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Conclusion: Sentiment is at maximum levels.  This is another indicator to watch carefully as this market continues to echo the mania of 2007.

With much of Wall Street focused on the election and upcoming Federal Reserve Policy Announcement, it is interesting to look at the sentiment that has bolstered this recent stock market rally.  Clearly it is not news that sentiment is high among investors but the chart below paints an alarming picture of just rose-tinted the Street’s glasses are.  As LBO rumors and guesstimates of how sizeable QE2 might be have driven the market, the underlying economic climate has remained fragile.  The clear and lucid picture of GDP growth propped up by government spending and inventory build is a stark reminder not to follow the herd.  I discussed this point in greater detail in the Early Look yesterday, titled, “VERSIONS OF THE TRUTH”.

Looking past the Federal Reserve announcement today, the next ball to catch is the Retail Sales numbers that are due to be released tomorrow.  Eric Levine, Director of Retail at Hedgeye, had the following insights ahead of tomorrow’s releases.  The question is, does the market – and the elevated level of bullishness – bake in the significant downside risk suggested by the commentary below.  As Eric told me, the preponderance of the commentary around the building products companies of late suggests slowing within 3Q.


  • With cold weather comparisons at their toughest for the month of October, we believe solid Halloween sell-throughs will be mitigated by weak overall demand for seasonal apparel.
  • With the next major catalyst being Christmas (kicked off by Black Friday), it’s unlikely that any tangible improvement in sales momentum materializes over the next few weeks.  We fully anticipate that holiday sales will materialize, although in a manner in which it will be difficult to guage in real time.  Recall that holiday sales generally occur later and later each year as well as even after 12/25. 

Howard Penney

Managing Director