GDP Report

Friday morning, the preliminary Q3 GDP report was released. While the growth rate, 3.8%, was slightly higher than expected, the media has attributed the large stock market rally to this report.

Screen the media in a situation like this. Everyone knows that Q3 is history and Q4 growth will be slower than the Q3 value. Why the stock run-up then? Partially it was a short-covering rally, where shorts, persons who are betting that the market and individual stocks will be declining, sell borrowed shares of these stocks from their brokers. IF all goes as planned, and the stock prices decline, they can then purchase the shares of these stocks to replace their borrowings at a lower price, giving them profit. On rally days like yesterday, stock prices rise, meaning they will have to pay more to buy the replacement shares, either limiting profit or resulting in an outright loss. So, they often "pull the trigger" and purchase the stocks, leading to further increases. If you graph the Dow-Jones Index ($INDU), you will see two major resistance hurdles for the next couple of weeks: the 50-day MA at 10,437 and the 200-day MA at 10,500. Beyond this, the declining resistance line is at 10,640. Will another bounce off this resistance occur? Stay tuned.

Look at the dollar on days like this. The dollar was higher, and both stock and bond prices rose. What does this indicate? A capital inflow from overseas investors whose overall fears about the future course of the US economy were temporarily pushed aside (remember, they are still unsure about Fed Chair designee Bernarke).

Read about the Q3 GDP report, and remember the "tricks" I showed you about how to summarize all of this data. Look for the significant changes in items from last quarter (Table 1 is % changes, Table 2 notes contributions of individual elements). Remember: this is a preliminary report, where inventories are estimated (September data is not in yet). The same is true for Net Exports.

Keep an eye on Government -- its contribution rose significantly in Q3 as Gulf Coast relief efforts began. This will intensify in Q4, helping that quarter's final value. For durable goods, especially auto sales, sales were higher in Q3. I doubt they will do as well in Q4 as the big discount programs are largely over and they "borrowed" some sales that would have occurred in Q4.