Editorial
The three stock indices we cover continued higher this week with the Nasdaq 100 Index setting the pace with a comfortable 0.47% increase. This increase was slightly outdone by the Russell 2000 Index which garnered 0.48% and to an even greater extent the S&P 500 Index that climbed a steady 0.64%.
- Our Primary Trend Indicator is Bullish.
- Our Sentiment Indicator is Bullish.
- Our Interest Rate Indicator is Bullish.
- Our Valuation Indicator is Bearish.
Our Primary Trend Indicator, as one can imagine, with the sturdy move forward in the S&P 500 Index, remains entrenched in Bullish Mode. Momentum players are surely in this market now and continue to push all the indices higher on any market setback. Friday brought a day of strong profit taking and it will be interesting to see how soon the Bull's will regain the upper hand and push the indices ever higher. This Indicator continues to show marked investor conviction to the upside, even in the face of fear mongering by perennial market gloomsters.
Our Sentiment Indicator finished Friday once more fully engulfed in Bullish Mode. However, with the market sell off on Friday a glimmer of investor unease surfaced. This we would interpret to be good news in order for the stock market to consolidate for a week or two before resuming its uptrend. Therefore, based solely on this Indicator we would not be surprised by a slightly negative tone to trade next week. However, as April showers bring May flowers, the market should resume its uptrend again after this relatively short period of cleansing.
Our Interest Rate Indicator bolted ahead at the end of the week to finish firmly in Bullish Mode by Friday's close. The rally in the bond market was sparked by a drop in residential housing data and was capped off by a lower then expected GDP report for the 3rd quarter. We are very encouraged by the action in the Bond Market and firmly believe that it will provide a strong underpinning to the Stock Market at current levels. We are only slightly concerned that the yield curve has inverted a touch. This is because we believe the US Federal Reserve can and will drop short-term interest rates quickly if the economic slowdown, already at hand, becomes excessive. We will note that the latest Economic Cycle Research Institutes latest report showed their Weekly Leading Indicator's annualized growth rate increased to a negative 0.1% from a negative 0.5% the prior week.
Our Valuation Indicator, although in Bearish Mode, is now situated in much better position then last Friday's close, especially for those looking to invest new capital into the market. However, we would suggest that stocks continue to remain a fairly lofty levels and therefore a program of dollar cost averaging into this market would probably be our best strategy. The current market is prone to swift, pronounced sell offs, like that experienced on Friday. Therefore, we would feel much more comfortable investing on periods of weakness then chasing stocks that are running ahead of themselves. Although we do not know the catalyst, a market correction of a few percentage points can be readily expected after the huge run up in stocks over the prior three month period.
In conclusion, we believe we are now approaching Stock Market levels that, over the short-term, are extended and in need of a slight pullback. This is not to say that we do not continue to remain positive on the medium-term outlook. In fact, with interest rates heading lower we are now more bullish at the end of this week then at the same time last week. Corporate Earnings continue to shine, in fact with 62% of the Companies that make up the S&P 500 Index already having reported, a stellar 74% have beaten profit estimates, 11% have met and just 15% have fallen short of the mark. Furthermore, the average profit growth has increased from 15.30% at the beginning of the quarter to 17.40% by Friday's close. These are not numbers that Bear Markets are easily made of. However, we must be on alert that we are not at the top of the earnings cycle. In fact, already earnings estimates for the 4th quarter have declined to profit growth of 10.70% currently from growth of 12.80% forecast as late as October 1/06.
We wish you continued good luck with your investments next week.
Sincerely,
The TimingCrystal Team
