Investors are worried. The big question – as always – is whether the primary uptrend remains intact.

And the answer is yes.

To understand just what that target should be, let’s take a look at where we are right now.

Just before Wednesday’s sell-off, measures of the supply of stocks moved to new lows, while demand moved to new highs. This means bull-market-trading rules remain in effect. But as the cyclical bull market matures a little, we need to change the target of our buying efforts.

Although it looked like losses would be cut in the early afternoon, a lack of demand resulted in the major U.S. indices settling gently at support near the high end of the August trading range. The Dow Jones Industrial Average lost 0.4%, the Standard & Poor’s 500 Index lost 0.6%, the Nasdaq Composite Index lost 0.8%, and the Russell 2000 lost 0.5%.

All the major sector groups save healthcare finished in the red. The declines were the most severe among industrial conglomerates. The Industrials Select SPDR (NYSE: XLI) lost 1.4% thanks to a 2.5% fall in Textron Inc. (NYSE: TXT). Bank stocks were also weak as Bank of America Corp. (NYSE: BAC) dropped 2.2%. Defensive healthcare and utilities stocks were relatively buoyant with a gain of 0.1% for the Healthcare SPDR (NYSE: XLV) and just a 0.3% loss for the Utilities SPDR (NYSE: XLU).

Homebuilders were under some heavy selling pressure over the past week, likely the consequence of the U.S. Federal Reserve’s decision to slow its purchases of mortgages. By spending $1.45 trillion, the Fed kept the difference between mortgage rates and the yield on U.S. Treasury debt very low.

Now, as these purchases taper off, mortgage rates will creep higher and erode some of the awesome affordability levels that are driving buyers to take advantage of the government’s first-time homebuyer tax credit and stabilize the housing market. As a result, the iShares U.S. Home Construction ETF (NYSE: ITB) lost 2.7% on Friday and dropped 8.3% last week.

The declines of the past week have been in alignment with our expectation of a short-term correction before equities push on to what should be a more meaningful top near the 1,200 level on the S&P 500. A number of technical indicators, including the percentage of stocks over their 10-day moving average as well as breadth and volume measures, had begun to deteriorate after having moved well into overbought territory the prior two weeks.

We aim to run our portfolios for long-term holds during bull markets, so although we warned of weakness ahead we did not expect it to be serious enough to merit exiting positions. Still don’t.

The big question – always – is whether the primary uptrend remains intact. And the answer is yes. Just before Wednesday’s sell-off, measures of the supply of stocks moved to new lows, while demand moved to new highs. This means bull-market-trading rules remain in effect. But as the cyclical bull market matures a little, we need to change the target of our buying efforts.

However dramatic the action of the past few days has been, it is a sign that some normalcy is returning to the equity markets. Moving forward, it is unlikely we will see long strings of uninterrupted up days, super-strong performance in the lowest quality stocks, and high correlations between stocks. In the final push to the stimulus- and recovery-Fed reaction high that we will likely see over the next three months or so, the emphasis may shift to fundamental analysis and quality.

As you can see in the chart above, stock-performance correlations tend to spike during times of economic stress. When investors enter panic mode and analyst estimates become much less accurate, the focus shifts from individual assets to asset classes and broad sectors of the economy. In other words, when all hell breaks loose investors don’t differentiate between great companies and good companies – they throw them all out.

Once this unease subsides and economic volatility wanes, fundamental analysis once again becomes the most important driver of investment performance.  And that’s okay, because there will be plenty of opportunities as investors shift their focus from stocks that were priced for Armageddon to stocks that are poised to benefit from renewed economic expansion.

The foundations for the transition are already being laid: UBS AG (NYSE: UBS) analyst Jeffrey Palma notes that after nearly a year of downward revisions to earnings, analysts are starting to upgrade their forecasts for 2010. Estimate rebounds are largest in the cyclical materials and retail sectors. Breaking it down by region, the most promising opportunities are in commodity-related stocks in the United States, consumer stocks in Europe, and British banks.

We have recommended SPDR Metals & Mining (NYSE: XME) in our Strategic Advantage service as a great vehicle to play this trend, even though it stumbled last week. Another good one is iShares Australia (NYSE: EWA). Check out our newsletter for a much-expanded list of recommendations.

The Week in Review

Monday: The index of leading indicators jumped 0.6% in August after a 0.9% jump in July and a 0.8% jump in June. The indicators’ August performance represented the fifth consecutive monthly increase. Moreover, the 4.7% increase during these five months was the strongest showing since early 1983, which marked the beginning of one of history’s greatest bull markets.

Tuesday: Home prices backed by Fannie Mae or Freddie Mac jumped 0.3% in July. There were also indications that retail sales plummeted in the week following the Labor Day Back-to-School blitz.

Wednesday: The Federal Reserve announced it would leave interest rates unchanged. Stocks initially bounded higher before abruptly shifting direction and screaming lower. The bulls gunned the Dow Industrial Average close to the 10,000 level before things fell apart. At issue wasn’t the Fed’s target policy rate, which affects short-term interest rates. Instead, traders were apparently concerned that Fed chairman Ben Bernanke and his cohorts failed to expand its direct purchases of mortgages and government debt. This will likely result in higher long-term rates.

Credit markets, though, didn’t care, and carried on with their bull market run. Crude oil fell 4.8% to $68.33, its largest percentage loss since July on a surprise increase in inventories.

Thursday: Some momentum was lost in the housing market after weak existing homes sales numbers put an end for four straight months of gains. Sales last month came in at a million seasonality adjusted annual rate of 5.1 million — a 2.7% drop from July. We continue to see an emphasis on foreclosures with distressed sales making up 31% of total sales. The highlight: Supply of homes fell to just 8.5 months of sales, a level that is believed to reflect a balanced market. There are, however, the issues surrounding a “shadow” inventory of homes waiting for foreclosure proceedings to complete or the slightest whiff of a recovery before being listed.

Friday: The G20 wrapped up its meeting in Pittsburgh with a commitment to tighter regulation of the financial system and system to subject each country’s economic policy to a type of peer review to try to avoid the types of global imbalances — China’s export obsession and America’s credit binge — don’t happen in the future. While the latter can only be enforced by a public shaming by other countries and the International Monetary Fund, it lacks an actual penalty. But it’s a good first step.

Consumer sentiment, as measured by the University of Michigan, improved to its highest level since early 2008 after rising by nearly one-third since late last year. According to Haver Analytics, over the last 10 years there has been a 69% correlation between sentiment and growth in consumer spending.
Unfortunately, the good news didn’t extend to durable goods orders in August: There was an unexpected decline that reversed half of July’s 4.8% gain. A drop in orders for transportation equipment was fingered as the main culprit. However, this metric is quite volatility and the overall trend still points towards a rebound in the manufacturing sector.

The Week Ahead

Monday: A quiet calendar with no economic releases.

Tuesday: The latest on nationwide home prices courtesy of the excellent Case-Shiller Home Price Index. Also, we get another update on consumer confidence.

Wednesday: The government makes its final revisions to second-quarter GDP. The last revision made no change to the initial estimate of a 1% decline. In the first quarter, GDP plummeted 6.4%. Traders will be looking for indications that inventories have dropped and demand is increasing ahead of a projected inventory rebuild in the months ahead. We will also get an update on the health of the manufacturing base in the latest ISM – Chicago Business Barometer.

Wednesday will also mark the end of the third quarter.

Thursday: A busy day with an update on auto sales, personal income and spending, the latest ISM Manufacturing Index, and construction spending.

Friday: The September jobs report is expected to show a loss of 170,000 jobs compared to the 216,000 that were lost in August and a 463,000 decline in June. The unemployment rate, currently at 9.7%, will move closer to 10%. Also, we get an update on factory orders.
In summary, the start of the fourth quarter is on the horizon. We expect it to be a plus for investors, though not without growth and geopolitical scares that create S-turns and potholes. Stay positive amid the turbulence as long as corporate credit markets remain strong and the primary trend is up.

Source: Long-Term Stock-Market Uptrend to Continue

Although it is difficult to speak while gritting one’s teeth, laughing hysterically and trying not to vomit up blood in sheer anger and outrage, The Heroic Mogambo (THM) rises to the occasion and bellows, “No inflation beyond food and energy! Hahahaha! Relax, everybody! The guys who are afraid of deflation say that you should be afraid of deflation, too, since there is no inflation beyond food and energy! Hahaha!”

And since inflation is the thing I most fear, I knew that I needed money, and fast. So I spent most of the week setting up Step One of my plan, which involved setting up a fall-guy using the DaVinci Code method to find the words “Danny in accounting will loot the employee pension fund” somewhere in the Bible, but it was pretty much a bust.

Discouraged, I found, instead, an email with some clever anagrams, and I found one that seemed to be pertinent to the times, in that nowadays every moron government and all their moronic neo-Keynesian econometric buffoons (who have been the instigators of the economic disaster that has befallen the world, thanks to them and the despicably incompetent Alan Greenspan, former chairman of the Federal Reserve) are so desperate that they are “quantitatively easing” So Damned Much Money (SDMM) that we are, in a nutshell, freaking doomed!

Anyway, the anagram that tickled me is in taking the word DESPERATION and then re-arranging the letters to get A ROPE ENDS IT! Hahaha! It works on so many levels! Hahaha!

An upshot is that all of this “quantitative easing” of SDMM, and the reference to the anagram, is that most of the money that the Fed is creating is used to buy government debt! This increases the national debt, so it is not surprising that Agora Financial’s 5-Minute Forecast reports, “Your family’s share of the government debt is now over half a million dollars. A record $546,668, to be exact”!

Naturally, I am thinking that at 5% interest, each family owes, in addition to the $546,668 principal, a princely $27,333.40 in interest this year alone!

Fortunately for the government, they do not have to actually tax each family $27,333.40 this year because the government will just sell more Treasury debt, bought by the Federal Reserve with money they created just for the purpose.

Unfortunately, the family will pay it anyway, except in the form of higher prices as all this new money creates inflation in consumer prices!

The 5 says that they were quoting a USA Today study, which claims that each American family’s share rose 12% in 2008. That’s $55,000 in new government debt last year for every U.S. household – thousands more than the median household annual income.”

Perhaps as a result of all this bankrupting idiocy, the London Times reported that Treasury Secretary Geithner told the students at Peking University during his visit to China that “we believe in a strong dollar,” and that all the trillions of dollar’s worth of US debt owned by the Chinese “are very safe.”

If he had been addressing the usual kind of American morons that big-shot officials usually address, like the Economics Club of New York, Princeton, Harvard or Congress, then the audience would have sat there, dumbfounded, before applauding politely and saying, “Duuuhhh! Okay!”

But in China, Geithner’s speech was greeted with laughter! Hahaha! This shows that the Chinese are very perceptive and not stupid, in contrast to the USA, as this is the kind of response that it really, really, really deserves.

If Mr. Geithner really wanted to act smart, he would ask the Chinese why they have suddenly added their growing hoard of gold to their money supply. And if the Chinese wanted to be gracious hosts, they would have told him.

If he had asked me why I am buying gold, I would have told him, “Because this investing stuff is easy when a Federal Reserve creates 13% of GDP so that the federal government can spend a third of GDP! Whee!”

Source: An Economy at the End of its Rope

This from Fleet Street Invest:

As investors, we must take a step back from the spectacle of this historic event and ask a more pressing question. What does this mean for the world economy and the world’s stock markets?

First the economy…

Almost 70 per cent of Americans named the economy as the number one motivation behind their vote.

A vote for a man that has so much influence on us all.

After all, when America sneezes, the rest of the world catches a cold. And when the US subprime bubble burst, we caught pneumonia. We are caught in a storm of macro crises: the credit crunch, housing slumps, recessions and bear markets across the globe. The responses by the world’s leaders affect all of the above and all of us.

As leader of the free world at such a low ebb, Barack Obama’s next move is so important.

President Obama wasted no time, addressing the economy in his acceptance speech:

“Even as we celebrate tonight, we know the challenges that tomorrow will bring are the greatest of our lifetime — two wars, a planet in peril, the worst financial crisis in a century.

“There is new energy to harness and new jobs to be created; new schools to build and threats to meet and alliances to repair.”

The President must, in the coming weeks, outline a convincing plan of action to help the world’s biggest economy get back on its feet.

What’s next for the economy?

A big recession bailout.

The last intervention by the US was the $700 billion bank bailout. That was about the financial system, not the recession.

The last recession bailout was the $150 billion of rebate cheques handed out to ordinary Americans. This fiscal injection was a bad call, one that the new President-elect opposed, and it had an artificial effect on the economy.

The money could have been much better spent and the next round of monies will be better spent.

How much money?

$300 – $500 billion is being touted as the size of the next injection. That’s what is estimated as necessary for America to spend to offset the downturn of the private sector.

- $300 billion is equivalent to a 2% boost to GDP.
- $500 billion is equivalent to a 3.4% boost to GDP.

The expectation is that rather than give everyone $600 to fritter away, they’ll put the money into big infrastructure projects to spur “job creation.”

Digging holes in the ground, building bridges… the Keynesian approach.

The good news is that it should all now happen a lot faster.

We have a Democratic President and a Democratic Congress. That means that we are unlikely to face the same sentiment-crushing political hurdles that we encountered with the $700 billion bailout.

SocGen Cross Asset Research

The bad news is that it only delays the inevitable. The US, the world’s largest recession and an economy that affects the UK heavily, is still going into recession. Even a supersized deal would not prevent recession in the US and, if anything, will probably push debt levels over 50% of GDP.

It’s a bad move in the long term, but having led his campaign on the economy, Barack Obama has no choice but to spend, spend, spend.

Source: Even Obama Can’t Fix The Economy