Monday, June 01, 2009

Why is the Market Rallying?

- Quiet session gets a last hour burst on end of month mark-ups.
- Economic data fails still fails to show any economic recovery, or any slowdown in selling first.
- Is the stock market the leading indicator? Liquidity and thus inflation drive stocks higher.
- Why is the market rallying? We bought the rally with trillions of dollars in liquidity.
- Have to keep looking at the same leading sectors.

End of month book marking drives stocks higher.

Friday was a quiet session, trading on the flat line, at least until the tail end. A last-hour burst of buying due to end-of-the-month portfolio bookmarking sent stocks higher and closed the indices out with 1% (or better) gains. A quiet session turned into quite a rip-roaring session by the closing bell.

The early news did not do much to excite investors. GDP came in at -5.7%; that was less than the -5.5% expected, though it was better than the -6.1% previously reported. Consumption was down 2.2% - originally it was reported down to 1.5%. It was not a very encouraging report; we did not see any kind of revisions that showed things are getting better, and that is what everyone is looking for and talking about in the economy. As you know, we have been saying that things are not getting much better - they did look promising for awhile, but things are turning back down.

Oil was up again. It closed at $66.31, up $1.23. Gold surged up to $978.90, up $17.40 - back near that magic (or maybe not so magic) $1K mark that it hit in February. With the dollar getting shredded again, closing at 1.4160 Euros, there is no surprise at all to see gold and oil spiking higher. The 10 year bond yield was really the only surprise on the day. It fell to 3.46% after hitting 3.71% this week. This was mainly some backfilling due to such a tremendous rise over the past three to four weeks, where the 10 year bond yield rose 150BP.

Stocks opened slightly positive, but chopped around all session - in other words, they traded back and forth, above and below the flat line. There were little loses, little gains; quiet trading to end the week and month. In the last half hour, bids hit. Friday was the end of the month when mutual funds want to put good stocks on the books to send out to their investors. It does not only happen at the end of each quarter, it happens at the end of each month. A lot of mutual funds have missed out on the rally, so they want to buy these stocks and show off what they have in their portfolios; of course their performance does not reflect the performance of the stocks they say they own, but they do not bother to tell people that they bought them in the last half hour of the last session of the month. In any event, the end results were the 1+% gains on the indices that made the session look quite good overall, though it was basically end-of- the-month bookmarking, or markups, as mutual funds strive to make their performance appear better.


INTRADAY. Intraday, the action was flat for most of the session with a burst of buying at the end. Technically that is good action. It looks good; the market started soft and built into nice +1% gains - true, but we know why, so we cannot put much credence into why the market showed good intraday action Friday. It moved up, made us money on our positions, so we are happy with that.

INTERNALS. Breadth went from pancake levels to close out at 2.2:1 on NASDAQ, 3:1 NYSE. Not bad, and in line with what we have seen on moves up and down - we will get 2:1 to 3- 5:1 ranges either way when this market moves - it tends to move with a lot of authority. The textbooks would call that volatility, and we are in a trading range, so that makes sense.

Volume was much stronger on both the NASDAQ and the NYSE. NASDAQ topped 2.5B shares, while the NYSE cleared 1.8B shares. Both were above average, with the NYSE being much more above average; indeed this is the first time that either exchange showed above average trade in three weeks -basically since the beginning of May.

Again, with the markup at the end of the month, we cannot put a lot of emphasis on how important, or more accurately, not important, volume was. The moves were end-of-the-month moves, and as with expiration volume, you have to put that in perspective. Once more, we had a good move to end the week and that is all you can really say.

CHARTS. Given the rush higher late in the day, the indices all moved up toward their May peaks. NASDAQ topped its May high, as did NASDAQ 100. The SOX matched its May high - remember, the SOX is much higher than the rest of the indices in its recovery move, having cleared all interim highs after the bear market low. So the SOX has shown a lot more relative strength and leadership than the rest of the indices, but they are all trading well as they move in this consolidation range, bumping up at the top of the range. We will just have to see in the coming week what happens - whether they can continue up with the move and break out, or stall and trade back down in the range.

If you were only looking at the higher Friday volume you might conclude there was a chance that they could make the breakout this week and make it stick. They still can, but again, the volume was the result of end-of-the-month bookmarking, and so one should not anticipate a breakout to start next week.

LEADERSHIP. The late move took everything higher. Financials were lagging, but with the rush into the last half hour, they picked up and lifted the SP500 higher. Everything else came up as well, but to really get a flavor for what was leading the market, you have to look at what happened before the last-hour rush. The same group of leaders taking things to the upside all week - and really ever since this rally stalled out in May - led the Friday move.

Early in the rally semiconductors and techs led the way, with financials coming on strong as well. Energy moved well- it was not sleeping at the bottom - but it has come into its own leadership as the market has moved laterally in the consolidation range. Commodities of all types have been moving up as well; they were leading again on Friday - copper and steel stocks were moving up as part of the continuing inflation trade that we discussed rather extensively.

Outside of commodities and energy, other stocks are moving up well, also part of the inflation trade. When you have trillions of dollars, marcs, pounds, and Euros being printed by the world's central banks with no economic activity around the world - and as we are seeing in many places, the activity is backsliding - what you have is a lot of with nowhere to go. Over the last couple of months the money is being put into financial markets in general; that is what is pushing stocks higher. Not only are we seeing commodity stocks, energy stocks and gold stocks move up on the inflation trade, but there is also technology, semiconductor, and even industrial stocks moving up as well as this money is put to work. It is being spread out all over the world and all over the market, and therefore, we are seeing many sectors in the financial markets rising higher and higher.


More economic data shows no recovery and indeed a turn toward the downside again.

Friday was more of the same. The economic data is failing to show any real economic recovery; indeed, now it is failing to show any slowdown in the decline in economic data. That is what got everyone excited over the last couple of months - when the data started to slow its collapse. It was not falling as fast as it had been, so it looked like a bottom could be developing - makes sense; you have to slow down before you hit bottom. The problem we are seeing is a slowdown in the decline is not necessarily the case.

The Chicago PMI, the monthly Midwest manufacturing report, came in less than expected. It came in at 34.9 when 42.0 was anticipated- 40.1 was registered the prior month. That does not show the slowing decline, that shows a resumption of decline. These regional manufacturing reports are very important in terms of determining an economic recovery. They were the first to turn positive back in 2002, and gave us a heads up as to what was going on with the recovery. They are not making the turn right now and that is telling us that there is still downside to come in economic activity.

Thursday we saw the durable goods orders. They were better than expected, but the revisions were terrible; they were revised almost quadruple to the downside, and we saw that most of the bump in spending was due to government spending as business spending fell even more - it fell for the second month in a row, well over 1% (-1.5%). We are not seeing the actual manufacturing - or the real data that is more leading - indicate any kind of turn.

Michigan Sentiment was released on Friday; similar to the consumer confidence report that was released last week, it was better than expected, coming in at 68.7, versus the 68.0 expected, and 65.1 in April. Consumers feel better - why? The stock market is going up and their 401(k)s do not look so deathly ill - they do not look great, but the stock market is going up, so people think it must be getting better; they have all been trained to believe that the stock market is the ultimate leading indicator. It is, but there are times when you have to read behind the front headlines to see what is really going on - this is one of those times.

Stock market is not the best leading indicator right now.

There is a lot of liquidity in the world and as a result there is a lot of inflation building in the pipeline. It does not always mean inflation if there is a lot of liquidity; if supply is ramping up that takes the liquidity and drains it from the system, creating new businesses, new products, new jobs - that leads to economic growth and thus new jobs. All the excess liquidity is sopped up and goes to work in the economy. What we have now, however, is all over the world the economies are in recession, unable to mop up that excess money.

ECRI, which is a great economic indicator with respect to what will happen down the road -says the recession could end in the summer. It very well can end, but that does not mean we will have recovery; if you have a recession end without recovery, and there is still all that liquidity in the system, there is still the age-old problem of too much money chasing a finite amount of goods. That is the textbook definition of inflation.

While some are saying that we are seeing the bottom forming because the stock market is rallying, they are missing a big part of the picture. There are clear signs of inflation out there.

Oil. Oil prices are one example. Oil demand is that 2001 levels, yet oil has hit a new high on this particular run, closing at $66.31 on Friday. The fundamentals simply do not support oil at these prices. The economic data shows that there is no US demand for oil at levels supporting $66 a barrel. Germany's GDP is at a 40-year low. The Japanese slump continues; production may have ticked up, but consumption is down. The UK's economy is crashing at a faster rate than Germany. Russia's GDP is down 23%.

In short, there are major problems in the world's economies that are not showing recovery, yet oil prices are surging up. What that tells us is that it is not a fundamental reason for the price rise. One of the reasons it is rising is because the dollar is crashing. The crashing dollar - thanks to our monetary policy and poor fiscal policy that we are putting into place - is telling the smart investors in the world that the dollar is not going to be worth much because our economy is not going anywhere. The dollar is plunging in price, and since oil is denominated in dollars, it is going up; we are importing inflation with every barrel of oil we bring in from overseas. Every time our dollar ticks down a fraction of a penny, our prices rise. Exporters have to raise oil prices more in order to make up the difference due to the loss of value in the dollar. If we lived in a bubble and did not have to import anything, that would not matter, but the problem is we are importing the majority of our oil every day from overseas, which gets us right in the wallet and kills the economy.

Commodities. Commodities in the CRB index just logged there largest one-month spike since 1974. That is an important time - we have been talking a lot about similarities between now and the 1970's; in 1974, the economy was in real trouble and we had a major oil shock with the Arab oil embargo. Right now the world economies are struggling and again there is a spike in energy prices, this one ongoing for over a year now. Why are prices rising when the economy is weak? In the 1970's OPEC had clout. Right now it is not OPEC but a weak dollar AND speculation as investors buy oil as a hedge against inflation.

Gold. Gold is another hedge. Gold prices are spiking, and that is a classic inflation signal. After crashing when prices hit 1K in February, they are right back up there again just three short months later. Is this in anticipation of more Chinese or Indians wearing gold in the "If you have got it, flaunt it" philosophy of their newly high-powered expanding economies? Not really, because their economies are not going up that much right now. That could play a role in the rise, but let us get serious: gold is not at $1K-per-ounce merely on anticipation of consumer demand.

Bond yields. We have talked about yields a lot this week - indeed this past month - but they are very important. Bond yields often rise in anticipation of the economy improving. The bond market looks down the road, and as with the stock market, people look at the bond market and are encouraged by the 10 year rates jumping up to 3.71%, rising 150BP in a month. They think the economy is ready to rock 'n' roll because money is going to be more in demand, and interest rates rise in anticipation of that demand. That is the theory and is actually how it usually works in normal times. There are other reasons that are floating around in the world that tell us that is not the case in this instance.

The data simply does not support this idea. The economic data is terrible and is turning worse right now. Fiscal and monetary policies around the world are not conducive to growth. China has a pretty good fiscal stimulus policy; it fits their form of government. It would not work well over here - though it would work better than the one we have adopted. What really works in the U.S. are supply-side economics used in the early 1980's when the government gave tax credits and said we could either send the money to the government in the form of a tax, or buy a piece of equipment and write that right off the bottom our taxes. Any sane person would buy that piece of equipment and spend the money that way, versus sending the check to the government where in theory you would receive some services, but we all know it is not the same benefit as a tax credit. . Credits jumpstart the economy as they ignite investment in the country by entrepreneurs, sprout new technologies and new companies that really sparks the economy. We are not doing that now, and we have a sluggish economy; none of the stimulus is going to really hit until next year - even then it will not really be stimulus, it is just government spending . But, I digress.

This sudden massive spike in bonds is not the kind of rise you get when there is an economic recovery anticipated. Remember, yields spiked 150BP in less than four weeks.

All of these signs (oil, commodities, gold price spikes, bond yield surges) show that there is inflation, yet we are trying to ignore it. We want it to be different this time, and are willing to ignore that the world economies are still heading lower, and that there are trillions in additional currency floating around the globe.

Think back - this is the Greenspan argument from mid-2005. Remember, we had an inverted yield curve at that time, and that says that economic slowdown is coming; the short-term rates are higher than the long-term rates, indicating demand for money is expected to decrease. Greenspan tried to explain this away as the result of heavy buying of US Treasuries as a form of safety, and therefore it was not clear how much of the curve inversion was due to a flight to safety in US bonds. Thus he questioned the curve's forecasting ability. It turns out it was absolutely right - it did not matter what percentage it was because the yield curve was inverted, and it was saying trouble was coming. Man, did we have trouble; we had a housing bubble and the cascade of events after that.

Right now, just as Greenspan, many are trying to ignore this huge spike in yields, the huge spike in gold, a surge in commodities as big as any since 1974, and oil prices blasting higher when on no fundamental reason to do so. They are saying it is different this time. It is NOT different this time. We have inflation coming. We have been here before - open a history textbook, read about economics. I do not think they even cover it anymore in school, and that is the problem - you have to get an older textbook that actually covers the 1970's and tells it like it is. We have been here before and we are going down that road again as these are the exact problems and indicators in the 1970's, but we are ignoring them and doing so at our peril. We do not want to go back to the 1970's, but we are going whether we like it or not.

An interesting and poignant point to make is that the Fed has short-term rates at less than 0% - they want people to borrow and are sitting on rates to accomplish this. Even with the Fed desperately buying treasuries and doing anything it can to keep interest rates down, the longer end of the bond curve is shooting higher. The Fed cannot control it; it is going to have to raise interest rates sooner than anybody thinks because the short end and the long end cannot stay so far out of balance as this creates economic havoc. The only people who will benefit are the banks. They will be able to effectively print money as they borrow at 0% short-term rate while a 3 - 4% 10 year Note allows them to lend much higher. Good for the banks, but a recipe for disaster long-term.

Another interesting fact: Treasury Inflation Protection Securities - TIPS - had basically a 0% spread between the short and longer end. Over the last three weeks, the spread is now 2% - it is showing us that there is a lot of inflation building in the pipeline and a lot of trouble out there.

I am a history buff - an economic history buff. I learned that if I watch history, I can figure out what will happen in the future. Unfortunately, it is all too clear to me and a lot of other people that we are on the same wrong path as before.

Some argue that there are 'bond vigilantes' that are trying to show the Obama Administration what it is doing wrong as they drive rates higher. There are no vigilantes - this is smart money just anticipating what will happen in the future. You do not go out in the market to teach anyone a lesson - what happens if you do that? You get your head cut off. If you are lucky, you do not get your legs cut off, too. This is smart money trying to make more money, nothing more. We worry about this for our kids and our retirements - our retirements shrink as dollars lose their value and inflation digs into it every month.

Buying the rally: back to the 1970's.

Let us get back to the market, though. We always say it is a great indicator of economic activity, but we have pretty much debunked that at this point because we can see why inflation is a problem - but why is the market not sniffing this out, seeing the trouble and rolling over?

First, we bought and paid for this 30% rally. Trillions and trillions of dollars printed and promised has been enough to buy this rally off the lows. We printed a bunch of money, threw it in the market, and no one is using it - none of the banks and financial institutions that have this money are lending it; they are hoarding deposits as discussed last week. What they are doing with this excess money is putting it in the market. There is a lot more money chasing the same amount of stocks, the same amount of commodities, and that spells inflation. What we are having is inflation in stock prices - no problem with that because we own stocks to the upside; we are enjoying the run higher right now. We know that cannot last, however.

Back in 1999, the Fed pumped tens of billions of dollars into the economy ahead of Y2K. The NASDAQ rose 75% for July 1999 to March 2000; that was all money that was not needed by any of the consumers - there was no panic and rush on the banks with people putting 10-,
15-, 30- $100K in their mattress. So, the unused money went into the markets and the markets took off - then the Fed called the money back, the markets crashed and we went into recession.

This time around the Fed with will have to raise rates - it cannot hold rates at 0% for long if long-term rates continue to surge. Those long-term rates may come back and retrench as we saw on Friday - that is a pretty hefty drop down to 3.46% from 3.7% in just a day, but those are the kind of moves we will see when there are such large swings upside. We will probably see more retrenchment next week, but it likely will not stop there - rates will go back up. It went up too fast and will crash back down some, but just because they fall back does not mean we are not going to get inflation. The big spikes are similar to 'get ready' spikes before a stock takes off. The spiking rates indicate rates are moving higher.

When is this rally going to reverse? When the Fed has to start raising interest rates. We do not know when it will do that; it does not want to (and right now cannot) do that because it has bet the farm on keeping rates low and pumping a lot of money in the system in order to get the economy moving. The problem is, while we have avoided the Depression, we are in the longest recession we have had since the Great Depression now. The Fed, by raising interest rates would undermine its attempt at fostering a recovery. At some point, however, the Fed will have to raise rates to match the higher end rates - when it does that, we will have the malaise like back in the 1970's. We will have a weak dollar, high inflation, massive government spending - in the trillions - and our debt will be in the trillions yearly as far as we can see into the future. We'll have thousands of new government regulations for the cap and trade, for the healthcare system -- that is going to make the federal register quadruple in size each month. The CFR - the Code of Federal Regulations - is going to surge in size as well.

If you want to be socialist, you have to have a lot of regulations. The EU has about 10:1 regulations over the United States when it comes to regulating each business. We seem want to be like Europe, so we will have that as well - we will have a lot of big government and a lot of trees being burned to make the CFR bigger because of it. Maybe the environmentalists will get on the side of getting the economy going in some other direction than socialism - we will have to see. I am on my soapbox again, but this is dear to me - it is dear to all of us because we all have kids and grand kids, and we want them to have the same opportunity we did. I do not want them to go through the 1970's - we are going to do it, but we can try to truncate it as best we can if we recognize the problems and we talk to your Senators and Congressmen and tell them we are making the same mistakes. Maybe if they hear enough of us, they will change.



VIX: 28.92; -2.75
VXN: 29.44; -2.08
VXO: 29.62; -0.84

Put/Call Ratio (CBOE): 0.77; +0.01

Bulls versus Bears:

This is a reading of the number of bullish investment advisors versus bearish advisors. The reason you look at this is that it gives you an idea of how bullish investors are. If they are too bullish then everyone is in the market and it is heading for a top: if everyone wants to be in the market then all the money is in and there is no more new cash to drive it higher. On the other side of the spectrum if there are a lot of bears then there is a lot of cash on the sideline, and as the market rallies it drags that cash in as the bears give in. That cash provides the market the fuel to move higher. If bears are low it is the same as a lot of bulls: everyone is in and the market doesn't have the cash to drive it higher.

This is a historical milestone in the making. Bulls are impressively low considering we are in general a very optimistic country. The few bulls is a positive indication because it means most everyone that is getting out is out and there is money on the sidelines. In other words the ammunition boxes are full and as the market recovers investors will start opening up the boxes and firing. Little by little they will be forced to put more money into the market and there will be some rushes higher in fear they are missing the train. You relish times when sentiment is so negative because it means some tremendous buys are setting up. This could indeed be the opportunity of a lifetime, and you take advantage of it by buying quality stocks and letting them work for you as long as they will. If we can hold them for years, great.

Bulls: 40.9%, up a fraction from 40.7% and 41.0% the prior week. Bullishness is still creeping up as the market holds its gains. Makes sense, but there are also those that feel the good times cannot last, undermining the number some. Still a strong move, up from 36.0% just three weeks back and moving in on the 43.2% hit mid-April before anticipation of stress tests and SOX' issues. Over the 35% threshold, below which is considered bullish, but this is not a bearish indication yet. Has to get up to the 60% to 65% level to be bearish. Dramatic rise from 21.3% in November 2008, the bottom on this leg. This last leg down showed us the largest single week drop we have ever seen, falling from 33.7% to 25.3%. Hit 40.7% on the high during the rally off the July 2008 lows. 30.9% was the March low. In March the indicator did its job with the dive below 35% and the crossover with the bears. A move into the lower 40's is a decline of significance. A move to 35% is a bullish indicator. This is smashing that. For reference it bottomed in the summer 2006, the last major round of selling ahead of this 2007 top, near 36%, and 35% is considered bullish.

Bears: 28.4% versus 29.1%. Bears continue to fall, growling less and less. Down from 33.7% three weeks back. Well off the 37.2% and the 37.1% in mid-April as the rally continued higher. As with bulls, below the 35% threshold considered bullish though not at bearish levels. Now far from off the high on this run at 47.2%. For reference, bearishness hit a 5 year high at 54.4% the last week of October 2008. The move over 50 took bearish sentiment to its highest level since 1995. Extreme negative sentiment. Prior levels for comparison: Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). That was a huge turn, unlike any seen in recent history.


Stats: +22.54 points (+1.29%) to close at 1774.33
Volume: 2.495B (+12.32%)

Up Volume: 1.747B (+123.972M)
Down Volume: 682.236M (+133.903M)

A/D and Hi/Lo: Advancers led 2.26 to 1
Previous Session: Advancers led 1.27 to 1

New Highs: 49 (+10)
New Lows: 20 (+9)


NASDAQ cracked the top of it is May range on rising trade. It is moving toward that November peak, but it is not there yet. It is typically promising when you have a run to the top of a range and a crack threw it on high volume, but there were extenuating circumstances on Friday, which makes this move not as reliable as you would normally attribute to it, given the volume and the breadth, and the moving by the leadership stocks. It could still break higher this coming week and keep going; believe me, there is enough money in the markets to send it higher. There is so much liquidity out there that it could go right on threw - that was the miracle of the 1999 rally; it never stopped. Everyone is scratching their head and wondering what is going on; it is unnerving to continue to invest in a market that will not stop and keeps moving higher and higher after big gains and a very mild consolidation. If it breaks higher, however, we will continue to look at them because you have to go with what the market is giving you. We will keep buying the tech stocks, continue to look at the semiconductor stocks that set up and make breaks higher if that is what they are doing.


NASDAQ 100 broke over it is May high as well, rising up 1.0 7%. Large cap techs look strong. When people have extra money and are not sure what to do with it, they put them in their favorites such as Apple and Research and Motion and their companions - that is what we are seeing now.


The SOX was up 0.9 9% - it is at its May high as well, higher than the rest of the indices, and it is up there leading again. All the big techs, chips - things that go into things - are doing have well right now because they are getting the money put into them. The reason techs do well is because when smart investors see that there is a lot of money going into stocks, they see potential and look for stocks that are going to rally rapidly. You know that technology - chips, large cap techs - can tear off big chunks of real estate in short order. That is why money is going into them in addition to all the commodities and all the energy stocks.


Stats: +12.31 points (+1.36%) to close at 919.14
NYSE Volume: 1.854B (+35.48%)

Up Volume: 1.373B (+349.181M)
Down Volume: 455.763M (+116.002M)

A/D and Hi/Lo: Advancers led 2.88 to 1
Previous Session: Advancers led 1.95 to 1

New Highs: 31 (+15)
New Lows: 65 (+15)

SP500 surged above it is mid-point level in the trading range and toward the may high; it did not make it, it is got a ways to go to get up to that May high, but it is showing really go action inside of it is lateral consolidation range. This is exactly what you would expect: You see it come down and test, it downs up, volume pick us up on the way up - and again, volume is suspect on Friday, but it is still showing the kind of action you want to see in a trading range; it is very positive. The financials kicked in late and gave it a good boost.




Stats: +96.53 points (+1.15%) to close at 8500.33
Volume: 361M shares Friday versus 290M shares Thursday.



This week we expect SP500 to go up and bump into that range. What it does - similar to NASDAQ - depends on how much money continuing to flow into the market. This is a market driven by billions and now trillions of dollars, and it is finding a home in stocks because it is not finding a home with any investment in economic development. This is a rally that is similar to the rally that has no close - like the emperor that has no clothes - because this is money that has been printed in Washington, D.C. and other capitals around the world, and being pushed into world financial markets and driving stock prices higher. There is no reason for it other than money chasing the same number of stocks and commodities and bonds - actually they are getting rid of bonds right now, but you get my point.

Next week there is a lot of activity. Earnings are basically over; they will continue to trickle in this week - we saw Dell come in - but that story is known. GM is likely to file bankruptcy early next week. It has been unable to strike any deals and has basically burned the $15B that we loaned the auto industry, so we are back to bankruptcy and $15B poorer - and none the wiser; we are sure to make the same mistakes again.

As far as economic data, it is a huge week. Personal spending and income, we have the ISM, which is the national manufacturing report, we have the ISM Services - the national services report - we have factory orders and also job reports at the end of the week. Everyone looks as job reports and they will STINK. Yes, weekly jobless claims are better, but no one is hiring anybody. Continuing claims continue to rise; there are no jobs out there.

I hate to be a pessimist, but I want to be realistic as well - we have to have economic growth and recovery before there will be jobs. If there is a bump up in the number, the market will be happy, but it will all be false because it will not be able to sustain any continued job growth without sustained continued economic growth. As we saw from the regional manufacturing reports this week, they are still well below the zero line - still contracting, and indeed picking up speed to the downside despite better consumer confidence out in the world.

What will we do? We will keep looking for upside buys because the money is there. Inflation helps stocks rise early on; it helps inflate stock values, so early on it is a positive. That is why, between the inflation signs coming up and all the liquidity pushing stocks higher in the market, we have to keep looking for the upside. There are still downside plays out there because stocks will break down, but the majority of the plays we have will need to be on the upside because of all the money in the inflation trade. Eventually the inflation will hurt stock prices because inflation will crimp off the economy so badly that it is going to impact stock prices. Even though there is a lot of liquidity out there, the Fed will eventually have to pull the plug on that and raise interest rates at the short end (which is what it controls). That will crimp the rally.

Ultimately the Fed has no choice or it runs the risk of very pernicious inflation and stagnation similar to the 1970's. During that period the Fed unwittingly fed the inflation after the oil embargo by cutting interest rates and increasing money supply as it wanted to mitigate the oil shock that it felt would send the world economies into horrible depression. We avoided that, but ignited stagflation. The economies did not recover because of the high oil prices, and all we did was liquefy all the energy prices and other prices in the world and make them rise up when the world economies were still burdened by heavy spending and ever-increasing government regulation. That sounds like the 2000's - oh, it IS the 2000's. We are doing the same thing we did in the 1970's.

So, surprise, we are going to look at commodity stocks, energy stocks, China stocks (as China is still showing signs of economic recovery). Medical stocks and healthcare stocks are also perking up as the money pushed into the market looks for other areas. Even some consumer discretionary looks good, but more on the discount side of the equation as the economic data is weakening again.

There will be hiccups along the way; it will not be a straight shot up. In 1999 it was a frighteningly straight shot higher that never really slowed down, but there were some violent pullbacks, 1-, 2-, 3-day pullbacks on high volume. They sold hard but then we bounced right back up.

The good aspect of this move is the lateral consolidation range. Very solid action. That sets a foundation for a new move higher. The 1999 rally did not have that and it crashed horribly. There are some positives here in that it is building a good base, though, each rally leaves you with a bit more trepidation that it cannot last. But as the trend is still higher, we will continue to invest in these areas when they show good entry points.

On Monday, the market is likely going to try those May highs. The SP500 may try to bump up there as well. There may be some new money that comes in to start the month. They put new money to work, and there is money coming into mutual funds; so we could get some more upside into Monday. After that money is spent the indices can come right back down in the range. That is the lick log for this move; what happens when the SP500 gets up to that May high - is it going to break through?

We are going to get bumps and hiccups in the road, but we will use them to get better entry points because at this point, the bias is still higher. I will repeat: The bias is still higher despite the runs thus far. We will continue to look for opportunities in the leading areas. We did not get many on Friday. Buying on Friday is tricky because Fridays often lead to lower Mondays, but we did see some that were moving, and we did not want to miss the boat completely on them - such as SNDA - so we bought some positions on it. We will wait for next week and see how stocks come back and how the May peaks treat the indices; we may get some very good buys off of those tests from that level.

I know I was a little impassioned tonight about what was going on and what is happening with the economy and the market, but it is a passion with a purpose. We have to understand what is going on now to be able to block out what we hear on TV and invest in what the market is showing us. While we are concerned that the market is going way too high without a serious rest, there is a realization that we have seen this movie before and have to play what is out there and take what the market gives.

Support and Resistance

NASDAQ: Closed at 1751.79
1770 is the mid-October interim peak
1773 is the May peak
1780 is the November 2008 peak
1947 is the October gap down point

The 18 day EMA at 1714
The 200 day SMA at 1702
1673 is the prior April peak
1666 is the intraday January 2009 peak
1664 is the May 2008 low
1661 is the April 2009 prior peak
The 50 day EMA at 1654
The January closing peak at 1653 (intraday)
1623 is the early April peak
1620 from the early 2001 low
1603 is the December peak
1598 is the February 2009 peak, the last peak NASDAQ made
1587 is the March 2009 high is getting put to bed again
1569 is the late January 2009 peak
1542 is the early October 2008 low
1536 is the late November 2008 peak
1521 is the late 2002 peak following the bounce off the bear market low
1505 is the late October 2008 closing low.
1493 is the October 2008 low & late December 2008 consolidation low

S&P 500: Closed at 906.83
919 is the early December peak
930 is the May peak
935 is the January closing high
944 is the January 2009 high
The 200 day SMA at 931

899 is the early October closing low
896 is the late November 2008 peak
The 18 day EMA at 894
888.70 is the April intraday high.
882 is the early May low
878 is the late January 2009 peak
The prior April peak at 876
866 is the second October 2008 low
The 50 day EMA at 866
857 is the December consolidation low; cracking but not broken
853 is the July 2002 low
848 is the October 2008 closing low
846 is the April peak
842 is the early April peak
839 is the early October 2008 low
833 is the March 2009 peak
The 90 day SMA at 827
818 is the early November 2008 low
815 is the early December 2008 low
805 is the low on the January 2009 selloff. KEY Level
800 is the March 2003 post bottom low
768 is the 2002 bear market low
752 is the November 2008 closing low but it is not broken and done away with
741 is the November 2008 intraday low

Dow: Closed at 8403.30
8419 is the late December closing low in that consolidation
8451 is the early October closing low
8521 is an interim high in March 2003 after the March 2003 low
8588 is the May high
8626 from December 2002
8829 is the late November 2008 peak
8934 is the December closing high
8985 is the closing low in the mid-2003 consolidation
9088 is the January 2009 peak

8375 is the late January 2009 interim peak
The 18 day EMA at 8335
8315 is the February 2009 peak
8307 is the April 2009 intraday high
8221 is the May 2008 low
8197 was the second October 2008 low
8191 is the prior April peak
8175 is the October 2008 closing low. Key level to watch.
8141 is the early December low
The 50 day EMA at 8135
The early April intraday peak at 8113
The early April peak at 8076
7965 is the mid-November 2008 interim intraday low.
7932 is the March 2009 peak
7909 is the early January low
7882 is the early October 2008 intraday low. Key level to watch.
7867 is the early February low
7702 is the July 2002 low
7694 is the February intraday low
7552 is the November closing low. KEY Level.

Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.

June 1 - Monday
April Personal Income (8:30): -0.2% expected
Personal Spending, April (8:30): -0.2% expected
Construction Spending, April (10:00): -1.8% expected
ISM Index, May (10:00): 42.0 expected

June 2 - Tuesday
April Pending Home Sales (10:00): 3.2% prior
Auto Sales, May (14:00): 3.2M prior
Truck Sales, May (8:15): 3.8M prior

June 3- Wednesday
May ADP Employment Change (8:15): -543K expected, -491K prior
Factory Orders, April (10:00): 0.3% expected, -0.9% prior
ISM Services, May (10:00): 45.0 expected, 43.7 prior
Crude Oil Inventories, 5/29 (10:30): -5.41M prior

June 4 - Thursday
5/30 Initial Jobless Claims (8:30): 623K prior
Productivity-Rev. , Q1 (8:30): 1.2% expected, 0.8% prior
Unit Labor Costs, Q1 (8:30): 2.9% expected, 3.3% prior

June 5 - Friday
May Average Workweek (8:30): 33.2 expected, 33.2 prior
Hourly Earnings, May (8:30): 0.2% expected, 0.1% prior
Nonfarm Payrolls, May (8:30): -550K expected, -539K prior
Unemployment Rate, May (8:30): 9.2% expected, 8.9% prior
Consumer Credit, April (14:00): -$6.0B expected, -$11.1B prior

By: Jon Johnson, Editor
Copyright 2009 | All Rights Reserved

Jon Johnson is the Editor of The Daily at

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1 comment:

Anonymous said...

With the ECRI up/calling end to recession why is your forward tone so negative on the economy? I went to their site and they talk of the giant error of pessimism that follows every crisis... I'm just wondering.