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InvestmentHouse Weekend Update:

http://www.investmenthouse.com/weekendmarketsummary.htm

- Techs pick themselves back up and financials come back to life, delivering a strong 1 - 2 punch.
- The rest of the world views the US economy as a leper. Expecting a market breakout as a result.
- FOMC decision is on tap for Wednesday and a 50BP cut will spring the next leg.

Market finds some additional leadership as indices attempt to end the choppy earnings trade.

You have to love it. You diligently take positions in stocks when they show you it's time to buy even though the market action is questionable. After you move in, the reason why stocks were telling you to buy in then appears when the good news hits and other investors rush in to buy and drive your stocks higher. That is what occurred Friday.

Looking at Friday in isolation, the action was no different from the up-and-down movement seen day to day over the past two weeks. The forces that cause the movement, however, changed somewhat. With Microsoft's blowout earnings, technology was back in the leadership mode, coming back from some wobbly sessions over the past week, but this time technology was not playing lone Wolf. The financial stocks finally stepped up to the plate and were taking their cuts as well on the heels of Countrywide Financial's prediction that it would return to profitability in Q4. That gave S&P 500 a new shot of energy lacking for the past two weeks. For once, it was not just Goldman Sachs leading the financials while all others sold off.

The earnings and forecasts of profitability were more than enough to take the sting out of a falling Michigan sentiment report (80.9 versus 82.3) and once again surging oil prices ($91.86, +1.40). Futures were sharply higher, and stocks indeed opened the session with gaps to the upside, even S&P 500.

Unfortunately, as is often the case with strong opens, stock started to sell almost immediately. It is always a risk that a strong open is used by sellers to unload positions, particularly when the market is as choppy as it has been over the past two weeks. NASDAQ lost 32 points off of its opening high right before lunch started on the east coast. That was not a good move given that one of the main reasons for the gap higher was the Microsoft earnings. Once more, however, the market found its bottom midmorning (at least by Central Time zone standards) and started to rebound. The market continued to rebound into the close, fighting off a rather eat last our intent to sell the stocks back down, and closing at or near session highs. It was good to see S&P 500 are really pushing hard into the close and moving to a new session high as the closing bell rang.

Technically, the action was solid overall, particularly on NASDAQ and S&P 500. Stocks started higher, but as noted, they immediately started to move lower. As they have done most all week, however, they resumed the move higher into the afternoon. Even though S&P 500 and DJ 30 struggled to move higher on the week, this low to high action intraday shows that there is some underlying strength in the market as buyers moved in on the lows to accumulate shares. You can call it the Fed bid or just plain old buying on the dips, but either way there was steady buying as the indices held key support during the week (e.g. S&P 500 testing 1490).

As for the internals, breadth improved nicely on both NYSE and NASDAQ on Friday, but it was really lopsided to the downsides for most of the week. Volume dropped off on Friday, but it still held the elevated levels that showed up to Fridays back. As discussed Thursday, volume improved as S&P 500 tested key support at 1490. That increased volume showed that big money was stepping in at that support level and buying into stocks. Thus, even though volume was lower on Friday, we do not view that as an overall negative, though we would've preferred volume to surge as stocks broke higher.

The charts showed a pretty good picture for a change after some pretty weak action during the week. NASDAQ broke over 2800 that acted as resistance for the past two weeks. It did not break to a new post-2002 high, but it was a key move as the index installed at that level. S&P 500 broke over the late September highs that represented the left shoulder in a potential head and shoulders topping pattern. The Dow is not quite bear, however, though it did rise nicely on some very solid upside volume thanks to Microsoft. Once more the indices are breaking up a potentially toppy pattern as they've done on many occasions during the runs higher this year. The rather striking feature of the Friday move higher is that with this move you can see an ascending triangle building on DJ 30. It still has a ways to go, but it is making higher lows below a rather constant peak for the past four months.

With respect to leadership, once more technology took the lead gratis Microsoft, but as noted above, financials were there as well, gratis CFC. It was finally not just Goldman Sachs leading higher in the financial sector, and that hold out some hope or S&P 500 as the market moves out of October and into the last two months of the year. China was hotter than a pistol as EJ, CTRP, BIDU, and EDU to name a few posted strong gains. Metals continue to rebound, in agriculture came back to life as well. Energy was not bad either, but given that oil prices were surging higher last week is not all that strong. The drillers, the tar sand plays, independents, and natural gas producers performed well, but service companies and large integrated companies continued to struggle. Leadership is not really spreading out across the market, but instead just returning to the prior leadership after it paused during this last pullback... with the addition of some financials.

THE ECONOMY

One of the reasons the Thursday night report was chock full of typos was that I was traveling and having to use a new voice recognition software program that still has some bugs in it. After having a bout in the hospital couple of weeks back, I was playing catch up on some economic research that I was undertaking when I had to make that unexpected visit to the hospital. I've been traveling around the country to certain real estate locations to ascertain the status of the commercial and housing markets. First, in the formerly hot housing areas such as Phoenix and Sarasota, Florida, the market is as bad as you hear. In Sarasota for instance, but was told by many in the industry, but they're typically 200 300 houses for sale in any given month. That is the land to 800 to 1000 units over the past six months. When you look at several similar markets across the United States, you understand that the housing market is definitely in a deep slump.

In addition to looking at housing markets, we also were talking with many visitors to the United States from foreign countries. Almost unanimously, the people we spoke with, while more than happy to be here to take advantage of shopping opportunities given the weak US dollar, had absolutely no interest in investing in the United States right now. Over and over we were asked when would things improve in the United States. Almost to a person the view was, things were too weak in the US for money to work here.

That kind of negative sentiment would love to hear. Just as with the stock market, sentiment about an economy can get to an extreme level and indicate that a turn is coming. Right now the sentiment in the rest of the world is that the US economy is bad and getting worse with no end in sight. That kind of sentiment starts brewing the recovery as the smart money starts moving in long before sentiment changes. There are indications that the worm may be turning a bit. The Countrywide CEO may conjure up images of a used car salesman, but he is CEO of the largest mortgage lender, and he is no fool. He indicated that there is liquidity returning to the market, and he has changed his forecast to profitability, not sometime in 2008, but in Q4 2007. Moreover, some very savvy people, Florida region were telling us that the market was very near a bottom, and that another quarter of bad results would likely see the money starting to move quietly back into the area. There are some waiting as patiently as possible to move in, but you get its the sense that some very smart people were already a bit itchy to take action.

The stock market typically show the move start before the actual recovery begins. The market is always leading in its view of the economy. Perhaps the moves in the homebuilders, mortgage lenders and the financials on Friday is the start of such a move. It is still much too early to determine that, but with the Fed actively in the game and likely cut another 50 basis points on Wednesday, there is very good reason for the stocks to start moving higher. In the market in general, you can see former leaders took a pause over the past two weeks to a month starting to move once more. There were fears of a global slowdown on top of the US slowdown. Given that the US still plays a dominant role in the world economy even with a slowing economic picture here at home. These indications that the weakest US economic sectors are bottoming might be one of the reasons that we're seeing the materials, metals, agriculture, and other early leaders starting to move once more as the market sniffs out the recovery long before it is evident.

We can prognosticate a bottom if we want to, but that really doesn't do us much good. We can think whatever we want and the market won't give a damn. All we can do is get the best lay of economic landscape and then look to see what the market is doing and whether or not that corroborates what we think we see. In the end, however, the market tells us what to do because as we've said, the market is the best economic prognosticator.

THE MARKET

MARKET SENTIMENT

VIX: 19.56; -1.61
VXN: 25.01; -0.76
VXO: 20.12; -1.93

Put/Call Ratio (CBOE): 0.82; -0.27. After a couple sessions of closing above 1.0, the strong moves and indices pushed the put/call ratio back below that key level. It never really got high enough for long enough to be much of an indicator on this round.

Bulls: 56.5%. As you would expect after a two-week pullback, bullishness declined among investment advisors, falling from a peak of 62.0% last week. This was the fifth week above the 55% level considered bearish. The action this week will likely drop the Bulls a bit further, but it won't do significant damage to the rise. If the market continues to rally that will leave the Bulls still at an elevated level. The theory is that when too many investors or advisors are bullish then most of the money is in the market and there is nothing ready to come in off the sidelines to drive prices higher. On a steady climb from a low of 40.6%, the low for this round. Never made the thirties. Hit 56.7% in June and now it has blown past that. The market peaked about a month later. For reference it bottomed in the summer 2006 near 36%, and 35% is considered bullish.

Bears: 22.9%. Back above 20% level that is considered the thresholds between bullish and bearish conditions. Bears fell to a low of 19.6% last week, after falling rapidly from 25% just couple weeks ago. Bearishness peaked at 37.4% on this move and it fell to 18% in August. It topped the June 2006 peak (36%) on this run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005).

NASDAQ

Stats: +53.33 points (+1.94%) to close at 2804.19
Volume: 2.654B (-3.1%). Volume fell back Friday as NASDAQ gap higher on the Microsoft earnings, but it remained well above average and continued the much higher volume shown over the past two weeks as the selling began. Once more we have to comment that the volume did not rise until NASDAQ started to peak out on this run. That's not the best time to see volume pickup, but we do note that many of the high-volume sessions were on upside moves or on recoveries from early selloffs. That still does not totally absolve higher volume selling.

Up Volume: 1.776B (+1.083B)
Down Volume: 846.191M (-1.187B)

A/D and Hi/Lo: Advancers led 1.97 to 1. Some decent breadth showed up, but it still was no match for the downside breadth on the selling sessions last week.
Previous Session: Decliners led 1.41 to 1

New Highs: 81 (+27)
New Lows: 85 (-29)

NASDAQ CHART: Click to view the chart

The internals were at extremely extreme levels, and so quickly into the selling. After an extended period of selling that would signal a cleansing, a catharsis. Not as likely with this just over a week old. Recall early on in the summer selling the internals jerked to extremes and we made the same comment. It took another three weeks to get to the bottom of a pretty quick selling binge. In any event, NASDAQ is still hanging onto its breakout to a new post-2002 high by a gnat's behind, closing right on top of that July peak. It has some room to play with down near 2700, but if it goes much farther than that it is going to be a longer correction. That makes this coming week and how it responds to being dragged lower by the industrials critical to how the market sets up for the run to the end of the year.

Some very interesting aspects to the chart action for NASDAQ on Friday and for the week in general. Without a doubt, it was another very volatile week with the index making a 100 point round-trip twice. That kind of high-volume volatility is typically not a good thing, as it shows sellers using upside moves to unload significant positions. Nonetheless, NASDAQ was able to gap higher on Friday clear some resistance that formed at 2800. It is still below the July peak (2834), but the ability to break through this near resistance was an important move. As for Friday itself, however, we note that NASDAQ gapped higher then it gave back half of the move, testing the 10-day EMA on the low before recovering to close just below its opening price. The inability to push the gap beyond opening price shows up there still overhead resistance for NASDAQ. It is in better shape, but it still has work to do this week.

SOX CHART: Click to view the chart

SP500/NYSE

Stats: +20.88 points (+1.38%) to close at 1535.28
NYSE Volume: 1.405B (-12.92%). Volume fell significantly on NYSE, but managed to hold at average levels to close the week. Again we note that volume surged as S&P 500, tapped at key support on the intraday lows the past week. That shows that there was big money stepping in to support the index at that level, and thus the big bounce higher on Friday when the good news hit.

Up Volume: 1.156B (+386.125M)
Down Volume: 235.023M (-592.887M)

A/D and Hi/Lo: Advancers led 2.83 to 1. Breadth was vastly improved on Friday, after some very negative - 5:1 during the week. With the financials posting gains and independent energy stocks performing better, it was easy for the A/D line to improve at the week's end.
Previous Session: Decliners led 1.06 to 1

New Highs: 164 (+69)
New Lows: 16 (-33)

SP500 CHART: Click to view the chart

After the high-volume testing at the key 1490 level are the large caps held the line, S&P 500 gapped higher Friday and close the session high. You don't see S&P 500 gap a lot, but it gapped four times last week. As with NASDAQ, that shows a lot of fighting between the buyers and sellers. Friday, it sure looked as if the buyers won out as S&P 500 moved above the late September consolidation range. It is still below the June twin peaks at 1541, but is doing what it has to do, i.e. taking out one interim peak at a time.

The small-cap S&P 600 (+1.82%) posted a gain second only to NASDAQ, clearing the 50 day EMA on the close. That still leaves at well below the September peak that marks some strong resistance from 430 to 435. That leaves S&P 600 still in a precarious pattern. If the economy is going to improve in a significant way, you'd expect to see the small caps in better shape as they were at the beginning of October, i.e., ready to make a breakout to a new high. At this juncture they're 17 points off of the October hide that matched the prior all-time highs. That doesn't sound like much, but on small-cap index one is a pretty long road to travel.

SP600 CHART: Click to view the chart

DJ30

The blue chips got a lot of help from Microsoft on Friday, pushing through the 50 day EMA on a very strong shot of volume. They still couldn't top the late September consolidation range, and that leaves the index and a potential head and shoulders top has formed over the past six weeks. The move was significant, however, because DJ 30 rallied off support at 13, 500, and it did so on significantly higher volume. In other words, it made a higher low at support and strong volume reinforced that there was buying ongoing. While the near-term picture is still somewhat cloudy, looking at the past four months, this higher volume move made another higher low as part of what appears to be the formation of an ascending triangle. It looks as if there could be another three to four weeks of work to be done before a major breakout, but DJ 30 can still advance nicely even as it completes the rest of this pattern given that the it consists of higher and higher lows. So, while there is some immediate overhead resistance, the bigger picture is trying to shape up a bullish fashion.

Stats: +134.78 points (+0.99%) to close at 13805.7
Volume: 311M shares Friday versus 274M shares Thursday. What looked to be some churn, just below the 50 day EMA on Wednesday and Thursday turned into some strong buying on Friday after the Microsoft earnings report. That puts the volume in better light and consistent with the blue chips trying to form a larger ascending triangle base.

DJ30 CHART: Click to view the chart

MONDAY

This week is sure to result in information overload with another heavy week of earnings reports, mountains of economic data (Q3 GDP, manufacturing reports, personal income and spending, and the jobs report), and the FOMC meeting on Halloween. A ridiculous amount of data to process.

It is all very important, but what we've seen in the market since the Fed moved in with its 50 basis point Fed Funds rate cut is that the Fed's willingness to cut aggressively has put a bid in the market that has survived significant selling attempts. Thus, anything that does not deter the Fed from cutting again on Wednesday, his overall good for the market. About the only thing that could seriously derail Friday's start of a potentially positive break higher, would be economic data and earnings that are so weak that even Fed action would be viewed as unable to remedy the situation.

We don't think the latter will be the case. Moreover, we think Fed is going to 50 basis points not the 25 basis points, factored into the Fed funds futures contract. Now the Fed funds futures contract is typically very accurate within two weeks of an FOMC meeting. At least that was the case with Greenspan Fed. As seen at the last FOMC meeting, however, that's not the case with Bernanke because Bernanke does what is needed, not what is expected. Big difference.

We are not the only ones talking about a 50 basis point rate cut. More and more are figuring a 50 basis point cut, but they are still a significant minority of opinion. We have to remember, however, that the Fed was worried about the growth prospects for the US in 2007 as well as 2008 even before the credit issues hit during July and August. The housing reports have been horrific subsequent to that first rate cut, earnings have been this morning, and there are continued calls from corporate CEOs about the need for better liquidity and credit. For the last rate cut, the Fed was still fighting inflation until Robert Rubin contacted Bernanke and arranged several meetings with CEOs from various economic sectors. Soon after those meetings, the Fed quickly changed voila, the 50 basis point rate cut. There are indications of improvement in the mortgage market, the credit market, and in corporate investment. It is much too nascent at this juncture, however, at least for the Bernanke Fed, to rest easy and feel that its job is done or that a 25 basis point rate cut would be sufficient. Thus we are looking for a 50 basis point rate cut on Wednesday. That would be a treat, not a trick.

While some are saying the market is building in a 50 basis point rate cut all ready, we don't believe that is entirely the case. Some of that is occurring, but looking at the FFF contract, the bond money isn't going there. Moreover, unless the market runs significantly higher into Wednesday afternoon, we believe 50 basis point rate cut will give the market and other solid boost higher. It may not have the same effect as the initial 50 basis point rate cut, but the fact that the Fed has cut 100 basis points in a short period of time shows the market that the Fed is going to do what it takes to overcome these issues. That is always an upside catalyst for the market.

As the market moves toward the FOMC meeting, we want to be positioned so that we can take advantage of any run up to the meeting as well as any pop subsequent to the announcement. We already have many good positions and leading stocks, but if we see the move spreading out or if we see former leaders shaping up again to step into the lead, we will take advantage of the situation.

The market is hardly out of the woods, but it is weathered some serious attacks over the past two weeks and managed to break higher on Friday when Microsoft finally joined the growth side of technology. The market now definitely has the 'gist' of the earnings season, and after the back and forth action the scales may be tipping to the upside. The fact that Microsoft is now returning to a growth mode after six years of stagnation is a tremendous positive because it shows that the economy is not dead or even critically wounded, as is the common view outside the US as discussed earlier. So much pessimism, yet growth continues. In the bigger picture, Microsoft is still a copycat and is not the savior of the economy, but with all of its antitrust woes around the world, if it can resume the mantle of growth, there is hope for old line tech companies not to mention the actual growth technology companies.

Support and Resistance

NASDAQ: Closed at 2804.19
Resistance:
2834 is the October intraday peak
2887 from a September 1999 peak
2920 from an October 1999 peak

Support:
2778 from a July 1999 peak
2773 is the November/February up trendline
2725 is the July high
2713 is the November/December/February up trendline
The 50 day EMA at 2700
2673 is the early July high
2634.60 is the June peak

S&P 500: Closed at 1535.28
Resistance:
1534 is the early July high
1539 is the mid-June intraday high
1541 is the early June high
1553 intraday high from March 2000 used to be the all-time peak
1556 is the July intraday high
1576 is the Thursday intraday high.

Support:
1519 is the July 2006/March 2007 up trendline
The 50 day EMA at 1516
The 90 day SMA at 1502
1490.72 is the early June closing low and early August peak.
The 200 day SMA at 1479
1475 from peaks in December 1999 and January 2000

Dow: Closed at 13,806.70
Resistance:
The July high at 14,022
14,035 is the old channel line
14,088 is the early October closing high
14,198 is the Thursday intraday high.

Support:
The 50 day EMA at 13,698
The August high at 13,696
The mid-June high at 13,689
The early June high at 13,676 (closing), 13,692 (intraday)
The early July peak at 13,671
The 90 day SMA at 13,570
13,325 is the July 2006/March 2007 up trendline
The 200 day SMA at 13,168
12,845 is the August closing low
12,786 is the June peak

Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.

October 30
- Consumer Confidence, October (10:00): 100.0 expected, 99.8 prior

October 31.
- GDP, Q3 (8:30): 3.1% expected, 3.8% prior
- Chain Deflator, Q3 (8:30): 2.1% Expected, 2.6% Prior
- Employment Cost Index, Q3 (8:30): 0.9% expected, 0.9% prior
- Chicago PMI, October (9:45): 53.0 expected, 54.2 prior
- Construction Spending, September (10:00): -0.3% expected, 0.2% prior
- FOMC policy statement (2:15)

November 1
- Personal Income, September (8:30): 0.4% expected, 0.3% prior
- Personal Spending, September (8:30): 0.4% expected, 0.6% prior
- Core PCE Inflation, September (8:30): 0.2% expected, 0.1% prior
- Initial Jobless Claims (8:30): 331K prior
- ISM Index, October (10:00): 52.0 expected, the 2.0 prior
- Pending Home Sales, September (10:00): -6.5% prior
- Crude Oil Inventories (10:30): -5.28M prior

November 2
- Nonfarm Payrolls, October (8:30): 90K expected, 110K prior
- Unemployment Rate, October (8:30) 4.7% expected, 4.7% prior
- Average Hourly Earnings, October (8:30): 0.3% expected, 0.4% prior
- Average Work Week, October (8:30): 33.8 expected, 33.8 prior
- Factory Orders, September (10:00): 1.0% expected, -3.3% prior