Weekly Outlook

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Click here for Stocks in Focus for Monday by MarketWatch.com.

There are several economic reports of note and some significant corporate earnings reports scheduled for release this week.

Economic reports for the week include:

Mon. – ISM Manufacturing, ISM Prices Paid

Tues. – Pending Home Sales, Total Vehicle Sales, weekly retail sales

Wed. – Weekly MBA Mortgage Applications report, weekly EIA energy inventory report, Challenger Job Cuts, ADP Employment Change, ISM Non-Manufacturing

Thur. – Initial Jobless Claims, Factory Orders

Fri. – Change in Non-farm Payrolls, Unemployment Rate, Average Hourly Earnings, Consumer Credit

Some of the more noteworthy companies that release quarterly earnings this week are:

Mon. – Walgreen(WAG), Palm Inc.(PALM)

Tues. – Pepsi Bottling(PBG), Micron Tech(MU)

Wed. – Wolverine Worldwide(WWW), Immucor Inc.(BLUD), Arrow Intl.(ARRO), Gerber Scientific(GRB), IDT Corp.(IDT)

Thur. – Constellation Brands(STZ), Marriott Intl.(MAR), Acuity Brands(AYI), Family Dollar(FDO), Research In Motion(RIMM), Solectron(SLR)

Fri. – None of note

Other events that have market-moving potential this week include:

Mon. – Jeffries Technology Conference

Tue. – Citigroup Ethanol Conference, CIBC Industrials Conference, (IRM) analyst meeting, (KSS) investor day, (CIEN) analyst day, Deutsche Bank Leveraged Finance Conference, Jeffries Technology Conference

Wed. – Deutsche Bank Leveraged Finance Conference, William Blair Small-cap Growth Conference, CIBC Industrials Conference, BOE Policy Meeting, (CBRL) analyst meeting, (NSM) analyst meeting, (RENT) analyst presentation

Thur. – Fed’s Mishkin speaking, Fed’s Fisher speaking, ThinkEquity Healthcare Forum, (FLO) analyst meeting, Deutsche Bank Leveraged Finance Conference, BOE Policy Meeting, ECB Policy Meeting, (PRX) analyst meeting, (AEP) analyst meeting, (NSTK) analyst meeting

Fri. – None of note

BOTTOM LINE: I expect US stocks to finish the week modestly higher on less economic pessimism, diminishing credit market fears, lower energy prices, investment manager performance anxiety, a stronger US dollar and short-covering. My trading indicators are still giving bullish signals and the Portfolio is 100% net long heading into the week.

S&P 500 1,526.75 +.07%*

Click here for the Weekly Wrap by Briefing.com.

*5-day % Change

Weekly Scoreboard*

Indices
S&P 500 1,526.75 +.07%
DJIA 13,895.63 +.55%
NASDAQ 2,701.50 +1.13%
Russell 2000 805.45 -.94%
Wilshire 5000 15,317.90 +.11%
Russell 1000 Growth 618.52 +.71%
Russell 1000 Value 851.0 -.34%
Morgan Stanley Consumer 747.03 +.81%
Morgan Stanley Cyclical 1,061.49 +.55%
Morgan Stanley Technology 667.98 +1.63%
Transports 4,836.32 +.19%
Utilities 501.54 -1.32%
MSCI Emerging Markets 149.47 +3.37%

Sentiment/Internals
NYSE Cumulative A/D Line 69,560 +2.01%
Bloomberg New Highs-Lows Index +250 +70.0%
Bloomberg Crude Oil % Bulls 16.0 -27.3%
CFTC Oil Large Speculative Longs 243,458 +2.2%
Total Put/Call 1.09 +26.7%
NYSE Arms 1.24 +49.4%
Volatility(VIX) 18.0 -5.26%
ISE Sentiment 110.0 -32.1%
AAII % Bulls 49.4 +25.8%
AAII % Bears 34.2 +8.0%

Futures Spot Prices
Crude Oil 81.62 -.01%
Reformulated Gasoline 204.25 -2.1%
Natural Gas 6.88 -1.38%
Heating Oil 222.55 -2.06%
Gold 749.70 +1.49%
Base Metals 250.74 +1.31%
Copper 363.05 +1.29%

Economy
10-year US Treasury Yield 4.58% -4 basis points
4-Wk MA of Jobless Claims 311,500 -3.1%
Average 30-year Mortgage Rate 6.42% +8 basis points
Weekly Mortgage Applications 654.20 -2.82%
Weekly Retail Sales +2.2%
Nationwide Gas $2.80/gallon unch.
US Cooling Demand Next 7 Days 15.0% above normal
ECRI Weekly Leading Economic Index 141.10 +.28%
US Dollar Index 77.75 -1.12%
CRB Index 333.67 +.16%

Best Performing Style
Mid-cap Growth +.72%

Worst Performing Style
Small-cap Value -1.75%

Leading Sectors
Steel +4.62%
Wireless +2.70%
Networking +2.56%
Defense +2.39%
Computer Hardware +2.23%

Lagging Sectors
Banks -2.29%
Oil Tankers -2.47%
Airlines -3.52%
Homebuilders -4.84%
Foods -5.5%

One-Week High-Volume Gainers

One-Week High-Volume Losers

*5-Day Change

Stocks Slightly Lower into Final Hour on End-of-Quarter Profit-Taking

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Networking longs, Retail longs and Internet longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is slightly negative today as the advance/decline line is mildly lower, sector performance is mostly negative and volume is below average. High Yield Corporate Bond Funds saw $405 million in inflows this week, the greatest amount since June 1, 2005, which is a big positive. Once again, domestic mutual funds, which have been completely shunned during this bull market, saw outflows while non-domestic mutual funds saw inflows. Keeping the public afraid of U.S. stocks remains one of the bears' most successful weapons. I still believe the eventual participation by the general public in U.S. stock gains will help contribute to the "mother of all short-covering rallies." The proliferation of hedge funds and significant increase in turnover by many other funds since the bubble burst in 2000 usually leads to mild profit-taking at quarter's end, in my opinion. Bespoke Investment Group recently said that, since the fourth quarter of 2002, the S&P 500 has averaged a -0.01% decline over the final two days of the quarter and a -0.28% decline on the final day of the quarter. The Fed's Lockhart made several comments this morning. He painted an economic picture of mildly below-trend growth and moderate inflation, which is what I have been saying for some time. He said he expects third-quarter growth to come in at 2.5% and fourth-quarter growth to be lower. I have been saying that growth would average around 2%-2.5% during the second half of the year, notwithstanding fed funds rate cuts. He also said the Fed's Sept. 18 rate cut action was a "tactical move" to reduce the risks facing the economy from the rout in financial markets that gathered momentum in August. Fed funds futures now imply an 84% chance of a 25-basis-point fed funds rate cut at the October meeting. The AAII percentage of bulls rose to 49.4% this week from 39.2% the prior week. This reading is now modestly above average levels. The AAII percentage of bears rose to 34.2% this week from 31.7% the prior week. This reading is now above average levels. Moreover, the 10-week moving average of the percentage of bears is currently at 39.4%, a high level. The 10-week moving average of the percentage of bears peaked at 43.0% at the major bear-market low during 2002. The 50-week moving average of the percentage of bears is currently 36.8%, an elevated level seen during only two other periods since tracking began in the 1980s. Those periods were October 1990-July 1991 and March 2003-May 2003, both of which were near major stock market bottoms. The extreme readings in the 50-week moving average of the percentage of bears during those periods peaked at 41.6% on Jan. 31, 1991, and 38.1% on April 10, 2003. We are currently very close to eclipsing the peak in bearish sentiment during the 2000-2003 market meltdown, which I still find astonishing, notwithstanding the recent correction. The S&P 500 is 108.6% higher from October 2002 lows and is only 1.3% lower from its recent record set in July. While the percentage of bulls has rebounded recently, I would have to see several readings in the high 50s-low 60s before becoming concerned. US stock mutual funds have seen outflows for most of the past 5 years, there has been an explosion in low correlation/negative correlation US stocks strategies, there have been huge spikes in gauges of investor anxiety over the last couple of years on relatively mild market pullbacks, a fairly large chunk of the public generally hates US stocks and says they won’t ever invest in them again, the mainstream press obsesses with what is wrong or what could go wrong and long-term investors are denigrated, while day-trading is championed as a crash is always seen as just around the corner. I continue to believe overall investor sentiment regarding US stocks has never been worse in history with the S&P 500 right near a record high, which bodes very well for further outsized gains. I expect US stocks to trade modestly higher into the close from current levels on short-covering, bargain hunting, less economic pessimism, lower energy prices and investment manager performance anxiety.

Incomes Rise, Spending Jumps, Inflation Decelerates, Manufacturing Healthy, Construction Spending Rebounds, Confidence Still Low

- Personal Income for August rose .3% versus estimates of a .4% gain and a .5% increase in July.

- Personal Spending for August rose .6% versus estimates of a .4% gain and a .4% increase in July.

- The PCE Core for August rose .1% versus estimates of a .1% gain and a .1% increase in July.

- The Chicago Purchasing Manager Index for September rose to 54.2 versus estimates of 53.0 and 53.8 in August.

- Construction Spending for August rose .2% versus estimates of a .3% decline and a downwardly revised .5% decline in July.

- Final Univ. of Mich. Consumer Confidence for September fell to 83.4 versus estimates of 84.0 and a reading of 83.8 in August.

BOTTOM LINE: Consumer spending in the US rose more than forecast in August, despite the credit market turmoil, and real consumer spending rose the most in more than 2 years, Bloomberg reported. Moreover, the core PCE, the Fed’s favorite inflation gauge, rose 1.8% year-over-year, the smallest gain since February 2004. This inflation gauge is also well below the long-term average of 2.5%. Inflation-adjusted spending on durable goods, autos, furniture, and other long-lasting items, surged 2.8%. Receipts at automobile dealerships and parts stores rose the most since July 2006. Considering the gloom and doom perpetuated 24-7 in almost every media outlet during the month of August, the consumer spending number was very impressive. As well, the 10-year yield is falling another 3 basis points today as investors continue to ratchet down long-term inflation expectations. I still think inflation worries have peaked for this cycle and the long-term trend of disinflation remains firmly in tact, despite the rise in commodities and decline in the dollar which are being driven mostly by investment fund speculation. I expect consumer spending to remain relatively healthy over the intermediate-term as sentiment improves, housing fears subside, inflation continues to decelerate, interest rates remain low, the job market stays healthy, the unemployment rate remains historically low and stocks continue their major bull run.

US business activity accelerated more than expected this month as production and employment expanded and a measure of prices companies paid fell to the lowest since January, Bloomberg reported. The new orders component of the index fell to 56.2 from 58.4 in August. The inventories component fell to 38.2 from 44.6 the prior month. The order backlogs component jumped to 50.5 from 38.8 in August. The prices paid component plunged to 59.0 from 71.8 the prior month. Moreover, the NAPM-Milwaukee Index soared to 70, the highest on record going back to 1998. As well, the New Orders component of this index jumped to 81, also the highest on record. I continue to believe manufacturing will help boost overall US growth over the intermediate-term as companies gain confidence in the sustainability of the current expansion and rebuild depleted inventories.

The final reading on consumer confidence for September came in slightly below estimates, Bloomberg reported. I expect consumer sentiment to rebound sharply during the fourth quarter as stocks make new record highs, energy prices fall and housing fears subside to an extent. I still expect both main gauges of sentiment to rebound back near cycle highs over the intermediate-term.

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