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• Our title is due to the Wall Street reaction to strong numbers vs. our reaction to the better than expected recent economic reports. It is stunning how uniform the skepticism toward equities is due to Friday's "poor" performance on great fundamental news. Meanwhile, advancing issues and volume beat its declining counterparts on the NYSE on Friday despite the negative showing on the indices.

• The October payroll gain and positive revision to the September reading reinforce the trend of labor improvement that began months ago. In Labor of Love (10/31/03) we highlighted how the trend of employment growth had begun turning months ago. Once that happens, it usually STAYS turned for some time (Exhibit 1). This is very important because it suggests the economy is JUST BEGINNING to transition from the Fed driven to earnings driven phase of the economic cycle. So far this market has been about liquidity, now is turning to the sustainability of economic and corporate profit growth.

• The reason to pay special attention to this transition now is that a combination of significant stimulus early next year (tax rebates) plus building economic strength due to an improving income picture suggests it may be a tad early to call for any peaks - whether economic or equity market related, especially given current Fed policy.

• Typically, major tops are not associated with skeptical psychology, especially when there are few if any signs of intermediate-term technical deterioration (overbought does not count as deterioration) after an economic trough.

• Even in the strongest markets, there are periods of consolidation/correction where the action can whipsaw both traders and investors. Our underlying thesis is that could be more upside ahead in the equity markets over the intermediate-term, and the decision isn't whether to be increasingly negative, but when to "not chase," and wait for better prices to become more enthusiastic. The equity market may "chill" for a bit in order to attract enough demand to move stocks broadly higher. We believe the risk is to sell in anticipation of a big sell off that may or may not materialize, and not putting the money back to work.

Exhibit 1 - Once the Labor trend changes after a negative reading, it stays changed for a while

Chart courtesy of FTN Financial

Exhibit 2 - The S&P 500 (SPX) remains overbought and is likely to "Paws"

Chart courtesy of Baseline
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