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Friday, November 30, 2007

ECONOMIC DATA / NEWS

There was a lot of economic data this morning, and once again the markets ignored it.  We’ll start with consumer spending, which was presumably the big news for the day.  Yesterday’s GDP revision was written off as old news, and everyone was saying that the past quarter does not reflect what they expect going forward.  But then when consumer spending turned out to have gained just .2% last month, the Dow gained over 100 points within minutes of the opening bell.  There are two more big months consisting of holiday shopping to be reported before we get a clearer picture of where economic growth heading.  Personal income only rose .2% as well, and consumers weren’t about to spend that money when gas prices are soaring and future paychecks are in question.

All traders cared about were Fed Chairman Bernanke’s words.  Just one key phrase, “exceptionally alert and flexible,” was all they needed to hear.  This was taken to mean that the Fed is very open to another rate cut at their December meeting.  Stocks love this because they assume that companies will be able to grow quicker as borrowing costs are lowered, thereby increasing profits.  Bond traders have been a bit more baffled by the news.  They have yet to pick a clear path.

Chicago PMI was probably overlooked by most.  But, if anything, it added more confidence to the stock markets.  The index shifted back above the key 50 level between contraction and expansion.  It also beat forecasts by about 2 points, coming in at 52.9.  Manufacturing one of the two weakest sectors of the economy right now, along with housing.  The only difference is, people aren’t sure that manufacturing will ever recover.

The core PCE price index rose .2% in October, but inflation has remained well contained this year.  It is a distant second, in terms of concern by the Fed, behind economic stability.

The least important data today in the markets’ eyes was probably the .8% decline in construction spending in October.

TECHNICAL ANALYSIS

The FNMA 30-year 6.0% topped the six month high this morning, but it is currently unchanged from yesterday.  Not only do we have the long-term upward trend supporting prices, but a much sharper upward trend has developed over the last week and a half.  However, those sharper trends usually don’t hold for more than a couple of weeks, so we could see prices drop back down into a more steady range.

The 10-day moving average is rarely such a strong resistance level for this long, but it held once again this morning.  It has been pierced each of the last two days though, and, similar to a paper towel, if you poke enough holes in it, eventually it will break.  The stochastics are starting to climb out of overbought territory, which is also a threat to resistance.  The yield has traded widely over the last three days, but it has ultimately hovered around the 4.00%.  This is a huge psychological resistance level now, which is why trading has defied all other technical indicators this week.

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