Zeev --
I too expect some better economic numbers coming out of the current quarter simply due to increased activity associated with preparing for the Christmas selling season.
My guess is that the economic numbers and earnings will be a bit weaker than the normal increase for this time of year but still up because of inventory building based on hopes for strong holiday retail sales, which has proved to be a false hope. The various pundits will pounce on the stronger numbers as evidence of a "recovery underway" and ignore the seasonality behind it, but the piper will have to be paid next quarter as leftover inventories from both the weaker back to school and the much weaker than hoped for Christmas seasons pile up and have to be worked off or charged off (those never ending "one-time charge offs). That will in turn slow the economy as new orders will be sharply curtailed while inventories are taken down, resulting in more layoffs and earnings disappointments in at least the first two quarters of next year, if not longer.
Based on just seasonality, I can see a weak rally here through just beyond the end of the year. I cannot see a strong rally though, because the weakness in the Christmas season is too obvious to create any excitement even with gobs of hype under the Christmas tree and much well-spiked egg-nog.
The question, of course, is how much disappointment in weak holiday sales is already built into the market and judging by valuations, virtually none of it is, with investors still betting on the ephemeral "great recovery" - which ain't gonna happen. Based on just that, I expect any rally to be very short lived with a good deal of distribution coming into it, which will put a cap on how high we can go. I would not be shocked if they are unable to get one going and we continue down from here, at least to the next support level at 1320 or so. As for the equity put/call index, I still contend that it is very distorted during the week or so of options expiration and I have found it to be not as reliable as it used to be except at extremes.
The wild card is the Fed. Greenspan has repeatedly and openly stated recently that he is targeting deflation and that the Fed/PPT/ESF is going to be used actively as a tool in fighting that deflation. I personally think it has become evident that the center of his battle will be the markets, which is the only target that will touch at all the biggest problem for the economy, which is the debt burden - primarily of the consumer, but also of corporate America. The only mechanism to open up a new source of spending and investment is to drive the markets much higher, and I believe that is what he is attempting to do.
I have serious doubts about his ability to pull it off, but for now my bearishness is constrained by fear of Fed involvement and I will be carefully be playing it by ear.
Good luck to you.
mlsoft
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