End of the Month Surge

The economic news of the day includes the GDP and the Chicago PMI, not to mention the continued disaster in the New Orleans area. This morning we got the latest revision on the second quarter GDP and it was down 0.1% at 3.3% from the last estimate of 3.4%. Meanwhile, in more current news, the Chicago Purchasing Managers Index fell significantly from 63.5 last month to 49.5 this month after estimates of 60.5 to 61.5. This is an index that indicates contraction when it’s under 50 and it’s under 50. The news is generally not too positive around the country but the stock market bulls seem to think in the back of their minds that the Fed will certainly have to stop raising rates.

The bond market has had a stunning rally the last two days with the ten year dropping back to 4% today. We discussed the possibility of a bond rally that would be contained by the highs set back on the June jobs report. The futures price back then was just over 119½. Since then we have seen prices drop to a low around 113¾. Today’s high of 118½ is pushing up to the limit of where we think it should go.

The great credit expansion can continue with rates dropping the last two days. We have discussed this many times this summer that we think that rates would come down a bit but that the credit expansion would subside. We didn’t know what would do it but now we can see a little more clearly. The wake of Katrina will be wide.

One item of concern is the price of natural gas. This is the last day of August, not a month you would normally think about natural gas but here we are bringing it up. The price of natural gas has spiked this week along with the other petroleum products. The price of natural gas dropped to a low around 6.50 back in May and tonight it is 11.50. Last winter’s spike high was around 7.50 and it spiked again in early April just over 8. Basically, you can expect about a double in the price of heating your home this winter over last winter. And, still bonds rally (lowering interest rates).

Today the stock market enjoyed the last trading day of the month and rallied the Dow almost 70 points, but not back to the 10,500 level. The volume was heavy at 1.8 billion shares on the NYSE. Some might think this is the start of the uptrend that the bulls are hoping for going into the fall. So, we offer up a slightly less bullish opinion, surprising don’t you think?

We remind you of the turn down in the Dow’s 50 day and 200 day SMA. The levels of those two averages are just overhead at 10,530 and 10,538 respectively. These averages serve as a bit of a ceiling on the prices. Not that the market can’t break those ceilings, just that there is some resistance overhead in terms of the SMA’s, not to mention the general overhead supply in that 10,500 to 10,600 range.

Mining stocks surged back to life today as the HUI jumped 7 points and that 200 level does look like some fairly good support. Keep it coming.

Dow Industrials: 10,481.60 + 68.78
BGEIX: 11.46