We had an impressive GDP report last Thursday, which sent the market up nicely that day. The following day (Friday), the market appeared to suffer from buyer’s remorse after finding that most of the GDP gain was due to the fiscal stimulus. As a result, we lost all of the previous day’s gains and then some. The market was able to stay in the positive territory today, helped by good news flow on the economic and earnings fronts.

For my first weekly commentary, I want to discuss my market outlook – to provide readers with my take on the market’s course going forward. This is important given a busy economic calendar, with the Fed’s FOMC meeting ending on Wednesday and October payroll numbers on Friday.

The strong third-quarter earnings season to date and the equally strong third-quarter GDP report are evidence that the market’s impressive run up from its March lows had a basis – that it was not based on wishful thinking. The recession’s unofficial end, albeit with substantial government help, was important.

With temporary fiscal stimulus measures, particularly the cash-for-clunkers and first-time home buyer credit programs, accounting for a big chunk of the third quarter growth. It is fair to be concerned about the sustainability of economic growth going forward. There is still substantial fiscal stimulus in the pipeline, which should keep the economic engine running, at least through the middle of next.

We need to see the growth baton passed on from the government to the private sector, with some favorable evidence that trends in investment and hiring are on the mend. Later this week (Friday), we will get the October employment. With about a tenth of the workforce out of work, the labor market weakness remains a major problem. We have been steadily seeing the job loss rate come down, with October losses expected to be around 166,000, down from the September level of 263,000 jobs lost.

What it all comes down to is that the economy is on the mend and further evidence of the sustainability of the economic growth will help push the broader markets higher. While lack of visibility and conviction is expected to keep the market range bound, I do not see any major downside risk near term.

Portfolio Updates

Last week, we added one and sold three stocks from the Focus List.

Cantel Medical Corp. (CMN) was added to the Focus List. This medical supply company specializes in preventing and controlling infections, including H1N1. The company’s estimates are going up, after a 65% jump in quarterly earnings.

China Fire and Security Group (CFSG) was removed from the portfolio to cut losses resulting from the loss of momentum in Chinese equities.

Canadian Natural Resources (CNQ) was removed to take profits in the face of negative estimate revisions, as two out of the five covering analysts cut their estimates in the last 30 days.

Carter’s Inc. (CRI) was removed following the company’s announcement of a delay in its quarterly earnings report due to an accounting issue around its wholesale customers. While the stock had already lost around 25% of its value after the announcement, we are not comfortable owning names grappling with issues like these.

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