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The Market's Week Ahead


The week coming up will see lots of economic reports, a Fed meeting starting Wednesday, vulnerable bank stocks and more...


Last week, the main focus was on the subprime mortgage mess, hedge fund blowups and widening credit spreads.

The contagion effect is making folks nervous and the S&P closed under the 50-day moving average for the first time since March. Whether this is a pause, a consolidation, or the beginning of a big correction remains to be seen; but higher interest rates are definitely not supportive. When looking at the 10 year yield and seeing that it has moved above the 50 and 200-day moving average, technical analyst John Roque wrote, "It's a trite line, but if the yield were a stock we'd be getting long." A black cloud hanging over the bond market creates a vicious circle - more subprime downgrades, increased counterparty risk, potential belly up hedge funds and liquidation which can feed on itself.

Bank stocks are vulnerable as Bank of America (BAC) is breaking an important trend line and has been under the 200 day moving average since May.

Wells Fargo (WSF), Wachovia (WB) and J.P. Morgan (JPM) are technically weak and looking as if they are struggling under the 200 and 50 day moving averages. This does not bode well for the market. Adding to the list of negatives, Friday, 14 Democrats from the US House of Representatives proposed a bill that would raise taxes on "carried interest." This would double the tax rate for this type of income as well as take billions away from private equity chiefs.

While everyone cheered the $4.1 bln Blackstone IPO (BX), on Friday, Andrew Barry ponders in Barron's if it "could be a high water mark for the private equity business." He is concerned with higher rates, more conservative lending standards, tax changes and increased competition for the buyout business.

In the week coming up we will be focused on the FOMC meeting starting Wednesday and looking for any hints as to direction in interest rates. The bulls are hoping they will remove that annoying inflation language, but I doubt it. Friday will report the core personal consumption expenditure deflater which is an inflation gauge the Fed likes to watch. The consensus is for an advance of 0.2%.

Speaking of inflation, Pizza Hut was forced to raise its prices on its favorite American food due to a 55% increase in the price of cheese. The signs are everywhere and I am afraid that producers cannot contain price increases; it is popping up in the food you buy and at the places you dine. Now, when you go to order your large cheese pie, they will charge what it used to cost to purchase a large cheese and pepperoni pizza, but you won't get the pepperoni. It will be interesting to see what ConAgra Foods (CAG) and General Mills (GIS) have to say about commodity prices when they report earnings this week.

The week is full of economic reports with Friday as the most active day. Traders will be watching oil prices, subprime news, hedge fund fall outs, and interest rate wording from the FOMC meeting. Technicians will be paying attention to the 50-day moving average, the percentage of Dow stocks above their 50-day moving average, and the number of new highs at the NYSE (which has been constricting lately). We will also be monitoring volume, which was large on this last downdraft. In market profile terms, 1528.00 is an important level. If we are unable to capture that number early, the market should stay on the defensive. Trades that worked well last week were shorting opportunities, as failures at the previous day's value area low were rewarding. Once the market failed there, it was typically a fast run down.

This morning we are coming in with the Shanghai market off 3.7 % and most commodities down with gold off $4.00.

Good Trading!

No positions in stocks mentioned.

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