A Quiet Week Ahead Favors The Bulls – Use Caution!

This morning, industrial production edged up .2% as manufacturing output staged its best gain in 10 months. The New York Empire index also rose for the first time since April. Consumer confidence also improved slightly due to lower gasoline prices. These pieces of economic news supported the market early on and it is trying to breakout above SPY 130 ahead of the weekend. Commodity prices continue to fall and that will help ease inflationary pressures. Oil is down more than $3.50 per barrel and the metals are also participating in the decline. There is evidence that global growth is slowing and that is putting pressure on commodity prices. Next week, the earnings and economic news is fairly light. I don't see any material events that will drive the market. Consequently, I expect choppy trading that favors the upside. We have a nice trend that has formed off of the July lows, the market has broken through horizontal resistance at SPY 130, the Fed seems content keeping interest rates where they are and commodity prices are declining. These factors are reducing uncertainty and the VIX is declining. Experience has taught me to be very careful with August rallies. September and October are two of the weakest months historically and a nice rally could draw in many unsuspecting investors. The intermediate term trend is still down and underlying conditions continue to deteriorate here and abroad. Trade this mini rally in small size and be cautious. In the absence of news next week, the bulls might be able to force a short covering rally. Healthcare and tech are two of the strongest sectors. I want to commend China on the incredible job they have done hosting the Olympics. No detail has gone unnoticed. As I watch the games, our Olympic heroes make me proud to be an American. Go Team USA!

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