Monday, May 05, 2008

Commodities Continue Their Recovery

- Jobs report, additional Fed action rev up stocks, but the stronger start doesn't last.
- Stock market still looking for some power in its move higher.
- Commodities continue their recovery despite that rising dollar.
- Jobs report provides encouragement, and economic data improved, but with energy and food prices surging, can robins be on the economy's yard.
- Watching the commodities, tech, financials, and transportation as indicators of the rally's health.

Stocks sprint out of the gate, but it was Friday, and that was used to sell.

The jobs report was better than expected with a 20K loss (-75K expected) and a lower unemployment rate (5.0%, 5.2% expected) was a nice bonus. The Fed was active as well, showing it meant what it said about using its facilities to continue adding liquidity as needed. It increased its auction amount to $150B from the $100B it bumped it to in March, it included triple A asset back securities as acceptable collateral, it jumped its ECB swap volume to $50B from $20B, and it doubled the swap amount with Switzerland to $12B.

The combination had futures bouncing, the dollar running, and bond yields rising. Basically the same action seen in the several markets of late as the understanding of the Fed's liquidity steps grows. Of course, after a good move Thursday, a strong open on a Friday begged some sellers to come in, and indeed the stock market was already peeling back in the first hour. First half-hour for that matter.

A better than expected factory orders report (1.4% versus 0.2%) reinvigorated stocks with a caffeine injection and they rallied higher, moving to new session highs after that quick pullback. The caffeine high did not last long; less than an hour into the session stocks were turning over again.

We used the move higher to take some gain off the table. We were not buying on the move. As noted in Thursdays report, it was Friday after a pretty good week, and that left the market vulnerable to some profit taking. We noted that any decent jobs report would be a head fake as we know that report lags other economic data, and despite some modest improvement in some reports (e.g. the ISM, factory orders) it would be a head fake as we know jobs lag all other economic data and the other data has not indicated any economic bottom.

The surprise on the day was the strength in commodities. They rallied back sharply Thursday afternoon post-FOMC even as the dollar ran higher. Same on Friday: dollar up, so were commodities. Is it a situation where there is such demand that a rising dollar won't blunt the commodity advance? Could be. We will know more about that this coming week when the end of month/beginning of month trade is over and things 'settle down' into a more normal routine.

TECHNICAL. Well, it was the old high/low routine: high at the start, lower at the close. A little too much excitement that we lost 20K jobs, and when you factor in that the numbers likely don't reflect reality, it didn't take too long for the early surge to start to purge. Within in an hour as it turned out. Not great action, but when you see futures that strong on data that conflicts with reality, you typically get this response.

INTERNALS: Modest. That is about it: modest. Breadth was slightly positive on NYSE (1.3:1), slightly negative on NASDAQ (-1.3:1). Volume faded on both exchanges, remaining below average on NYSE while remaining above average on NASDAQ. Now NYSE volume never did break above average on this move other than back in mid-March when it was putting together the bottom. That means it hasn't been there through a month and one-half of gains. Not the best price/volume action though volume was mostly up on upside sessions and lower on downside sessions, which is what you want to see. As discussed Thursday, however, you want to see some power in the moves and that means volume. Below average volume means that not everyone is participating, and if things turn it doesn't take much for the sellers to send a rally packing. As SP500 is heavy into financials and investors remain pensive about them, even though they are rallying there is not much support.

On the other hand, NASDAQ is showing above average trade on key sessions, i.e. when it breaks higher. That shows significant accumulation and the market needs growth stocks to grow in price if it is going to continue rallying. Financials are also key and they have low volume; definitely a tension here as the market really needs financials to be successful. NASDAQ's increased trade is very good. It needs to spill over into the financials, however, for a rally to be really successful.

CHARTS: Great moves . . . intraday. DJ30 cleared the 200 day SMA, its next resistance, but gave it up on the close. NASDAQ gapped to next resistance at 2500, and that was the high for the day. SP500 hit its longer term trendline and faded back as well. Great starts, mediocre finishes. Good breakouts Thursday, particularly on NASDAQ with its volume, then an unfulfilled promise at the close. They likely have a bit more upside to put in despite the Friday reversal before they rest again given the breakout was just on Thursday. Not a lot of upside, but a bit more.

LEADERSHIP: The Thursday leadership surged but then purged, though not a total reversal as stocks such as RIMM held their gains. Overall there was a definite industrial and commodities bias as the latter continued their bounce back from some harsh selling. Some were quite successful with their bounces and held their trends. Others look as if they are simply in a relief bounce after breaking their trends. Still looks as if tech is in good shape after maybe taking a breather here. Transports remain in excellent shape, and even retail continues to improve. The financials are still moving up; if they had volume they would be serious contenders for new leaders of the new year.

In sum, the market is still looking for power. NASDAQ is showing some strength though not clear power. NYSE is simply not showing power. Financials are the clear example: rising but no volume. If they get power then this rally will be a clearer indication of real market strength and thus a better indication of a rising economy not too far down the road. The light volume for NYSE and the financials makes the move suspect in the longer run, but for now the rally is working.


Economic data shows nascent signs of bottoming. Good but don't light up just yet.

Jobs were better than expected though still negative. Factory orders for March were definitely much better than expectations at 1.4% versus the 0.2% expected and the -0.9% in February. That February number was revised higher from -1.3%; revisions are where the truth lies because it is like having more than just one good data point. Definite improvement there. The ISM as not as bad as expected either but it was still below 50.

Maybe all of this is telling us the economic dip is bottoming. If that is the case that is truly amazing given the housing bubble popping and the credit freeze from last summer. Yes the Fed has found what appears to be the magic potion and even strengthened the dosage on Friday. With a financial crisis restoring confidence is typically all it takes to get things greased and back to normal. If too much time passes, however, and damage is done as a result of the freeze up, then it can take more than just a Fed appearing in command of the situation. This recovery, or more accurately, attempted bottoming, is suggesting there was not a lot of structural damage.

Okay, maybe not. Maybe the Fed's actions were enough to sooth the savage beast of the financial markets AND soften the blow of housing burning down. What about gasoline heading to $4+/gallon this summer and food costs jumping, despite the President's protests otherwise, in large part because of added demand created by a social planning mandate courtesy of a philosophically confused administration (is it a free-market president or just a free-market until some emotional issues comes up president?), can any attempted economic bottom hold?

Food and energy (now referred to as Foodergy because their prices are now joined at the hip) are taking a larger and larger share of disposable income. It is thus no longer disposable income but monthly overhead: you have to eat and drive to work (remember, jobs are improving, right?) and it is taking more scratch to do it. Thus less for the other things in life that make our standard of living nice. We are not going to get wealthier as a nation spending our money on fuel and food, the former going to fund the anti-American activities of those selling us the fuel. This higher and higher cost of living is only going to drag the economy more just as some of the numbers are showing signs of bottoming.

The questions about the impact of surging fuel and food prices on an already weak economy remains. A look to the market shows an improvement and thus something of a confirmation of the attempts at bottoming in the economic numbers (actually it is the other way around: market bottoms, then the data improves, just as it is trying to do here).

So, bear market rally or a new bull market starting out of a very, very modest correction? As I said before, the correction sure seems too little to account for the mortgage and credit issues, and now you add surging energy and food costs on top. Robins on the yard indicating springtime for the economy and thus a new bull market? It is enough to leave you nervous and cautious about the prospects, but with growth stocks showing solid patterns and runs higher with tech gaining more strength you have to go with the market moves. You don't only play straight up bull market runs. You can play bear market rallies as well. You just have to keep alert and assume that, given the weak data and lack of NYSE volume on the rally, it is like a bear market rally. It could be very much the opposite, but if it is, it will just keep telling up to buy in and thus we miss out on nothing.

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at

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