Replies to post #2221 on Your Economy (No Politics) (YE1)

[Newly2b]

Enjoy your weekly updates, Bullwinkle. And a Merry Moose Christmas to you and yours.

Newly

[Bullwinkle]

>>>CYCLE/TREND Update for the Week Ahead>>>



Overview:
First off I want to wish everyone a Happy and Prosperous New Year! As mentioned in last weeks update with which this post replies; The coming week should give us a pretty clear signal of what "da boyz" have planned. I am not so sure this was the case as volume was weak and the markets in general seemed rather lethargic, then again this could be the calm before the storm. While SO many people are expecting a January Effect to take place, could it be that we have already had one? Think about it for a minute... Instead of rallying into the New Year as we did last year, caution seems to be in the air. The indices have managed to print new highs on poor volume and diverging indicators. I could be wrong, but it seems to me like this move is running out of steam and a classic case of realignment is/has taken place prior to a turning point. I just don't know for sure, but it will be interesting to see how new money is put to work. Even though a lot of money went into funds last month, a good portion did not find its way into domestic funds. As a matter of fact, for the week of Dec 22nd Global funds and ETF's such as MSCI were the big winners and this past week there was a decent outflow of funds from the Russell 2000. All I can say for sure is be careful, especially if you are fully loaded to the long side.

Economic #'s:
Even though it was a slow week for Econ #'s, the ones given were allowed to be examined that much more closely than usual and as usual we recieved a mixed bag of numbers. Consumer Confidence soared to 102.3 revised from 90.5 and approx. 10 pts higher than the previous month. I don't know about you, but it certainly does not seem as though that kind of confidence was reflected in Christmas shopping this year although the verdict is still out on that one with mixed interpretations of just how "Jolly" this year was. Existing Home Sales rose to a record number of 6.94M units sold or 2.7% higher than previously reported, but these stats run counter to that of the recently released New Home Sales which saw a 12% decline and Housing Starts which fell to 10 yrs lows. Mortgage Apps fell 1.7% and Re-Fi Apps fell 7.9%, the 5th decline in the last 6 weeks. Initial Jobless Claims came in at 326K or 5K lower than previously reported. The US Help Wanted Index dipped a full point to 36 which matches a 4 decade low. Chicago PMI fell considerably to 61.2% compared to 65.2% from the prior month, but more importantly the employment sub-index of the PMI fell to 49.1 from 60.8, the first time below 50 since July'04. Last but not least, Oil... Crude Oil Stocks fell by 800K bbls while Distillates fell by 800-900K bbls. Heating Oil supplies are currently 12% below YoY levels as well as Distillates being 13% below YoY levels. Crude remains 8% above YoY levels.

Next week it's back to business as we have a full week of numbers to scrutinize. Construction Spending, ISM Index and Services, Auto and Truck Sales, Factory Orders, Initial Claims, Average Workweek, Hourly Earnings, Nonfarm Payrolls, Unemployment Rate and Consumer Credit.

Time to spin a 2005 outlook. While I am not really comfortable giving price targets, I will make an attempt by calling for a top in INDU at 10,900-11,100 -- SPX at 1215-1235 -- COMP at 2180-2240... As for the things that make our world go round: Social Security will not get privatized, Gold will go to $490-510 an ounce, the U$D continues to fall to the 76-78 area and the Fed will continue to raise rates throughout the year. China will not revalue the Yuan, it will remain pegged to the U$D. Oil and energy will remain in high demand as well as commodities and natural resources. I do not expect to see Oil go below $35 bbl and possibly goes as high as $65 bbl. Too many wildcards that will not play to our advantage; Iraq, Iran, Russia and China. I am sure we have not heard the last from N.Korea...

Synopsis: No way no how will Congress get this Social Security bill approved, too many level heads from both sides of the aisle will not permit it to happen. Once it is realized that there will be no privatization of Social Security the indices will tank. Interest rates will begin to rise and be felt. It takes roughly 9 months for rate increases to work there way througgh the system so the current 1.25% is just making its way in now. Supposedly banks are already having a time dealing with it and I believe we have at a minimum 1.25% to 1.75% to go. This is based on the Yield Curve and GDP. Bankruptcies and foreclorsures will begin to climb in number and frequency. The dollar will recieve no real support and less money will be coming into the US System via foriegn investment while the Fed keeps printing away. Inflation will continue to rise in its stealth manner, although it will be very evident to John Q Public, Average Joe or Joe 6-Pack (whatever you prefer). Stagflation may begin to set in as the price of Oil remains too high, Corporate profits weaken, Job Growth remains stagnate and Consumer Confidence begins deteriorating.

I will be watching the COMP most closely, it is my playground. I believe we get a similar yet deeper drop than that of 2004. Once a top has been established, the correction will last approximately 3 Quarters. Then there will be a steep Santa Rally leading into an even tougher 2006 when Sir Alan steps down and part 2 of a double dip recession begins...

One last note: Essentially we have put the world on alert and for every action, there is a reaction. It is only a matter of time. Our global partners' masses are boycotting a number of major US products. Our global partners' governments are beginning to defend their economic livelihood. This has recently been evidenced by the lack of interest at the last treasuries auction where 2 yrs notes were given the cold shoulder. These had been one of the bright spots at these auctions, but as mentioned even the 2 yrs are not drawing. We have also witnessed the chess moves for oil by Russia and it's move in regards to Yukos and China who has been shopping around and securing options via Venezuela and Canada.

What can we expect now?:
I dislike being so bearish... It is really not in my nature but I do not see a wall of worry, I see a mountain. This will be tough to scale, yet Bullish Advisors are at 62.9% and Bearish Advisors are at 19.6%, VIX/VXN are beginning to spike up and the Equity P/C Ratio is .452. The RSI 5-Days are Neutral on INDU, SPX and COMP while RSI 5-Wks are overbought. All of the majors show a rising wedge into diverging RSI and MACD's with Money Flow drying up and a weakening ADX (DMI). Volume has been pathetic and I continue to watch for a high volume pull back, once the momentum starts in that direction it will be tough to stop. The INDU and SPX seem to have hit a ceiling although this is not to say that we cannot continue higher from here, but I would be less surprised if a decline began in earnest...

NOTE: I continue to hold a USPIX position which I will continue flip when the time feels right. LT Holds: HSGFX, PCRDX, PRPFX, QRAAX, RSNRX and TAVIX

Disclaimer: This disclosure is not a recommendation to buy or sell or to do as I do. It is to let people know what I am doing and give my thoughts on current market conditions. I am not a day trader and only attempt to identify up/down trends and play the swings.