doing their job to slow the economy (never mind that the previous day's rally was fueled in part by signs of a strengthening economy: a 4.8% jump in GDP accompanied by low inflation, and never mind that a sharp slowdown in the housing market would exert a profit lowering ripple effect across a broad swathe of industries).

The housing report further strengthened the now prevailing belief that the current Fed rate hike cycle will end at 3, or possibly even 2 if favorable economic data continues to flow between now and the November FOMC meeting.  With the Fed seemingly out of the way, investors see little to stand in the way of higher stock prices, with Dow 12000 in the sights of many.

The one factor that could quickly move in to deflate the carnival atmosphere of Euphoria: investors see little to stand in the way of higher stock prices.

With bullish sentiment now resembling an inflated balloon, one pin prick could be enough to deflate the balloon and send stock prices hurtling towards their October lows.  This week the market will have its eyes on two important readings on the economy: tomorrow's NAPM survey and Friday's October Employment report.  While even an unfavorable NAPM is unlikely to be any match for rampant complacency, the employment report just might be.  Current estimates call for a jump in non-farm payrolls of 313,000, but estimates range as high as 525,000.  Look for trouble to develop if the numbers come in above expectations, or if the unemployment report or average hourly earnings numbers surprise.

After nearly 6 long months at war with the jitters, we're free at last...

...or so the prevailing wisdom goes after Greenspan's pet indicator ECI came in 0.1% below expectations and GDP exceeded estimates by 0.3%.

For the bond market, the rally that followed the release of the numbers has been four parts relief and one part belief that the road ahead will be jitter free.  Yields on the 30-year  bond have tumbled to 6.25%, their lowest level in many a day (14 days for those who are counting).  Despite the apparent move to easy street, Fed Funds are still pricing in a 60% chance of a November rate hike, indicating that the bond market's life in the jitter free zone may be a short one, lasting only until the next economic report.

Today's stock market rally on the other hand is one part relief and four parts monocular vision, that peculiar way of seeing the world that involves seeing a part but not the whole, of anointing one data bit as the definitive answer to the questions of life, a singular focus that has proved to be the market's undoing on more than one occasion in recent months.

Now to be fair to those who have decided to do some bargain hunting today, and in the process have pushed the P/E of American Express to 29.2 , of Wal-Mart to 47, of Procter & Gamble to 40 (PG earnings released today tore the roof off, rising at the breath taking pace of 8.5%), and of General Electric to 41, there was a lot to like in today's economic data.

The Employment Cost Index, the number that sparked today's upward re-rating of the stock market, registered a 0.8% gain during the third quarter, with wages rising 0.9% and benefits increasing 0.8%.  Wages rose 3.3% over the past year, a subdued rate that by itself is not a cause for worry, nor is it a reason to raise rates.

If the number's in the latest ECI could be sustained into the future, our friend the Pre-emptive Crusader could hang up his rate-hiking hat and loll the days away, secure in the knowledge that his arch nemesis Wage Pressure man was securely locked away.  Unfortunately, the threat of wage pressures picking up and introducing inflation into the system remains very much alive.

Labor market tightness shows few signs of abating.  The latest initial jobless claims numbers registered a surprising drop to 278,000, with the four week moving average dipping 6,000 to 293,500.  Equally bothersome in the latest claims data,  the seasonally adjusted insured unemployment rate fell to a record low 1.7%.  The latest numbers indicate that the labor market remains strong, with unemployment low and jobs being added to the economy.  Add to this recent signs of a pickup in health insurance costs, and signs that employees are gaining the ability to demand higher wages, with the recent Automaker-UAW contracts standing out at the forefront, and the conditions exist for wage growth to pickup.

The GDP data, while indicating that the economy continued to enjoy strong growth side by side with low inflation, with GDP rising a better than expected 4.8% and the price deflator coming in below expectations at 1.0%, failed to show that building economic imbalances that could spark inflation are easing.

Despite today's good numbers, the factors that prompted the current Fed rate hike cycle remain in place: consumer demand remains at near record levels, the labor market continues to tighten, a pickup in global economies and a reversal in the long term trend of commodities has removed one of the economy's great inflation fighting safely valves.  Add to these, recent signs of the beginnings of inflation emerging at the producer level, and the case for further pre-emptive Fed action still remains strong.

Today's data is unlikely to sway the Fed either way, and with the employment report, NAPM, PPI, and Productivity still to come before the next Fed meeting, it is unlikely that the market has permanently escaped from the clutches of rate hike uncertainty.

In the case of the unexpected rally in European bond markets, the answer is a simple one: relief, a wiping away of uncertainty after a stronger than expected 6.1% annualized rise in the growth of euro-nation M3 money supply (the European Central Bank's pet inflation forecasting indicator) all but assured an interest rate hike by the ECB on November 4th.

U.S. bonds rallied on the coattails of their European counterparts as dreams of a quick end to the debilitating malaise of uncertainty spread from Duisenberg watchers to Greenspan watchers.

For the U.S. bond market, those early morning hours were as good as it was to get.  The long bond has since given up the lion's share of its gains,  despite a better than expected durable goods report, with yield's creeping up from their low of 6.314% to 6.34% as thoughts turn from the today's release of the ECB's pet indicator to tomorrow's release of the Fed's pet indicator, the Employment Cost Index.

With all eyes on the closely watched ECI, the bond market's inability to rally on back to back favorable economic reports should not be viewed with alarm, nor should the latest consumer confidence and durable goods numbers be taken as the definitive signal that the long hoped for economic slowdown has arrived.

Consumer confidence fell to 130.1,  its lowest level in 9 months in October as falling stock prices took their toll on confidence, but we wouldn't rush to put out an obituary for the over- exuberant consumer just yet.  In recent years, the numbers have exhibited a pattern of October declines followed by November rebounds in confidence.  There is also a strong correlation between the trend of stock prices and the trend of consumer confidence. If another bout of "irrational exuberance" were too occur, or if stock prices sold off sharply and rebounded with a v-shaped bottom, confidence would resume its upward trend.  This month's numbers are a start in the right direction, but one month does not make a trend.

Today's better than expected durable goods numbers, which registered their first decline in 5 months, are also a step in the right direction, but ex-transportation (not to mention ex-Hurricane Floyd) the numbers were not as weak as they seemed at first glance.  The numbers still indicate an expanding manufacturing sector.   Next week's NAPM is likely to provide a better gauge of the manufacturing sector than today's durable goods numbers.  Like the consumer confidence numbers, the trend will need to be continued in coming months before a definitive answer emerges as to a slowing of economic activity.

Of course, consumer confidence and durable goods are not the numbers that will move the markets this week, instead it is tomorrow's release of the ECI, and to a lesser degree, the GDP that will.  For the very short term trader, an exclusive focus only on the headline ECI will likely prove profitable, but for the longer term trader, a belief that tomorrow's ECI will provide a definitive answer to end uncertainty's seige will likely prove to be costly. In short, the usual warning, don't view tomorrow's numbers in a vacuum because interest rate decisions are not made on the basis of one piece of data.

Finally (in a sarcastic note), in the past 24 hours it has come to our attention that the revenue figures of all companies that own newspapers (in particular newspapers that charge a listing fee for items listed in their classified sections) are greatly understated because the companies fail to include in their revenues the total value of all items sold through their classified sections.  Perhaps it's time that the N.Y. Times, Gannett, and others followed eBay's example and included a "gross merchandise sales" figure headline in their earnings report press release.

With Dow Component Union Carbide set to leave home for the arms of another Dow, the folks at Dow Jones & Co decided to do a little housekeeping, a little sprucing up to better reflect the times.  Effective next Monday, old friends Sears (NYSE: S), Union Carbide (NYSE: UK), Chevron (NYSE: CHV), and Goodyear Tire & Rubber (NYSE: GT) will no longer be members of the exclusive 30 member club known as the Dow Industrials Average.  In their place, will be young whippersnappers Microsoft (NASDAQ: MSFT), Intel (NASDAQ: INTC), Home Depot (NYSE: HD), and SBC Communications (NYSE: SBC).

The move is designed to bring the composition of the Dow into better alignment with that of the overall economy, while at the same time helping the Dow to regain some of the crowd pleasing thunder it has lost to the upstart growth stock led NASDAQ Composite.

It is  a move that also has the potential to backfire in a big way during a market decline.  The Dow's growth injection comes at a price: increased volatility and Valuation levels.

Home Depot and Microsoft are trading near historical highs, at unsustainable P/E ratios that far exceed their projected growth rates going forward.  If interest rates continue their march higher, we expect to see P/E ratios contract, with the heretofore unscathed Home Depot and Microsoft being among those stocks that will be hard hit as the narrow band of stocks that have escaped the broader market decline of the past six months come under attack.

The added volatility that the additions bring to the index is a welcome addition, provided the market keeps going up.  In a downdraft, adding volatility to the psychologically important Dow will have a spillover effect on the broader market-- not a pretty sight.

Elsewhere in the world,  e-commerce stock aficionados eagerly await the release of "earnings" from eBay (NASDAQ: EBAY) and priceline.com (NASDAQ: PCLN) after the bell today, with Amazon.com (NASDAQ: AMZN) waiting in the wings to report its latest widened loss tomorrow.  Somehow, after glancing at the lower highs and lower lows that have accompanied each of the two post-April rallies in the CBOE Internet Index (see today's market chart), we're not too excited...worried yes, that the market is looking to a group with a lousy chart pattern for leadership, but excited no.

Perception shaping is a weapon that can move mountains without the backing of reality for extended periods of time, it is a tool that if used to an extreme can make its intended target lose sight of both the forest and the trees, but it is not a tool which can indefinitely obscure the arrival of truth.

Confused by the above lapse into philosophical spewing forth?  Good!, because your confusion (as to the market's next move) now places you one step up on the average market guru (including the bubble-bashers at Tulips and Bears) who claims to hold the magic key to the market's movements and remains steadfast in their belief that either 'strong tech sector earnings' or 'higher interest rates' will determine the outcome of the stock market's five months of indecision.

In reality, it is not the actual events which matter, but the perception of those events, the old case of 'is the glass half full or half empty'. To gain a better understanding of the current market, it is perhaps best to use two glasses rather than one: a large glass to represent deeply ingrained long-term sentiment, and a smaller glass to represent shorter-term sentiment.

The larger glass may be thought of as the great unblemished safety net, strengthened by 17 years of positive reinforcement, manifesting itself in the form of the deeply held beliefs  'buying on the dips' and '20% plus returns are an inalienable right', it stands ready to cushion any short-term blows that the market may endure as the perception of the smaller glass (the one containing shorter-term sentiment) shifts from half full, to half empty, and back again.

To put it in plain English (and to shift out of our role as unbiased market observers into our more traditional role as opinionated market cynics), the deeply ingrained bullish sentiment that has built up during this record bull market rules out the most bearish of market forecasts (the ones calling for a total market collapse, or Dow 5000 by New Year's), but it does not rule out market participants enduring a great amount of pain before the blow is temporarily cushioned by the safety net of bullish long term sentiment.

Long term sentiment may be thought of as the product of the aforementioned weapon known as perception shaping.  In the current market, this perception shaping reached extreme proportions, with long-term bullish sentiment becoming so firmly entrenched that it remained blind to the weakening of the supports which have enabled this decade's above trend gains.

With the supports now bloodied, and sentiment beginning to swing from an extreme, we wouldn't be surprised to see long term sentiment, and the market's safety net, take a hit in the future as sentiment, valuation levels, and stock market returns begin their inevitable swing back towards the historical mean.  The return to the mean is unlikely to be a sudden affair however, instead the market's course is more likely to resemble the prolonged path of slow death taken by Dow component Coca Cola over the past year as deeply ingrained bullish sentiment towards the stock gradually waned.