Those 3 words -- better than expected -- are all it takes for the market to rally right now.  This week we've already been able to say it regarding the ISM Manufacturing index, ISM Services Index, and Weekly Jobless Claims.  This morning we can say it about the September Payrolls Report.

Don't get me wrong, none of the economic numbers are anything to get too excited about -- more on that when I post my economic update either late today or on Monday.  The reason the market can rally with these reports is because they are not as bad as everyone was pricing in just a few weeks ago.  When you combine these better than expected numbers with the rumors that the leaders in Europe are getting more serious about their debt mess, it is easy to see why many people are saying we hit the bottom for the year earlier this week.

Of course all of that can quickly change if the talk in Europe doesn't turn into some sort of action that stems the bleeding in their banking system.  Already this morning we are reminded of the trouble across the pond.  Moody's has announced that they downgraded 12 UK financial firms along with 9 banks in Portugal.  In both cases they cited exposure to bad loans and holdings of European debt. 

Just as the market was becoming too pessimistic, leading to the ability to rally on better than expected, while still weak, economic data, the market will run the risk of getting too far ahead of itself if real improvements are not made.  As mentioned yesterday, our Price Divergence System liked the action off of the lows this week and jumped in.  Yesterday our Trend Capture System also bought into the rally.  When offset with the final sells from our Volatility System (which buys when the market is oversold and sells when that condition is alleviated), our exposure has increased to 27% for our Enhanced Growth Program and 24% for Enhanced Portfolio Allocator. 

As the market heads back to the top of the trading range, these two systems will be monitoring the internal strength of the rally to determine if there is potential to finally break through the top of the range.  If not, they are likely to retreat back to cash.

We are heading into another weekend where we've yet to see a real solution proposed to handle the European financial mess.  If they continue to just float rumors without any real actions, sooner or later it will be too late to save many of their banks. 

As always we will be watching your clients' money all day, every day for signs of strength or weakness.  We will keep you posted if there are any changes in our positions or our outlook.

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