It has been a long time, maybe too long, but it finally happened for the first time in more than a while – the economy actually created jobs last month (oh, yeah – the Cubs won a series for the first time in 95 years – it just might be the water!). While the mournful Cub fans rejoice, investors did a bit of celebrating on Friday, pushing the market back up near the yearly highs on very good volume. While the employment report looked pretty good, there were (aren’t there always) a few warts as many of the newly created jobs were temporary positions in the service sector and manufacturing job growth remained very poor. The average hourly earnings also dropped for the first time in 14 years. Also lost in the shuffle of the jobs report was the decline in factory orders, certainly not a harbinger of economic growth. But investors, the ever forward looking (maybe next year?) souls they are will be focused on what many expect to be a very good earnings quarter. The Yom Kippur holiday may hold trading down a bit on Monday, but look for earnings to drive the market to new heights or back to last weeks lows. The minor turn in the daily data suggests the market may have completed its short and shallow correction and be embarking on a rally higher. Hope, especially in Chicago, runs high. (Go Cubs!!)

The “correction" ran eight days, retracing just over 60% of the entire increase from the bottom in early August, and now complete the market is once again racing higher. It is racing with the fuel from the temporarily unloved key sectors, technology and small/mid cap stocks. While the turn higher came on good volume, many of the indicators were barely registering oversold conditions. The weekly data wiggled, but really never turned lower. Any new advance phase of the market will have to begin on good volume, which we saw in the OTC market, not really in the NYSE. Also a requirement will be the ability of the market as well as the internals (advance decline line, net advancing volume etc) to also register highs – confirming the move. While this will not be able to be seen for a couple of weeks (as the rally develops) the initial push from the lows has been very strong. The concern (and there are always at least one) is looking at the weekly data, which is a better guide for the next 3-6 months remains at very high levels, indicating whatever rally occurs may be still weaker than prior advances. We indicated last week that the tug of war between the bullish and bearish camps should resolve this week, and the early indications are that the bulls wrested the baton from the bears. As long as the earnings season provides little in the way of “negative” surprises and the economy muddles along, the rally can continue. A once again lower dollar and higher yields, if persistent, could derail the market, but for another week, the bull lives.

As we have been highlighting over the past couple of weeks, the volatility in the bond market is rising, and quickly. Rates reversed late last week and shot higher as the Fed indicated no cut were likely and the job creation machine just may beginning to get going. The bond model remains positive, but barely so at 3/5 – losing the corporate bond market in the decline last week. If long rates, now at 5.10% move a smidgeon higher, the model will once again move back negative. A positive equity environment, with good earnings reports could be enough to once again register a negative reading on the model. We have remained hedged in the bond portfolios, expecting rates to remain well above their summer lows and likely remain in a broad trading range over the coming years. We believe the 20+ year decline in rates is likely over and a new era in bond yields (range bound) has likely begun.

The correction in the averages has barely touched the industry groups, as those on top a month ago (technology related) have remained at or near the top. What remains interesting is the actions and reactions in the more cyclical and basic materials sectors as they have been whipped around depending upon investors appetite for an economic recovery or despair over a slow growth economy. For example a small group, coal stocks, were out of favor all last year, rallied early in the year and bounced back and forth since, alternating between the top and bottom sectors. Once again on the move higher, they have maintained a trend higher and a few (Arch Coal, ACI and Peabody Energy, BTU) are nearing a multi year breakout higher. Big Steel (US Steel – X) and the big copper producer, Phelps Dodge (PD) also had relatively shallow corrections and have once again moved higher and are nearing multi year highs. Still mired at the bottom are the safe and consistent groups, like beverages and pharmaceuticals. Unfortunately, many of these stocks remain in downtrends and have done little, yet, to challenge the pervasive trend. A couple of drug stocks that may be trying to base are Bristol Myers (BMY) and Schering Plough (SGP). Both have big warts (lack of earnings growth, poor pipeline, SEC investigations etc). However they both have had reversals higher in the past two months and just may be trying to “put on a happy face”. The sector reaction to earnings this week should maintain the status quo as key stocks will be reporting later in the month.

So much for the correction, we blinked and missed it! We expect the market to trudge higher this week, as investors get ready for earnings season. The old favorites – technology and small/mid cap stocks should remain as leaders. Interest rates, with last week’s reversal, may continue higher over the week, so we are reluctant to chase yields much beyond 7-10 years.

© 2003 Paul J. Nolte, CFA
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The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.

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Paul J. Nolte, CFA
Director Investments
Hinsdale Associates
630-325-7100
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