The Market Is Consolidating After Recent Gains – Expect Choppy Action.

Today, the stock market has played both sides of the net. It started off on a weak note and then it staged a nice rally. The action feels very choppy and the option trading volume is light. After a nice rebound from last week's lows, the market needs time to consolidate. Tomorrow we will get the PCE deflator. It is the Fed’s preferred inflation gauge. Last week, the PPI came in hot but that number was lost in the Bear Stearns/financial earnings shuffle. I am expecting a fairly hot number; however, the response will be muted. Right now, the Fed has turned a blind eye to inflation and it will continue to do so until the credit woes are behind us. Looking ahead, we have a very light earnings schedule next week. That is not the case on the economic front. A week from tomorrow, we will get the Unemployment Report. That will be a likely catalyst and the market could swing in either direction. This morning, initial jobless claims improved and that could be a good omen for next week. There is not much news to drive the market. End of month fund buying should help to support prices. The bulls do not want to see prices fall below the horizontal support level - SPY 132. If that level can hold, we could see a nice rally in the next two weeks. For the rest of the week, expect choppy price action as end of the quarter window dressing dominates the trading scene. A hedged approach to this market is to short stocks that are in a long-term downtrend and have recently bounced and to buy stocks that have been able to maintain a long term up trend. An example of this strategy would be to buy agricultural stocks and sell short financials. I still believe that this market has another strong up leg and I am in "buy the dip" mode.

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