Weekly Outlook

There are number of economic reports scheduled for release this week as well as a few significant corporate earnings reports. Scheduled economic reports include ISM Manufacturing/Prices Paid, Vehicle Sales, Factory Orders, ISM Non-Manufacturing, Non-farm Productivity, Unit Labor Costs, Unemployment Rate and Change in Non-farm Payrolls. ISM Manufacturing/Non-Manufacturing, Unit Labor Costs and Change in Non-farm Payrolls have the most market-moving potential.

IAC/Interactive Corp.(IACI), Clear Channel(CCU), Emerson(EMR), Northrop Grumman(NOC), Tyco(TYC), CVS Corp.(CVS), Caremark(CMX), Fox Entertainment(FOX) and XM Satellite Radio(XMSR) are some of the more important companies that release quarterly earnings this week. There are also a few other events that have market-moving potential. The JP Morgan Tech/Telecom Conference, FOMC Policy announcement, Morgan Stanley Healthcare Conference and FOMC minutes release may also impact the market.

BOTTOM LINE: The S&P 500's P/E on 04 estimates is 17.33 and falling, the lowest level since the depths of the Asian/Long-term capital crises in 1998. The S&P 500's current valuation is also lower than in 1992 and 1987, years preceding major bull moves. The economy is growing the fastest since the early 80's, American household net-worth is at all-time highs, American home ownership is at all-time highs, corporate profitability is at all-time highs, interest rates and inflation are relatively low and consumer spending is very strong, yet the stock market is falling. Multiple sectors appear to be breaking down technically. This leads me to conclude investor psychology has changed and the market is in the middle of a P/E multiple contraction phase. Market participants appear to be factoring in the likelihood of another major terrorist attack on U.S. soil. The strong fundamental backdrop for stocks should keep this phase from turning into another bear market. With my short-term trading indicators on sell signals, investor complacency still relatively high and deteriorating technicals in multiple sectors, I expect more weakness in the near-term. I will look to make additional short sales into any bounce from technically oversold levels.