The major indexes finished higher as the theme for the week was lower oil prices, lower bond yields and increased optimism that the Fed may be able to remain on the sidelines for a bit longer than originally anticipated. Oil slipped to its lowest level in roughly 5 months as well, nearly breaking below the $66 per barrel mark. If you recall, it wasn't too long ago that oil was trading just below $80 per barrel. This decline (largely on account of the end of the summer driving season, and perhaps some of the speculation coming out of futures contracts) was a welcomed development for the equities markets, since it likely helps take some of the pressure off the Fed as far as inflation pressures in commodity prices.

Speaking of pressures, it seems there is a growing view that the economy will avoid a recession, even though the housing market is showing signs of slowing down. Recently, it appears the stock market may be pricing out the possibility of a economic contraction to the point of recession. While it's still premature to say for sure, this certainly would be bullish news for stocks. As I mentioned previously, recessions are never beneficial no matter how you slice them. A soft landing for the economy and/or the housing market, on the other hand, could be viewed rather positively (especially compared to the alternatives). For now, it appears the equities markets are pricing in more of a soft economic landing, as compared to a recession/hard landing.

Looking ahead, this week will bring several closely watched economic reports. On Thursday, Initial Jobless claims and Retail Sales figures will likely be the highlights of the week. With the Fed on hold, but certainly not far from the minds of traders, these reports could very well be market-moving events if any indications of inflation are seen. Nevertheless, for now, my view remains one where the Fed remains out of the market through most (if not all) of 2006 and the economy avoids a full blown recession. Even though the housing market appears to be cooling down, I feel that the economy will likely still remain fairly intact during the rest of this year.

The one area to keep a close watch on is the upcoming FOMC meeting scheduled for September 20th. While it's generally accepted that the Fed will not make any changes to interest rates, changes to their bias and/or language could have the ability to move the market and/or influence market direction in the near-term. For now, I would call it cautious optimism. However, given the fact that the markets have rallied towards new higher ground recently, I would still suggest some caution moving forward on the long side. This is especially true given that September and October are traditionally difficult months for the markets.

Please feel free to email me with any questions you might have, and have a great trading week!

Chris Curran

Chris Curran started his trading career at the age of 22 with a national brokerage firm. He combines fundamental and technical analysis to get the big picture on the market. Chris has been trading for 15 years, starting full time in 1997, and has never had a losing year as a full-time trader.