We have just some quick observations of Friday’s action. The market heard the news about the GDP just prior to the opening bell. The GDP wasn’t quite as strong as the early estimates. We try to be a little cautious talking about the GDP since there were some lowered expectations, around 2.0% versus last quarter’s 2.6%. The number came in at 1.6% even with a much lower inflation component than second quarter. The inflation number was 1.8% in third quarter compared to 3.3% in the second. We mention this because we think it’s important to look at the growth factors and how they are affected by the inflation factors.
We know it’s an oversimplification of the way it works but what you can do is simply add the two numbers together to get “gross” GDP before inflation. So, now we can do a rough comparison of second and third quarter “gross” numbers. The second quarter was GDP, 2.6%, plus inflation, 3.3%, for a total of about 5.9%; and, third quarter was GDP plus inflation of 1.6% plus 1.8% for a total of 3.4%. We also know that the inflation numbers are somewhat suspect but that’s a whole other story.
On the back of the GDP numbers the bonds were pretty happy and the stock market sagged a bit going into the opening bell. Once the bell rang, the stock market fell for about 15 minutes before starting the normal buying that we have become accustomed to over the past several weeks. However, about mid-session, according to Bloomberg news “Goldman Sachs Group Inc. reduced its forecast for motherboard shipment growth this quarter, saying demand is ‘falling off a cliff’ and portending a broader slowdown in sales of computers and components.” This news seemed to bring a chill over the tech stocks.
The NASDAQ 100, NDX, our index of choice was trading around 1740 down about three points but started heading down bottoming about an hour before the close near 1712 for one of the steepest drops in this index since the July lows. The big question is, “Does this mean anything?”
The stock market has gone up for some reason in the past few months and maybe it was the possibility of a good election (whatever that is) or the Fed was done or the “fact” that the fourth quarter is good for tech due to seasonal buying, or more simply the shorts were being squeezed (which we were). At any rate, maybe one of the tenets of a higher market took a little dent after Goldman announced that motherboard sales “fell off a cliff”. We think that one day of trading doesn’t mean much due to the huge non-stop rally we have seen for three months; plus, the chart doesn’t really show any violation of the upward channel.
We do have to say that there are other things to look at. One of those things is the annual measuring stick for the mutual funds occurs normally at the end of October so there may be less impetus to push some of the various stocks. Two, the market is overbought, which doesn’t mean it will sell off to correct, just that it is overbought. Three, there are tech dreams going on right now which did get a wake up call on Friday. Four, there is very little real leadership in this market.
For the bulls’ part, there are things in their favor, too. The main plank in their platform (this is as close to politics as we like to get) is the mere fact that world wide liquidity seems to be bubbling over. We understand that liquidity is based on a lot of credit and that it can quickly dissipate, but for now it seems to be enjoying a long reign (does that contradict the earlier political metaphor?). Other factors for the bulls include pure momentum in the market and strong bullish sentiment. We don’t think these have much resolve in the long run but here in the short run, they rule. We remain bearish.
There are several economic items of interest in the coming week with the most prominent one being the jobs report due out on Friday morning. This report has been one of our favorites as it marks the end of the Bullish period most every month, or so we think. There are other news items out there and we will probably bring them up as the week progresses. BE CAREFUL out there.
Dow Industrials: 12,090.26 -73.40