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Monday, October 02, 2006

Bob Brinker Timing Model Update For October

Steve Thompson’s Bob Brinker Timing Model Update For October 2006

Steve gives his update of Bob Brinker's Market timing model indicators. At the end of the article, Steve predicts if Brinker will remain bullish or turn bearish.
  • Steve Thompson's Bob Brinker Timing Model Update For October 2006

    The stock market is performing beautifully as we begin the fourth quarter. It seems some of the cash on the sidelines came into equities in September as oil prices dropped. It looks like earnings are going to be strong and bond yields have dipped, so investors have been gravitating towards stocks. With no major weather interruptions and things calming down in Iran and North Korea the near term looks hopeful for the U.S. stock market. It is possible the Mid term presidential cycle lows came earlier this year, in June. Those that bailed out of the market in May and hoped to get back in this autumn could do so now with only a minor loss after sitting out a shaky summer.

    Let's see how Bob Brinker maybe interpreting his model as we begin the fourth quarter.

    Valuation: We shouldn't be surprised to see the S&P 500 near recovery highs with the lack of bad news lately. Using Bob's $82 estimates for 2006 S&P 500 earnings we get a P/E in excess of 16. Investors are comfortable and could very well drive the multiples higher. For now the market is undervalued. Valuation is bullish.

    Monetary: Real seasonally adjusted M-2 money supply is still sluggish coming in at a meager .7% annual growth. The next two CPI releases are going to be worthy of attention as we hopefully work through the energy induced inflation spike last fall. I have noticed of late Bob is much more happy with FOMC chairman Ben Bernanke after they paused in August and September. Towards the end of this year the effects of the last rate increase of June should be working its way through the economy. For now I see this indicator as neutral.

    Economic: Final Second Quarter GDP came in a 2.6%. This should be no surprise, as we all know housing has cooled. I did notice a couple flies in the GDP ointment. The core inflation component of the GDP report, personal consumption spending was revised down to 2.7% from 2.8%. This is hotter than the FED would like. Corporate profits took a big hit, revised down to a measly 0.3% from 2.1%. Is this an early sign future earnings will take a beating? Or is it the normal ebb and flow nature of the business cycle? We shall know in the fullness of time. Last Friday's Chicago PMI report surprised economy watchers coming much stronger than expected. Conversely the ISM numbers came in soft and could be indicating slower growth ahead. Look to the September jobs report on October 6th for some guidance in sorting this all out. For now I'd rate this indicator as bullish, we are still growing but not at a pace that warrants short term rate increases.

    Sentiment: The Investors Intelligence survey has been very stable all summer and is now working its way to the upper 50s territory. It still shows a healthy level of respect. The latest four week moving average of bulls/(bulls+bears)= 57.38%. As we look to the 10-day Put/Call ratio we see .95, which is shows plenty of pessimism. The 60-day level is even more impressive coming in at .98! As a contrarian indicator this is bullish.

    CONCLUSION: I believe Bob Brinker is still bullish on the market as we are one good day away from his minimum target on the S&P 500 of 1350.

    Steve Thompson
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