Some of the broad indexes are at the 60% or higher recovery level since the March lows were registered and all of the major indexes are at new highs for 2009. In spite of the myriad of reasons for this market to go down, it continues to advance.

None of the bearish seasonal indicators are working. For example, the month of September is historically the weakest month of the year for U.S. equity prices and October is usually not much better.  Another failed seasonal is the bearish presidential term indictor. The first year of a presidential term is often the weakest for stock index futures, since the “giveaways” in the third and fourth years of a presidential term are “taken back’ in the first year of a new president’s term. That certainly has not been the case in 2009. Since the fundamentals remain bullish, it should be no surprise that the bearish seasonal signals have failed. Seasonal tendencies are not the best indicators of future price movements, except when they are in line with the fundamentals. We are predicting that, as long as the fundamentals remain bullish, all the bullish seasonal indicators will work, while all of the bearish seasonals will fail.  There is a bullish seasonal that is coming into play soon.  History has shown that November has been the best performing month for the S&P 500, on average, since the early 1950’s.  We can expect that this bullish seasonal will work, since it is in keeping with the stronger economic fundamentals.


On September 23rd there was a one day reversal sell indicator on the daily S&P 500, Dow Jones and NASDAQ 100 futures charts that received quite a bit of attention from commentators on the television business channels.  The one day reversal pattern top is characterized by a single day spike to the upside, making new highs for the move and then falling below the previous day’s low and closing near the day’s low and below the previous day’s low. Volume on the day of this pattern is often heavier than usual.  This bearish signal appeared to have attracted new selling that put additional pressure on the market. Follow through weakness lasted for seven more days before the bullish fundamentals reasserted themselves.  It wasn’t long before the new shorts that were drawn into the market were forced to cover at higher prices.   Technical indicators tend to work the best when the fundamentals are giving the same signals. The fundamentals remain bullish, which was contrary to this bearish one day reversal pattern. No wonder this sell indicator failed.




The October 2nd bearish nonfarm payroll report marked the end of a seven day correction to the downside. Prices have been up almost every day since then. Anytime a market is able to advance on bearish news it is a sign that prices are likely to move higher. Bearish news continues to be ignored, as futures prices continue to advance.   The “opposite reaction to the news indicator,” is telling us that higher stock index futures prices lie ahead.    


For several months corporate directors and officers have been selling stock in their companies by a very wide margin over what they are purchasing. How can hundreds of corporate insiders be wrong?  Since it is commonly believed that corporate insiders have a very good handle on current market trends, many traders tend to follow what the insiders are doing in the market. This “informed” selling, so far, has not been a useful indicator of market trends.


We are seeing corporations selling substantially more stock than they are buying back. Additional supply in the past has had bearish ramifications, since corporations are thought to know their industry better than the general public. Also, mutual funds and pensions are selling U.S. consumer stocks.  Why have stock index futures prices continued to advance in spite of all of this “quality” selling that has come into the market?


There is some concern that stock market valuations have gotten substantially ahead of themselves, in light of the current relatively high price to earnings ratios for S&P 500, Dow Jones and NASDAQ 100 companies.  So far, corporate earnings for the third quarter have been better than analyst’s estimates. We continue to believe that it is likely that stronger than expected increases in earnings later this year and in 2010 will justify what many analysts believe are excessive P/E ratios.


There are many more bright spots that beginning to emerge internationally. For example, Canadian employment data surprised on the upside. It was recently reported that employers in Canada added a net of 30,600 jobs, which compared to expectations of only a 5,000 increase. The unemployment rate in Canada dropped to 8.4% in September from 8.7% in August. European economic reports have been much stronger than anticipated.    For example, Royal Philips Electronics, which is Europe’s largest consumer electronics manufacturer, posted a profit against expectations of a loss. Australia’s economy has been so strong that the Reserve Bank of Australia decided to increase their benchmark interest rate by 25 basis points to 3.25%. Also, it is widely expected that the Australia’s central bank will increase interest rates again by another 25 basis points at their November 3rd meeting. China’s economy has been strong, as well. It was recently reported that China’s imports of iron ore increased to a record last month. Copper imports also increased. It appears that the global economy is recovering faster than most analysts had expected.

 


Throughout this seven month advance in stock index futures, it seemed as though there was never ending talk that the economy would weaken, especially after the effects of the various government stimulus plans diminish or are withdrawn. Our analysis continues to tell us that we can expect the majority of the economic and corporate earnings reports, for the balance of this year and well into 2010, to be stronger than the consensus view. This will continue to support this emerging bull market in stock index futures, which we believe is in the early stages of a multi-year up move. Our research continues to tell us that any correction should be viewed as a buying opportunity.                
 
If you have questions or comments about this article, please contact Alan at 1.800.243.2649 or send him an email to alan.bush@archerfinancials.com.

Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The views and opinions expressed in this letter are those of the author and do not reflect the views of ADM Investor Services, Inc. or its staff.  The information provided is designed to assist in your analysis and evaluation of the futures and options markets.  However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright © ADM Investor Services, Inc.