Chart of the Day: Gold Bounces Off Support Levels

The chart above shows the pullback in gold prices, which are now nearing support levels. The red line I have drawn in represents what had been former resistance levels around $1075. That former resistance is now acting as support, and gold is attempting to bounce from these levels.

I trimmed half of our gold etf (GLD) positions at higher levels, but yesterday I added back a little to play a potential bounce. I don't plan to add back all of our exposure to gold until I see it hold support. Often times there is an initial bounce, and then a pullback to retest said support levels. If this occurs, the second pullback would represent a better entry point. We shall see.

After the close last night, Micron (MU) and Red Hat (RHT) both beat earnings expectations, and both stocks are nicely higher this morning. Tech is leading the action so far, and energy and materials are strong as well. Financials and healthcare are lagging right now.

On an unrelated note, despite the widely heralded coming collapse in commercial real estate, the real estate etf (IYR) is making new highs for the year right now. I continue to think that with so many people focused on the CRE issue, and waiting for prices to come down, that the final wave will prove uneventful relative to expectations.

Despite yesterday's strong existing home sales report, I have said that the housing data (like the jobs data) is likely to be lumpy at best. So today's new home sales report is disappointing, but I don't think any single housing datapoint should be viewed in isolation. New home sales fell -11.3% last month, but the overall picture for housing in this country is still ameliorating.

Asian markets were higher overnight, led by a +3.2% spike in India after the Finance Minister said the economy may accelerate at a a faster pace; the 10-year yield is lower to 3.72% after spiking to 3.75% yesterday; and the VIX is now below 20, hovering at new lows for the year around 19.75 right now.

Trading comment: The S&P has joined the Nasdaq in making new highs again. I think the markets should hold their bid into year-end, so I am going to try to hang on to my positions and refrain from taking profits until the New Year. A lot of people are already talking about a correction in January. As a contrarian, it always makes me nervous to run with the herd. So if the calls for a correction grow too loud, I would be more apt to fade it.

long GLD

Stocks Inch Higher On Mixed Economic Data

The market is slightly higher in early trading after some mixed economic reports. The GDP report came out first, and was a bit soft. Q3 GDP was revised lower to a rate of 2.2% from its previous estimate of 2.8%. But the existing home sales report was much better than expected, and is probably the more important metric right now.

Existing home sales rose +7.4% in November, much stronger than the 2.5% consensus estimate. This is the fourth consecutive increase, and helped push the supply of homes down to 6.5 months (from 7.0 months). Some argue that the surge in sales was from a rush of buyers trying to get in ahead of the homebuyers tax credit that was set to expire. This could mean that we could see a couple of soft months ahead, before another pickup in sales next Spring.

The dollar is rising to a 3-month high today, which is weighing on commodities. Oil is down near $73.50, and gold is lower again to $1180. Gold is getting pretty oversold here on a short-term basis, and also nearing some support levels. I would not be surprised to see gold prices bounce from here.

Asian markets were higher overnight, and Europe was up this morning despite Moody's decision to downgrade Greece's debt rating.

The 10-year yield is higher again, rising to 3.74%; and the VIX has made a new lower for the year, briefly dipping below the 20 level.

Trading comment: Biotechs have been big laggards this year, and I added to the sector when it was lower in October. Lately, the group has been rallying. I think the move higher could have more room to go, but I will likely be looking to trim back my exposure into the lift, simply because this group is always volatile and prone to pullbacks in the future. That said, given the fact the group got no love in 2009, I think it could be one of the better performers in 2010.

long XBI

Monday Morning Musings: Are Dollar v. Stocks Decoupling?

The market is getting a nice bounce this morning, and is doing so without the benefit of a weaker dollar. For months, the relationship between a declining dollar and rising stocks has been firmly in place. But lately we've seen this relationship begin to loosen. Today is one of the larger gains we've seen in the stock market on a day when the dollar was under pressure. I know its still very early in the day, but maybe we are beginning to see this trend decouple?

There were a couple of better-than-expected earnings reports from the likes of Walgreens (WAG) and ConAgra (CAG). Also, Sanofi-Aventis (SNY) agreed to pay $93.50 in cash for Chattem (CHTT) causing the stock to spike +32% higher this morning. Nice.

Among the sector SPDRs, materials (XLB) and energy (XLE) are the strongest, but all 10 sectors are higher so far. Healthcare is also garnering some support from the news that the Senate Democrats are closer to moving past Republican objections to health care reform.

Gold is lower near $1106 on the weaker dollar, but oil is up a bit to $74 ahead of tomorrow's OPEC meeting.

Asian markets were mixed to lower overnight; the 10-year yield is higher to 3.63%, its highest level since August; and the VIX is down another -4.3% to 20.72.

Trading comment: No change to recent trading comments/strategies and my near-term outlook. I still think the stair-step higher market is intact, and picking away at select stocks and etfs (tech, biotech, healthcare, ag) on weakness works. The Nasdaq is breaking out to new highs today, and that should keep growth stocks in favor. Trading volumes are likely to slow as the Christmas holiday nears, but the old Santa Claus rally looks like it may have started already.

Was Yesterday's Weakness Related To Options Expiration?

The market sold off pretty much from start to finish yesterday. This week is options expiration week in the market, and often during expiration week we see at least one big down day. So its possible that yesterday's selling pressure was exacerbated by today's expiration (futures, options, etc).

But after the close yesterday we got some very solid earnings reports in techland, with Oracle (ORCL) topping estimates and Research In Motion (RIMM) doing the same and raising guidance for next quarter handily.

Tech and biotech are leading the action so far, while consumer staples are the biggest laggard.

The dollar is higher again today, which is weighing on gold a bit ($1101) but oil is still a little higher near $73.

Asian markets were lower overnight, while Europe was mixed this morning. The Bank of England said that the financial sector looks in much better shape than it did six months ago.

Trading comment: My modus operandi hasn't changed near-term. I am still using dips to pick away and add exposure to areas I like. Lately, that has been mostly to tech (XLK), med tech (IHI), healthcare (XLV), and some foreign markets like China (FXI) and Brazil (EWZ).

The market is roughly flat for the week, with the S&P a little lower and the Nazz a little higher. The normal seasonal trades we often see in the market (Sell in May, September selloff, Thanksgiving rally, etc) have not worked too well this year, but since this week was pretty flat it does raise the odds that we see the old 'Santa Claus rally' emerge next week.

long RIMM, XLK, IHI, XLV, FXI, EWZ

Will The Fed Change Their Language At All?

The markets are getting a nice bounce in early trading, after Asia finished mixed and Europe opened to the upside. A report on the December Eurozone Services Purchasing Managers Index hit 53.7, its highest level since November 2007. Not bad.

The FOMC meets today, and while it is a near certainty that they will hold rates steady a 0%-0.25%, there is some talk about if they will change any of the wording in their statement. Any change in the wording would lend itself to the Fed getting closer to withdrawing some of the liquidity it has pumped into the system. But from my perch, I think the language will remain essentially unchanged for now.

In economic news, the November CPI came in at 0.4%, and was flat excluding food and energy. Housing starts for November rose to 574,000 from 527,000 last month. And building permits hit an annualized rate of 584,000 from 551,000 last month.

The dollar is lower this morning, which is helping boost commodities. Oil is higher near $72 and gold is also up to $1138. The 10-year yield is lower to 3.57%, and the VIX is down another -4.3% to 20.56.

Trading comment: The stair-step market continues, and the Nasdaq is making new highs right now while the S&P 500 is very close. The rally could fade after the FOMC announcement today, but post-Fed trading is always a guess. AAPL is at a critical juncture here technically, as it bounces back to the underside of its 50-day average. I am staying long. GOOG might run into some resistance at $600, which is another new high. But the momentum seems to be returning to GOOG's business, and I want to stay long that stock as well.

long AAPL, GOOG

What Happened To Manufacturing Activity in New York?

There was some mixed economic data this morning, but the one that jumps out at you is the Empire Manufacturing Index. For December, the index plunged to a level of 2.55 from last month's 23.51. That is a huge plunge, but I'm not sure why it occurred.

In corporate news, Best Buy (BBY) reported very strong earnings, topping estimates by a wide margin and raising its fiscal 2010 forecast. I guess it helps when your biggest competitor (Circuit City) is no longer around. I ordered a new flat screen TV for the holidays, and when they brought it off the truck, the entire front glass was shattered. So I'm not too happy with BBY right now.

The market is hovering just below the flat line so far, as another boost in the dollar index seems to be weighing on commodities, although energy stocks are faring well. Financials are the weakest sector so far, after Wells Fargo (WFC) became the latest bank to raise $10.4 billion in a stock offering after announcing it will repay its TARP loans.

Asian markets were lower overnight; the 10-year is higher again to 3.61%, its highest yield since August; and the VIX is slightly higher at 21.26.

Trading comment: Today's disappointing economic data combined with a rising dollar and a slightly overbought market could provide some headwinds here. But I remain in the same mode of looking for spots to pick at and add exposure. The broad market has been essentially consolidating in a sideways trading range for the last month, and I think the resolution of said trading range will be another upside breakout at some point.

Monday Morning Musings: Dubai Gets A Lifeline

The markets are nicely higher this morning on relatively light news. The two major news items were Dubai getting $10 billion in financing from Abu Dhabi to stave off a debt default, and Exxon (XOM) paying $41 billion in stock for XTO Energy (XTO), a 25% premium to Friday's closing price.

There was also an announcement that Citi (C) has reached an agreement to repay its $20 billion in TARP funds, which will involve issuing $17 billion in common stock. Concerns over further dilution are weighing on the stock, which is down -5% right now.

The dollar index is lower today, which is boosting commodities. Oil is trading a little higher near $70 and gold is bouncing back to the $1125 level.

Asian markets were higher overnight; the 10-year yield is flat near $3.54%; and the VIX is down another -2.7% to 21.00.

Trading comment: The market is trying to break out of its recent trading range that has capped most stocks for the last month. I am watching the stocks that have held up the best over the last month, as I think those are the candidates with the best shot of breaking out and making new highs into year-end.

I have not made any major allocations recently, but I have used pullbacks to pick away at etf positions like tech (XLK), insurance (KIE), agribusiness (MOO), and healthcare (XLV).

Can The Dollar Continue To Rally?

The chart below shows the US dollar index, which is the performance of the dollar vs. a basket of other currencies. You can see how it has spiked higher recently, and is now trading above its 50-day average for the first time in many months. The question is: can the rally continue?

Yesterday on CNBC, one of the more vocal dollar bears - Jim Rogers - said he is currently long the dollar, although he doesn't plan to stay long for too much longer. So this is an interesting juncture. If the dollar can consolidate here, and move higher, it could put additional pressure on the crowded short dollar/long commodity trade, which would likely weigh on the overall market in the short-term. But if the dollar falls back below that 50-day average, I would expect the trends that have been in place to remain through year-end.

Today the dollar is higher, and it seems to be overshadowing the positive economic reports that were released this morning. Oil is trading lower to nearly $72, while gold is down for another day, nearing $1120. The Nasdsaq is also lower today, while the S&P is roughly flat.

The University of Michigan consumer sentiment survey was surprisingly upbeat, coming in at 73.4 vs. 68.8 consensus. Business inventories rose +0.2% (vs. -0.2% consensus), and Advance Retail Sales rose a better-than-expected +1.3% (vs. +0.6% consensus).

The 10-year yield is also rising today, after a lackluster Treasury auction yesterday, hitting 3.55%. But the VIX is still lower, down -1.6% to 21.96.

Trading comment: In addition to the strong dollar, the weak financials have been holding back the market as well. I am still picking away at adding to positions, but we need to see one of those two factors reverse for the market to really get going. The possibility for another push higher before year-end is pretty good, but the timing of it is hard to tell right now.

Stocks Follow Yesterday's Late Strength Higher

Stocks are bucking the overseas weakness, as well as a modest move higher in the dollar, and following through on yesterday's late day strength.

The initial jobless claims this morning were a little higher than expected (474,000 vs. 455,000), but the trade deficit for October totaled $32.9 billion (vs. $36.8 billion expected).

Asian markets were lower overnight, but European bourses were higher earlier today after the Bank of England held its benchmark interest rate steady at 0.5% and reiterated its 200 billion pound monetary easing.

The dollar is slightly higher, which is weighing on the materials sector a bit. Oil prices are flattish near $71 while gold is slightly higher above $1130.

Among the sector etfs, energy is leading the action this morning, followed by consumer discretionary stocks; financials are the laggard so far, followed by materials stocks.

The 10-year yield is higher again to 3.48%, and the VIX is nearly -2% lower to 22.23.

Trading comment: It looks like another predicted selloff may have been averted. The major indexes are still comfortably above their 50-day averages, and not far from their highs. Also, many of the leading growth stocks are rallying again, and if we start to see them make new highs it is likely that the broader market will follow higher. Yesterday I mentioned the action in GS and AAPL, but I would also watch GOOG, ISRG, FFIV, PCLN, AMZN, CRM, etc. to get a better gauge on how "leading" stocks are acting.

long AAPL, GOOG, GS

Are The Market "Tells" Back?

I had a busy morning, so am making this post after the close instead of near the open of trading. The market was weak most of the day, but a late day rally pushed the indexes into positive territory. That is the type of action I prefer to see, when the markets start off weak and then build strength into the close. This is the opposite of the action that we saw earlier in the week, when the markets would open strong, but then fade as the day wore on and close weak.

The chart below is of the Nasdaq 100, which led the action today. The reason I posted this as my chart of the day is that you can see on the chart below that today's action put in what is known as an "outside day". That is, we traded below yesterday's low, but closed above yesterday's high, meaning that today's highs and lows were outside of yesterday's ranges.

This is often a bullish sign, so we'll have to see if the action has legs. Yesterday I posted that the recent market "tells" that traders had been watching, namely Goldman Sachs (GS) and Apple (AAPL), had ceased to be market leaders. But today they were back, and led the action, especially at the end of the day. GS rallied nearly $5 (+2.8%) on solid volume, and AAPL spiked $8 higher (+4.2%) moving the stock back above its 50-day average.

Commodities had another rough day, with oil moving lower to $70.67 and gold closing below the $1130 level. Gold prices have now tumbled roughly -8% in just 4 days. That's a pretty sharp correction (which is why I took partial profits into the ramp), and a bounce could happen soon. I would not chase the bounce, as I think prices could settle in lower still before I would look to add back to my positions.

I added some individual names for a trade today, but will keep tight stops on them until I get a better sense of if this market can muster more than just a bounce.

long AAPL, GS, GLD