With the 4th Quarter beginning, its time to take a review of
the technical factors which will govern the action. While we always find the
Macro-economic issues (and how they get so readily misinterpreted) fascinating,
their lead-time is so long that we rely on them only to provide color for our
longest-term perspective. The same can be said about equity valuation measures.
For the intermediate term, we rely on Trend and Monetary
factors (interest rates, money supply and tax rates). Trend has remained
positive since the October 2002 and March 2003 lows; That reading is the
primary source of our intermediate term Bullishness (that is, until they
reverse).
As to monetary issues, the market has been wrestling with 2
out of three negatives: Rates have been rising, and the increasing budgetary
pressures suggest an increasing likelihood we see higher taxes sooner rather
than later.
The one positive monetary aspect has been money supply: Last
week, the St Louis Fed (Money Supply)
revealed a jump in the adjusted monetary base and over $40 billion surge in
MZM. This is consistent with our views of shorter-term gains set against
longer-term difficulties.
To anticipate shorter periods, we rely on technicals and the
market’s internal quantitative data to guide us. These have been modestly
encouraging, with a few exceptions. The overall technical picture on the major
indices shows a series of higher lows, and modestly higher highs. The Russell
2000 has been the exception. It had such a big run it simply got ahead of
itself.
Yet as the indices have moved higher, some market internals
have decayed. We note in particular that breadth has not kept pace. This
suggests that participation is less widespread than one would expect at this
stage in a healthy Bull market. So too, with the Net 52 Week Highs (see chart
nearby); We would prefer to see stronger readings more similar to the those of
the 2003 rally before we moved to a more aggressively Bullish postur
Lastly, we rely on Sentiment for facilitating the very
shortest trading periods, as well as key trend reversals. The excessive
bullishness seen recently has abated somewhat; Its worth observing that AAII
Bullish Sentiment has decreased
from 51.4% three weeks ago, to 39.5% 2 weeks ago, and to 31.9% this week.
Seeing some of the excess Bullishness removed is healthy for the near term
markets.
These factors confirm our prior expectations that the
markets can grind higher for the rest of the year; The serious trouble isn’t
expected until later in 2006.
<spacer>
UPDATE: October 4, 2005 1:54pm
I see that Doug Kass and Jay Shartis each noted the impact of declining breadth this morning over at Street Insight
exactly when in 2006?