Stock Market

As mentioned in posts of 10/13,10/16 and 10/24, the
stock market rally had become overbought and mildly
overextended as well. The overbought is now in the
process of being corrected.

The rally reflected a recovery of the market's p/e
ratio as investors began to factor in a deceleration
of inflation in an expanding but slowing economy.
But since the 10/26 interim high, the market has
weakened as evidence has accumulated that the economy
is slowing more rapidly than expected. This provided
a nice rationale for a bout of profit taking.

I have cautioned about a slowing economy for some
months as have most observers. The ISM report
for manufacturing supply managers released today
showed a drop from October's 52.9 to just 51.2%. This
confirms sluggish manufacturing. Readings below 45%
often signify recession. So the index has a fair way
to drop before a downturn would be an issue, but the
downtrend in this index has reached a point which has
induced jitters in the market. Also of interest here
is the fact that the Fed has often cut the Fed Funds
rate when this ISM index has dropped below 50%. If
the next reading of the index in early Dec. drops
below 50%, talk of a Santa Claus rate cut will no
doubt perk up and it would be interesting to see how
the Bernanke Fed might react.

For now I am stuck with a continuing expectation of
slow growth as the leading indicators I follow have yet
to show the kind of break that would suggest something more
serious might be in store.

That leaves me with the view that we are merely witnessing
the unwinding of an overbought situation.