Friday, October 22, 2010

Market Outlook

I believe that the broad market’s short-term prospects for further and sustainable gains are fairly limited. I would expect to see flat to modestly lower levels on the major indexes over the short-term. Looking to sell tomorrow on a low risk entry.

A volatile session saw the broad market advance by as much as one percent, then retreat, then advance again modestly, thus closing green. Intraday, equities reached a new five-month high. Market observers suggest that early gains were catalyzed by a weaker US dollar but later gains did not stick due to an advance in the dollar.

More earnings were released today, but the recent wave of better-than-expected results did not appear to be exciting investors as much as in recent days. Notably today, Dow component Caterpillar reported better-than-expected earnings, but the stock was sold down. Eli Lilly and UPS also reported strong earnings but also sold off on the news. Gaining on their earnings releases were eBay and McDonald's – but even these stocks closed near their session lows today.

The US government reported the latest jobless claims data today, showing a decline of 23,000 claims week-over-week to a total of 452,000 claims (consensus estimate: 455,000 initial claims).

Meanwhile, the Philadelphia Fed Index hit a level of 1.0 in October (consensus estimate: a reading of 1.5). Finally, September Leading Indicators were up 0.3%, matching consensus estimates.

Some market observers are warning that investors may once again be becoming too complacent and fearless, often a warning sign for equities, although such sentiment readings by themselves are not good market timing tools (as such conditions can prevail for some time before the market shows an adverse reaction). Case in point, the most recent survey by the American Association of Individual Investors shows the degree of bullishness at a reading of 49.6% and bearishness at a mere 25.2%. At the April 2010 top for equities, these readings were 48.5% bullish and 29.7% bearish. Likewise, the VIX Index (also known as the market’s fear gauge) is currently also indicating low fear levels coupled with high investor complacency.

1 comment:

  1. Is complacent the right adjective when the Fed is kicking in billions to leverage through POMO operations every other day? Hard to see us not getting through 1200 on POMO induced rallies alone -- imo.