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Bottom Line: U.S. stocks finished slightly lower last week, led down by semiconductors after disappointing reports from Xilinx, Altera and Cymer. However, significant gains in the homebuilding sector, spurred by a very positive report from Toll Brothers, helped minimize losses in the major indices. Taking into account the 25% gain in the Morgan Stanley Tech Index since Aug. 12, losses in the sector were relatively muted considering the news. After basing for several weeks, the homebuilders broke to ALL-TIME highs last week on heavy volume. The index has now returned 41.4% since the bears and pundits said the "bubble" burst in May. It is good to see the AAII % Bulls fall, however investor complacency remains elevated as a whole. The plunge in energy prices is very positive for the U.S. economy and remains underreported by the mainstream press. While oil is at technical levels normally associated with a short-term bounce, still lower prices are likely. A few months ago I forecast oil would reach $35-$40/bbl. during the fourth quarter. However, more supply from the Middle-East, less demand from Asia/Europe, a stabilizing US dollar, less speculation and a lower terrorism/war premium may lead oil prices to overshoot on the downside in the intermediate-term. I would not be surprised to see crude approach $30/bbl within the next six months. This would be a very positive development with respect to measures of inflation and consumer spending. Disposable personal income has risen 4.3% from a year earlier versus a 2.5% gain in the Consumer Price Index. A substantial fall in energy prices would further bolster the US consumer. Finally, it was also a big positive to see the US dollar rebound and interest rates fall last week. I expect the dollar to continue its rebound and interest rates to rise slightly from current levels over the coming weeks.
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