Stealth Stocks Weekly Update on Monday, October 4, 2010 With Dennis Slothower

Summary of Recommendations

Remain defensive as the market is subject to wild swings as fundamentals deteriorate but the Fed continues to prop up stock prices in roller coaster conditions.

Market Commentary

U.S. stocks fell in light trading on Monday as investors took profits on recent gains, using middling economic data and worries about euro zone debt as a catalyst for shedding long positions.

Stocks retreated today ahead of tomorrow’s ISM service report as investors wait for more economic data and further direction from the Fed.

A lot of answers to perplexing questions should be answered in the month of October.

The number one question I want to know is if the Federal Reserve is going to continue to do “Permanent Open Market Operations” as they did in the month of September. As we talked about last week, the Fed conducted 11 separate operations of over $27 billion, with the last POMO on September 30th.

These Federal Reserve adjustments to their balance sheets create liquidity from the Federal Reserve Bank of New York and create buying power for the primary dealers to pump up equities and commodities.

So I want to know if the Fed is going to going to continue to intervene in the stock market ahead of the mid-term elections regardless of the long-term implications of their actions.

If you want to track the inflows and outflows of POMO you can go here and track this daily:

Click the “Show last 10 Operations” and you’ll see for yourself why the stock market reacted the way it did.

Does it matter to the Fed if oil prices head to $90 a barrel in October or higher as long as the stock market advances ahead of the mid-term elections? Oil closed today on the long contract at $84.55, so another $5 jump isn’t out of the picture this month.

Perhaps one of the biggest answers to our questions comes later in the month with the release of the third quarter GDP. Are we going to see a soft landing as Wall Street has promised or are we going to see further contraction?

What are the odds?

Economist David Rosenberg points out the current ISM new orders to inventories ratio has been steadily declining. May: 1.44x June: 1.28x July: 1.07x August: 1.03x September: 0.98x

Rosenberg writes: “All we can tell you is what the historical record says – at this level in the past, the economy slipped into contraction 75% of the time.”

So the drum roll please because later in the month we are going to find out if the GDP is going to improve or get worse.

I also want to know how these charts are going to be reconciled.

With the prices of both food and energy skyrocketing, it is already starting to affect the consumer.

Have we ever known a period in history where an economic bottom occurred when crude oil prices were soaring? (Currently at $84.55 and rising.)

Notice, that this indicator is getting worse along with the higher commodity prices.

Until these questions are answered about the economy, the focus should be on what the Fed is doing with its POMO injections. Without them, my bet is the market dips below its 200-day moving averages.

Remain cautious until we know the answers to these questions.


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