If you pay attention to financial news, you’re already aware that the Dow Jones Industrial Average soared to a new high this week. While that is certainly noteworthy, it is important to keep it in perspective the the context of the overall markets.

The Dow is composed of 30 stocks. Historically, these have been some of the biggest American companies–the bluest of blue chips. These are the stocks investors and traders turn to when they have some uncertainty about the stock market. And this is the index that is doing best right now.

Most of the Dow stocks trade on the New York Stock Exchange (NYSE). There are more than 2,000 NYSE stocks, so the Dow represents just a fraction of those. However, NYSE stocks are generally considered more traditional and solid than those that trade on other exchanges.

The chart below shows year-to-date performance for the NYSE (black line) compared to the Nasdaq. Notice that not only have these indices not reached new all-time highs, they are still each below their highs of earlier this year. In the case of the Nasdaq, it is still about 5% below the high it achieved in April.

Some analysts use a comparison between these two exchanges to help determine optimum periods for market investment. Nasdaq stocks are generally smaller companies, often with a technical emphasis. The reasoning is that when the Nasdaq is advancing faster than the NYSE, it is a sign that investors are confident about the economy. There is some pretty compelling historical evidence that this reasoning has real merit.

For most of this year, the NYSE has held the dominant position in this comparison. That changed about six weeks ago. Since then the Nasdaq has advanced about 10% while the NYSE has moved up just 4%. Combined with the other technical and fundamental factors we’ve detailed in recent weeks, this is one more reason to have hope for a significant rally between now and the end of the year.

So while the Dow is the first index to set a new high this year, we hope others will follow in the days ahead.

F.S.

If you would like an investment strategy that attempts to minimize risk but still provides the opportunity for solid growth, check out the Foundation Strategy from Strategis Financial Group. This actively managed strategy is designed to take advantage of the experience and expertise of some of the nation’s best mutual fund managers. To learn more, call Mark Sumsion or Scott Garbutt at 800-279-3377.

You requested this MarketOwl free e-newsletter. Please add support@marketowl.com to your e-mail address book to ensure prompt delivery.

Editor’s Note: MarketOwl is a totally free publication. We hope you find the commentary interesting, insightful and valuable. If so, please encourage your friends and acquaintances to sign up.

As expected, Federal Reserve official left interest rates unchanged when they met this week. With only two meetings left this year (Oct. 24-25 and Dec. 12) it appears likely that we might not see another increase in 2006. Combined with some fairly powerful fundamental economic factors, it appears that conditions are ideal for stock markets to stage a nice advance through the end of this year.

After a fairly major correction that began in May, major stock indices began advancing again in August as traders and investors anticipated that the Fed was nearing a pause after 17 consecutive rate hikes. I have a high level of confidence that the rest of this year provides one of the best investment opportunities we’ve seen this century. I’ll detail some of the reasons below, but take a look at the following chart.

The black line is the S&P 500 and the gold line is the Nasdaq. Notice than since the start of 2004 the S&P has been in a gradual upward trend. The Nasdaq has been more volatile and has only advanced about 5% during that time. The blue line is a 200-day moving average. You can see that the S&P crossed back above that average a few weeks ago. The correction that occurred this summer was fairly significant–one of the worst in the past five years. It turned a lot of investors and managers bearish, but I think fundamental and technical conditions no favor the bulls.

The bottom section of the chart above is the P/E Ratio of the S&P 500. This widely watched indicator is at its lowest level in the past five years. There are still plenty of experts who will argue that stocks remain overvalued. Whether that is true or not, they are obviously less overvalued than they have been for many years.

Business is generally good. For the first two quarters in 2006, most businesses reported quarterly earnings that were ahead of expectations. That should continue as third-quarter results start coming in in early October.

Unemployment levels are below 5%. That happens to be the level that many economists believes marks full employment. In many areas, employers are struggling to fill industrial and manufacturing positions that traditionally never go unfilled.

GDP remains positive, but is not so strong that the Fed will feel obligated to continue raising interest rates.

Ditto for inflation. It is still there, but doesn’t seem to pose an immediate threat.

We are only a couple of weeks away from the start of the extended Christmas shopping season. Consumer spending over the next three months will provide a substantial boost to the retail economy.

Oil prices are dropping, leaving more money in consumer pockets for holiday spending.

In addition to these fundamental reasons for the market to keep advancing, right now just about any technical indicator you can think of is also positive. I’m not convinced we will see a major rally that will add 20% or more before the end of the year. But I do think all the major indices will end 2006 in the black and at multi-year highs.

Energy funds weakening as price of oil falls

I don’t normally like it when fund charts look like the one below. But in this instance, I’m thrilled. The chart shows the performance of Select Sector SPDR - Energy (XLE) and it is fairly typical of most energy and natural resource funds right now. The gold line is a 200-day moving average and the chart shows that after trending well above that line for the past two years, the fund price is finally falling. Naturally this move is directly correlated to the falling price of crude oil on world markets.
 
 

If this move continues, it will only mean good things for the overall economy. It will provide a major relief to inflationary pressures and give consumers a little bit of breathing room. High oil prices tend to have a dampening effect across the economy. They impact virtually every business and consumer. So after several years of watching these funds advance, its nice to finally see some signs of weakness.

I know I personally felt a little relief today when I filled up my diesel pickup and paid $3.09 a gallon. For many of you that still sounds like a high price, but a month ago I paid $3.60.

I hope the first weekend of the fall season is wonderful for you. I’m looking forward to some college football and some cool weather.

F.S.

If you would like an investment strategy that attempts to minimize risk but still provides the opportunity for solid growth, check out the Foundation Strategy from Strategis Financial Group.  This actively managed strategy is designed to take advantage of the experience and expertise of some of the nation’s best mutual fund managers. To learn more, call Mark Sumsion or Scott Garbutt at 800-279-3377.

You requested this MarketOwl free e-newsletter. Please add support@marketowl.com to your e-mail address book to ensure prompt delivery.

Editor’s Note: MarketOwl is a totally free publication. We hope you find the commentary interesting, insightful and valuable. If so, please encourage your friends and acquaintances to sign up.

Over the past 30 days, market momentum has decidedly shifted toward the technology sectors. That usually happens in the early stages of a major market rally. Combined with other indications of underlying market strength, this is providing traders and investors with hope for a solid advance in the final four months of 2006.

In spite of positive gains in most sectors over the past month, a few analysts are still on the sidelines, viewing the current move with distrust. But this move is providing every indication that it is real and could be substantial. For example, there are currently about 300 exchange-traded funds (ETFs), representing virtually every market sector and every major index. Over the past month, only 40 ETFs have had a negative return. Most of those are energy or natural resource funds or funds that short various market indices.

In other words, this is a broad-based move that appears to be building momentum.

The technology ETFs have produced gains of 8% to almost 21% over the same one-month period. While that’s impressive, it might not continue much longer. While the tech sectors tend to lead early during bull rallies, other sectors usually gain strength as the bull market matures. Those would include sectors like transportation, health care, insurance, brokerages, real estate, telecommunications and more.

Below is a list of the top 100 ETFs and their returns over the past month. (The EXTRADED designation merely identifies the investment as an ETF.)

Investors should also keep in mind that oil prices have fallen sharply in recent weeks. Those lower oil prices are expected to continue for some time and should help keep inflation controlled. That means there will be less pressure on the Federal Reserve to raise interest rates again anytime soon. The next meeting of the Federal Open Market Committee is less than a week away and obviously Wall Street is feeling more comfortable about the declining likelihood of another interest rate hike.

Many individual funds are trading at their highest levels of the year. That is still not the case for major indices like the Dow, S&P 500 and the Nasdaq. But even these indices are at four-month highs and within striking distance of the highs reached back in April. Those who are not fully invested yet probably still have time to jump in. This market advance has all the signs of a rally that should develop into a longer trend.
You requested this MarketOwl free e-newsletter. Please add support@marketowl.com to your e-mail address book to ensure prompt delivery.

Editor’s Note: MarketOwl is a totally free publication. We hope you find the commentary interesting, insightful and valuable. If so, please encourage your friends and acquaintances to sign up.

I dig quite a few post holes. In fact, on a consistent and ongoing basis, I might dig more post holes than any other investment advisor in the country. It seems like my yard always has fence that needs to be put up or repaired. For example, a few weeks ago a windstorm blew over a 50-foot section of board fence and snapped three posts off at ground level. I also have a small section of pasture that I need to finish fencing before winter and it will require about 15 more post holes.

I know what to expect when I am digging a post hole. The ground on my property has heavy clay soil and lots of rocks–many of them quite large. It is about the worst combination one could encounter for digging post holes. The holes are all dug by hand using a shovel and a heavy digging bar. Once in awhile I’ll hit a section of sandy soil with very few rocks, but that is quite rare. I can normally count on two to three large rocks per hole and dozens of smaller rocks. Most holes take about 45 minutes to dig. I can only do four or five in a session before I get too worn out and have to switch to a less strenuous activity.

Just as experience has taught me what to expect when digging post holes, two decades of market watching have given me a pretty good feel of what to expect when investing. I certainly don’t mean I can predict what stocks will do tomorrow or the exact level of the S&P 500 two months from today. But I know that the indices will fluctuate from day to day and week to week as part of their normal pattern of movement. The fact that major indices have been down for a few sessions is no more unusual than me finding a rock when I am digging a post hole.

I’m always surprised by people who are emotionally connected to these short-term market movements. They are despondent on days when stocks are down and euphoric on days when the market advances. One market pundit I read has been warning his subscribers for months about an imminent major bear market. A couple of weeks ago he finally advised his readers to close out their short positions. Now, based on just a couple days of downturn, he is again advising them to buy short funds.

The chart above is similar to the one I included last week. The black line shows the daily price activity of the Nasdaq. The gold line is a simple 50-day moving average. Notice that since bottoming in mid-July, the Nasdaq has had a steep rally. The sharpest portion of that advance was the last three weeks of August. It is normal for the market to correct after such a move. In fact, it would not be surprising to see the Nasdaq drop all the way back to its 50-day MA before resuming its advance. There is no reason to fret or worry about this latest move unless the Nasdaq drops below that level.

The next meeting of the Federal Open Market Committee is Sept. 20. Wall Street traders and corporate America are nervous about what the Fed will do with interest rates at that gathering. Between now and then, the market will decline every time a report shows economic strength and rise with each report showing weakness. My own opinion is that the Fed’s decision in August to hold interest rates stable after 17 consecutive increases means it is highly unlikely that Fed officials would raise rates again now. Fed officials tend to act deliberately. They understand that changes in interest rates take months of show up in the economy. I think there have been enough signs of economic slowdown that they will hold the line for the rest of 2006.

Of course, it is possible that something unexpected could happen. Occasionally while digging a post hole I’ll hit a rock that is too big and I end up having to move the hole or make it bigger. When that happens it might take two hours to finish one hole. But such instances are rare. And as far as the markets go, the chance for a major meltdown like we saw in 2000 seems very remote. Right now the economy is still strong. Unemployment is low. Inflation seems fairly under control. The price of oil is falling. Technical and cyclical indicators for stocks are generally strong right now. There is really nothing to indicate that the recent few days of weakness are anything more than a normal consolidation after a rally.

Have a great weekend. Feel free to come help me dig a hole or two.
You requested this MarketOwl free e-newsletter. Please add support@marketowl.com to your e-mail address book to ensure prompt delivery.