Credit Market Improves – Buy In Small Size – Add On Follow Through!

Yesterday, the market staged a nice rally after a weak opening. The SPY 85 level held and we never quite reached it before buyers stepped in. Thursday's reversal was needed and the market is showing its first signs of stabilization in weeks. We are not out of the woods yet and one bad day can push us below that support level. The market has already factored in weak economic news. Today, consumer confidence dropped to its lowest level ever, home construction fell to a new 17-year low and housing permits fell to a 27-year low. Earnings this week have been decent and 52% of the companies have exceeded estimates while 32% have missed. On average, quarterly earnings for S&P 500 companies have been down 17.5% versus year ago results. Earnings and economic releases are taking a back seat to the credit market. Yesterday, LIBOR rates eased and we are seeing some signs of improvement in the credit market. The actions taken by central banks around the world are taking root. The last week in October and the first week of November are historically the two most bullish weeks of the year. The market is deeply oversold and sentiment indicators are at an extreme. That is a bullish sign from a contrarian standpoint. Bears will be anxious to take profits and I believe that most of the hedge fund liquidation has taken place. Banks and brokerage firms have greatly reduced their leverage and the selling pressure should start to ease. Don't construe these as bullish comments; I am simply looking for a snap back rally. Longer-term, rising unemployment will be an issue. We are already seeing signs that states will not be able to fund unemployment benefits. Five states have less than three months of reserve left and they will soon seek aid from the Fed. Our national debt is spiraling out of control. Corporations, states and individuals will be pleading for handouts. It is expiration Friday and this market can go either way once it gains momentum. My guess from the early price action is that the market will grind higher this afternoon. If we get follow-through buying on Monday, I believe you can start taking long positions. As you trade the rally, remember that you're on the wrong side of the longer-term trend and that you need to be quick to take profits/cut losses.

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