The market had a big party last week when Fed Chairman Bernanke announced that the recession was ‘technically’ over. The market also celebrated every piece of economic news even when some of them came out slightly worse than expected.

The August retail sales was full of surprises and sent the market searching for higher ground. The strong growth of the August retail sales data suggests that consumers are still willing to spend money. This also pointed out that the government stimulus packages are working. However the strong rebound in the retail sales figure might not last as the stimulus packages fade off towards the end of the year.

The U.S. dollar declined by the same percentage to the surge in the equity market for the past few months. This is because the low lending interest rate in the U.S. makes it very attractive as the new ‘carry trade’. The surge in the market has also encouraged both investors and traders to take more risk to invest in higher beta currencies such as AUD, EUR and NZD.

The devaluation of the U.S. currency might not last long as it is still the reserve currency in the world. Fear is key factor that drives the dollar downwards. There is no doubt that the U.S. dollar should be weak because of the massive debts they are holding. But a weaker dollar will be bad for exporting countries such as China, Japan, etc.

On Monday, the market busted out of its starting block without so much as a glimpse back. With no other significant news on Monday for the traders to bid up the market, it seemed to know that the retail sales were likely to be better than expected,

On Tuesday, the market opened lower at the opening bell because of profit taking from the traders, even though the manufacturing and retail sales data came out better than expected. This kind of market behavior is known as ‘Buy the Rumors, Sell the News’. The market only started to pick itself up again when Fed Chairman Bernanke announced that the Recession is likely to be ‘technically’ over. The market closed slightly higher at the end of the day.

On Wednesday, the commodity sector was in the spot-light because of the larger than expected draw-down of Crude oil inventories. Furthermore, the better than expected results from the Industrial Production, CPI and Current Account have suggested that the economy is slowly getting its grip back. As there was no bad news on Wednesday, the market continued its push to higher ground.

On Thursday, the market open higher as economic data such as Building Permits, Unemployment Claims, Housing Starts and the Philly Fed Manufacturing Index continued to come in better than expected. However, a closer look into the details of each economic data revealed that the result was rather mixed. The market ended slightly lower at the closing bell.

On Friday, the market went sideways on Quadruple Witching fear as there was no economic news being scheduled for released. The earnings released from FedEx came out worst than expected, but FedEx manage to prevent a fall as they re-stated that this year’s forecast will be strong.

Major Events

• FDIC had closed 2 banks in Kentucky and Indiana on Friday brings the total number to 94 failures in 2009. The 2 banks are from Irwin Union Bank subsidiaries.
• Fertilizer giant Potash cuts profit forecast.
• Oracle and FedEx earnings came out worst than expected.
• Recession is over, said Bernanke.
• Tire tariffs threaten China chicken trade. This might lead into an ugly trade war between the 2 countries.

Economic Data

This coming week, the market will be focusing on the Housing and Manufacturing data. The market will also be watching out for the FOMC Statement, Federal Funds Rate and G20 Meeting.

The Fed Fund Rate is likely to remain the same. However, the market will be looking for any sign of unwinding on the QE programs. The market will also be looking for signals from the FOMC Statement, which are expected to point towards an early increase of the Fed Fund Rate.

Summary

The enormous amount of ‘Stimulus Money’ has fueled the stock markets of the world. This stimulus money has so far failed as there are no signs of improvement in the labor market. The Continuous Claim had been rising for the past few weeks. More than 15% are unofficially unemployed in the States if we take into consideration part-timers and freelancers.

The market continues to shrug off the ever-glowing fundamental risk lying in the economy. The streets continue to bid the market higher in search for the next fool to sell it to. As long as the market continues to surge higher, there will be more retail investors being sucked into this black hole while the insiders sell their shares.

Some of the traders and investors attributed the strengthening of the market to the weakening of the Dollar. This is truth but the reverse theory is likely to work too. Recently, the IMF was reported to have sold 1/8 of their Gold holding to the markets. This should cause Gold prices to take some beating in the coming week. The Dollar, if this happens, should benefit from this move.

Homebuilders had come into the spotlight recently as the JP Morgan analysts lifted its views on the homebuilder sector to Positive from Negative. The analysts also upgraded Toll Brothers and KB Home to Overweight from Neutral. The irony is that Toll Brothers’ CEO has been selling large amounts of stocks recently even before the upgrade.

Last Friday, China tumbled down more than 3% as the government pointed that the asset market had overrun itself. In Hong Kong, the housing market had risen to a level not seen in recent months. This prompted the banks to tighten up lending and the government to fight against the heated housing market.

In conclusion, the market is likely to cool off this coming week. However the market might want to push itself to the limits to hit the critical level of 10,000 for the Dow. The higher the market pushes in the coming week, the higher the possibility that the market will take a steep correction in the coming months. The market has been long overdue for a correction of at least 10%. Lastly, as the IMF slowly sells their Gold positions at multi year high prices, the dollar will likely strengthen in a short period of time.

The law of gravity – what went up must come down eventually.

Sector Rotation

This week, Financials (2.85%) led the market followed by Materials (2.66%), Consumer Discretionary (2.32%), Energy (2.19%), Industrials (1.54%), Utilities (1.09%), Consumer Staples (0.51%) and Health Care (-0.93%).

Homebuilders are likely to get a small boost in the coming week if the housing data manages to come out above expectations. A pullback is also highly possible as the 8k incentive to purchase houses will expire at the end of November this year.

The Commodity sector will be taking a back seat in the coming week. The dollar is expected to rebound from its lows, as there are rumors that the Fed might unwind some of the QE programs and even increase the fed fund rate by a quarter point in the near future. Potash cut its yearly guidance and this did not bode will with the sector.

Technical Analysis

The S&P500 Index closed at 1068 last week. This indicates a gain of 25 points (2.5%) from the previous week’s close.

Last week, the market rallied at the on Monday as investors and traders were betting on a good retail sales report on Tuesday. The market built rally after rally from Monday till Thursday. The U.S. market reacted strongly to the recession being ‘technically’ over. But the market took a break on Friday as bad news came out from China and Hong Kong.

The S&P500 had briefly tested the high of 1075 on Thursday before the market went into profit taking. The market had been rising and growing confidently for the past few weeks as September turned out to be a very bullish month. To date the S&P500 had grown to 7% from the beginning of the month. It is even more impressive given the fact that September is traditionally one of the most bearish months in history.

The optimism and confidence in the market had been growing steadily for the past few weeks. The market seems to be an easy ATM machine for the public, as it seems to be only going up. Many investors who are holding onto their cash had been lured into this market. This is because the investors are forced to invest in the stock market as currency continues to depreciate at an alarming pace.

Looking at weekly candles, the S&P500 Index is suggesting an upside movement if it can break above the 1075 level in the coming week.

Looking at daily candles, the S&P500 Index looks like it might be starting off the week with a negative Monday. This is because the candle shows a ‘Doji’ on Friday, which indicates a pause or potential reversal trend.

The immediate support levels are S1: 1050, S2: 1025 and S3: 1000.
The immediate resistance levels are R1: 1075, R2: 1100 and R3: 1150.

In conclusion, the market this coming week is likely to be bearish if it cannot break and hold above the 1075 level. The market will be looking at the strength of the dollar to decide which direction to follow. Watch out for increasing volumes, which might be selling into this unsustainable market’s rally.

[Conrad Alvin Lim]