Markets Bounce Early: Is It Sustainable?

The markets are getting a strong bounce in the first hour of trading, but as we saw yesterday, can it be sustained?

Hard to say. I am always skeptical of strong openings in the market. I much prefer strong closes. But since today is quarter end, we might see sustained buying into the closing bell.

The FOMC held rates steady yesterday, as expected. They also spoke about inflation pressures again. This is just the Fed trying to jawbone the market. That is the stage of the interest rate cycle where we find ourselves. The Fed will continue to jawbone the market, and talk about inflation, even as we get evidence that inflation pressures are easing.

To wit, this morning's core PCE inflation rate was just +0.1%, pushing the year/year rate down to +1.9%. This is below the Fed's 2007 inflation forecast of 2.0-2.25%. The bond market took notice, and pushed the 10-year yield down as low as 5.05%. I believe we will see inflation remain low, as the slow economic growth continues.

Asia was mixed overnight, with Japan up and China down. As for the Yen, it has plummeted back down the last 3 days, erasing fears of the carry trade unwinding.

*** No Blogging Today ***

I will be out of town for meetings today, and will not be blogging. I will be back at my post on Friday.

Short Interest Continues To Soar

My colleague Gary Smith sent me this graph of short interest on the NYSE over the last several years.

You can see that not only has it been steadily increasing, but it has recently accelerated. There are many reasons for this, one of which has been the ballooning of hedge funds employing absolute return strategies.

These strategies have garnered a huge share of fund inflows in the last several years (since the bear market), and now even mutual funds are being created to mimic these strategies. But if we get to a point where the market rallies strongly and these funds begin to meaningfully underperform traditional long-only funds, I think we could see a reversal in fund flows.

These shorts need to be covered at some point, and a prolonged or outsized rally in the market could easily spark round after round of short covering. My colleague and I call this MOASCR (mother of all short covering rallies).

Market Dips On Weak Durable Goods Report

The market has opened under some selling pressure after an economic report on durable goods came in weaker than expected. But this series of data is very volatile, so I wouldn't call it a trend yet.

At least we don't have another strong open, that fades by the end of the day. Maybe we can reverse the pattern today. I would love to see this weak open turn midday, and rally into the close on strong volume. That could excite buyers, and help build some quarter-end momentum that has been missing this week.

The 10-year yield gapped lower this morning, and is down near 5.05%, the fourth session of lower bond yields. Oil is also trading lower again, with crude near $67.50. The energy complex is very weak, with refiners leading the declines on an analyst downgrade.

Asia was down across the board last night, save China which bounced. The Yen had a big spike yesterday, exacerbating carry trade fears, but I suspect it is just some quarter-end squaring of positions.

Oracle (ORCL) beat expectations last night, and that is helping the NDX outperform this morning.

Engine room....more steam!

Another Bounce At The Open

The markets are getting a lift in early trading. Oil is down nearly a buck to $68, and bond yields are steady with the 10-year around 5.08%. There was also another slew of M&A activity announced this morning (what happened to the weekend?).

This time, it is large European companies doing the buying. Roche is launching a hostile bid for VMSI, sending that stock +44% higher. HUN and EAS are also being bid for.

Yesterday was clearly disappointing. You have heard me say many times that I am distrustful of a market that rallies strong early in the session. That kind of setup often leaves the market vulnerable to a late day selloff.

So today, I would prefer to see the market just mull around for the morning, and then build strength into the close. I think financials will be the "tell" for the day. I am keeping an eye on Goldman Sachs (GS) and Bear Stearns (BSC).

But I still believe quarter-end will begin to influence buyers and the markets will finish the week higher.

Hedge Fund Worries Weigh On The Market

The concerns over the bailout of the Bear Stearns (BSC) sponsored hedge funds is really weighing on the market. There were some conference calls held today that shed additional light on the problems that face BSC right now, and that weighed on the entire financial sector.

Some are classifying this as the biggest bailout since LTCM. Others are saying that it is the biggest test BSC has faced in decades.

The graph above shows that the major subprime indexes have made new lows recently, as the subprime mortgage mess continues to work its way through the system. Last month, it looked like these indexes had bottomed and were turning higher. But the recent news and turmoil among hedge funds is sparking a new round of concerns.

These things can take time to play out. When funds get in trouble, there are plenty of other players that take delight in shooting against them, and trying to profit from their misfortune. Remeber what they said in The Godfather, "...it isn't personal, it's just business".

The Yen Carry Trade: Alive and Kicking

The Yen has been sliding now for for nearly four months, ever since spiking in early March. That spike helped spark a dramatic selloff in the U.S markets, but those worries seem all but forgotten today.

The Yen has actually slid to a 4 1/2-year low versus the dollar. This indicates that the Yen Carry trade is alive and well, and that investor's have been zealous to borrow Yen to invest in higher-yielding assets.

The Yen has also hit its lowest levels versus the British pound since September 1992. The pound is one of the favored currencies used on the other side of the carry trade.

At some point, the Yen is likely to rally and concerns about the unwinding of this massive trade will resurface. But that is not today's issue.

Monday Morning Musings

The market opened mixed, but has since turned higher in early trading. One the one hand, the market may be beginning to bounce after last week's declines, and ahead of quarter end. On the other hand, we do have both bond yields and oil moving lower this morning, which is also helping improve sentiment.

The yield on the 10-year is down 5 bps to 5.08%, and the chart looks like its forecasting more downward pressure. Oil is also easing, down more than a $1 near $67.80.

And China got walloped in overnight trading. The Shanghai Index fell -3.68%, a big drop. I tried to position for this with a short FXI trade, but the Chinese ETF isn't budging. As such, I am looking to cover my short trade. Frustrating.

The home sales report was fairly weak this morning. Home prices eased further, and the supply of homes on the market rose again. This is causing a bump up in the fed funds futures that predict the chances of a rate cut.

I still think the combination of the subprime mess, and add to it the Bear Stearns hedge fund blowup, gives the Fed good cover to cut rates later this year.

Weekly Wrap

Here is the weekly recap from Briefing.com:

After a slow start to the week, the stock market action picked up on Wednesday following a number of reports discussing the troubles of two Bear Stearns mortgage hedge funds. By Friday's closing bell, there was little mistaking the bearish bias that governed the week and which left the major indices with some sizable losses that were exacerbated late Friday in the wake the Russell rebalancing.

Worries about a potential domino effect related to the troubles at the aforementioned funds took a toll on market sentiment, which was already wavering given the recent jump in interest rates.

The yield on the 10-year note dipped as low as 5.08% on Tuesday, but by Thursday's close, it was back at 5.19%. A flight-to-saftety trade on Friday drove the yield down to 5.13%, but it looks as if a 5.0%+ yield could easily hold.

The latter realization has effectively sapped the momentum from the market, and combined with reports of hedge fund troubles, it diminished investors' appetite for buying stocks in the past week.

The sell-off in the market was broad-based, but in light of the concerns about rising rates and the uncertainty regarding the hedg fund community's exposure to the subprime fallout, it was little surprise to see the financial sector pacing the broader market's retreat.

REITs and investment banks were some of the hardest hit industry groups, as were other rate-sensitive areas such as homebuilding, electric utilities, and real estate management.

Private equity firm Blackstone (BX) was a standout in the financial sector, though, as its emergence as a publicly-traded company on Friday got a warm reception. Blackstone priced at $31, the high end of its range, and traded as high as $38 in its first day of trading.

BX settled at $35.06, however, as poor market conditions and reports the House is angling to pass legislation that will raise taxes sharply on the "carried interest" for investment firms like Blackstone took some of the wind out of the stock's sails.

That news also weighed on the broader market, which feared a successful passage of such legislation could curtail LBO activity. That fear was misplaced. Higher taxes will impact the valuation of affected companies, but it is interest rates that drive LBO activity. So, if the market were to fear anything on this front, it should fear rising interest rates.

There were no major economic reports in past week.

The May Housing Starts and Permits report was mixed and did not have much impact on economic expectations or the market since the data were largely from a period before the recent spike in interest rates. The trend in new claims for unemployment remained steady and continued to reflect tight labor market conditions.

Meanwhile, the Philadelphia Fed reported a much stronger than expected report on regional manufacturing activity, but that report didn't have any real impact ahead of next week's FOMC meeting (June 27-28).

On the earnings front, there were a number of well-known companies that reported their results. They included Best Buy (BBY), Carnival (CCL), Darden Restaurants (DRI), Circuit City (CC), FedEx (FDX), Morgan Stanley (MS), H&R Block (HRB), and Jabil Circuit (JBL).

Most notably, electronics retailer Best Buy reported first quarter earnings that missed analysts' expectations and lowered its fiscal year outlook, as increased sales of lower-margin products weighed on results.

The weak forecast raised some concerns about the impact of industry competition and some residual concerns about the health of consumer spending. It would be remiss not to add, though, that Best Buy's revenues were actually up 14% for the period, so consumers clearly haven't shut their wallets.

As expected, moderating economic growth had a negative impact on FedEx's fiscal fourth quarter results, which also came in below analysts' estimate.

In other corporate news, Home Depot (HD) announced a massive $22.5 billion increase in its stock repurchase plan, which gave the Dow component a nice lift during a week when most stock prices were depressed.

A Few Good Stocks

The market closed basically at its lows for the day. The market had been up for the last 12 Fridays, as traders tried to position for any weekend M&A activity that would boost the market come Monday morning. But leave it to the market, as soon as a trend gets overplayed it becomes DOA.

Amongst the sea of red on my screens at the close, there were a few standout stocks. One was Google (GOOG), which made a new closing high today. That's some strong action in the face of overall market weakness.

Another stock that stood out was BE Aerospace (BEAV), which judging by the volume was obviously skewed by the Russell rebalancing. Nonetheless, the stock closed at a new high.

long BEAV, GOOG

Has Radiation Therapy (RTSX) Bottomed?

My Stock of the Day is Radiation Therapy Services (RTSX)

I have been bullish on this cancer treatment stock, as the compnay has good growth and strong fundamentals. But the stock has been mired in a downtrend that has been troubling.

It is sometimes painful watching and waiting for a stock to bottom, but I have held off adding to this position until I see some signs of stabilization.

Yesterday, the stock bounced sharply out of its recent consolidation. Volume surged on the move, adding to my conviction that the bounce could have legs. Also, a look at the chart shows the stock is coming out of deeply oversold territory.

The stock still has a lot of work to do, but a reversal of the recent downtrend would be a great start. And yesterday's action could be the first step in establishing a new uptrend.

long RTSX

Blackstone Prices Largest IPO Since 2002

The market is under some selling pressure in early trading. There was no real negative news. Bond yields are creeping back up, with the 10-year yield at 5.17%. And oil is nearing $69. So both of those are certainly headwinds for the market.

The other notable event was the pricing of the biggest IPO since 2002. Blackstone (BX) priced its IPO at $31, giving it a market cap of $33.6 billion. It opened +17% higher when trading began, and is currently hovering around $36.

In other news, Bear Stearns (BSC) is throwing its two trouble hedge funds a $3.2 billion lifeline, stirring up memories of Long-Term Capital Management (1998). But I see very few similarities.

Also, the Russell 2000 will get is annual rebalancing after the close today.

I wouldn't be surprised to see the market firm into the close. The last 12 Fridays have been up days in the market as investors anticipate more deal making to occur over the weekend.

Market Bouncing After Big Distribution Day

The market is getting a bounce in early trading, following yesterday's big selloff. The S&P 500 bounced right off its 50-day support this morning, but it has tested this level several times now in the last month, which makes it more likely that this support could give way.

The financials are under pressure this morning as two Bear Stearns (BSC) hedge funds are in trouble, and weighing on the sector. The restaurant group is also lower, as Starbucks' CFO said the high-end of its current guidance would be challenging due to higher dairy costs this year.

The energy complex is higher, as oil bounces again. Crude prices hit $69.50 today, which is another headwind for the overall market. The 10-year yield is also up a bit, near 5.13%.

But Asian markets shook off our weakness, and were mostly higher in overnight trading.

long SBUX

Oil Prices Dip, Helps Support Stock Prices

The market opened under a bit of selling pressure, but that has since reversed. The oil inventory data released this morning showed a build in supplies. That pushed oil prices lower, and helped lift stocks.

The market also got a boost from Home Depot (HD) seeling its supply business and announcing a $22.5 billion stock buyback. Morgan Stanley (MS) reported strong earnings and revenues, while FedEx (FDX) reported disappointing earnings results. But FDX stock is trading higher on the news, which implies the stock had already priced in this report.

Also, Nuveen (JNC) is being bought out by private equity, pushing the stock up +17%.

The yield on the 10-year is relatively flat at 5.10%. Asian markets were mostly higher overnight, except China which saw a -2% decline.

The S&P 500 is consolidating just under its recent highs, poised to breakout. The Nasdaq is already making new highs, while the mid-cap index is lagging after being the leading index all year.

Trade Update - Crocs (CROX)

Last week, I wrote that I was taking profits on Crocs (CROX) after a huge run for the stock.

Despite, hovering deep in overbought territory for a while now, the stock has refused to come down. Some of this could be due to the still high short interest in the stocks, which continues to fuel new rounds of short-covering on each uptick.

It also helps to have analyst upgrades, like the stock got today. The analyst from Wedbush raised his rating to 'Buy' and also raised his price target to $54. I don't think I would have put a buy rating on the stock yet, but his price target seems reasonable.

He raised his 2008 earnings estimates to $2.15. So that would imply just a 25x P/E multiple, which is basically in-line with the company's growth rate. This seems doable.

The company also signed another license agreement, this time with Marvel Entertainment, for characters like Spider-Man and the Fantastic Four. They also opened their first U.S. store in Santa Monica. I'll try to stop by over the weekend and let you know my thoughts next week.

no positions

Solid Housing Data Not Enough To Boost Stocks In Early Trading

The market is down a little in early trading, after a disappointing earnings report from Best Buy (BBY). Investors often look to BBY as a good "tell" on the consumer, since it sells so many products that are popular with consumers.

There were some solid housing figures this morning, but the market is shrugging them off, likey due to the fact that they cover a period before the recent runup in interest rates.

Yahoo (YHOO) got a boost before the open, after CEO Terry Semel said he was stepping down. But the enthusiasm quickly faded, and the stock is lower once again. I have always wondered why YHOO continued to trade at a premium to Google (GOOG), but maybe that is beginning to change.

Asian markets were mostly higher overnight. Oil is trading lower this morning, but it still above $68. And the 10-year yield is also lower at 5.12%.

long GOOG

Jones Soda (JSDA) Gaining Some Fizz Back

My Stock of the Day is Jones Soda (JSDA).

I have been long this stock before, and even short for a brief time after the shares broke above $30. At the time, I felt the stock was way ahead of itself, and would surely need to come down. But I have to admit to covering my short position quickly, and not sticking to my convictions.

Nonetheless, the stock has endured a long slide to get back to the level it sits today. Some of this was due to the company reporting earnings that didn't live up to lofty investors' expectations. Then last week, there was news that Starbucks would stop selling its sodas in stores.

The CFO has since stated that the revenues received from the SBUX relationship account for less than 1% of current total revenues. That makes sense, as the Jones sodas were only sold in 40% of the locations, and most people are running into Starbucks to buy a soday.

This year, JSDA signed broad distribution agreements with Wal-Mart, Safeway, Albertson's, and Kroger which should be huge. This is the main reason why the stock ran so far, so fast earlier this year. They are also rolling out a national advertising campaign which should really help increase the brand awareness. And they got an exclusive beverage deal at Qwest Field in Seattle.

Today, the stock got upgraded by ThinkEquity Partners, which boosted it by more than +10% today, on a big boost in volume. I think the upgrade is timely, as the stock has just tested its 200-day moving average, and is finding support. It is also very oversold, and likely due for a nice bounce.

long JSDA

No Big M&A News To Start The Week

The market is down slightly in early trading. Traders were likely looking for some big M&A news to hit the wires this morning, but there was nothing to speak of. Just the continued rumor of BHP for Alcoa (AA).

Bond yields are up a bit, and oil has reversed higher as well, both of which are providing small headwinds for the market right now.

But the Asian markets were on fire overnight. Shanghai rose +2.92%, Hong Kong +2.69%, and S. Korea +1.95%. Those are some pretty hefty gains.

And despite the improvements in the markets last week, investor sentiment remains on the skeptical side of the ledger. Can you say 'wall of worry' again?

Trade Update - Akamai

One of my recent trades, Akamai Tech (AKAM), has started to have a nice move in the last several days.

I am not ready to get out yet, but I think I may hedge a little of my long expsoure as the stock nears some resistance.

The stock is approaching its overhead 200-day average, which could act as resistance the first time it is tested. Also, a look at the stochastics on the chart shows that the stock is also well into overbought territory as it approaches said resistance level.

As such, I am going to decrease my long exposure slightly, with the expectation that AKAM pulls back a little before ultimately getting through these resistance levels and back into the $50s.

long AKAM

European Bourses Post Second Day of Big Gains

The European markets just closed, and for the 2nd straight day, posted some impressive gains. As the global markets seem to trade more in sync these days, this bodes well for our markets here. This is how some of their markets fared:

• Germany: +2.31%
• Norway: +1.94%
• U.K.: +1.24%
• Netherlands: +1.20%
• Italy: +1.18%
• Spain: +1.15%

For comparison purposes, if the Dow gained 2.31% today, it would translate to more than 300 points. The U.S. market has lagged most of its European and Asian indexes over the last few years, so a period of catch-up is in order.

Still Climbing That Wall of Worry

So many investors were worried about today's CPI report, that I suspect many were underinvested relative to what would happen if we got a benign report.

Well, that is exactly how it played out. The core CPI came in at +0.1% (vs. +0.2% consensus), which brought the year/year rate down to +2.2%. This is withing the Fed's comfort zone, and should keep them on the sidelines a while longer.

Bond yields are dropping on the news, with the yield on the 10-year down to 5.17%. And since the stock market has been taking its cue from the bond market lately, the Dow is surging more than 130 points right now. And the S&P is only 1 point from a new high.

In stock news, INTC got a big analyst upgrade and is helping power semis higher. Nymex (NMX) is rumored to be exploring a possible sale, and Penn Gaming (PENN) was acquired by a private equity consortium for a +31% premium.

Asian markets were all higher overnight, and Europe is also up nicely. Participation among the subsectors is broad, although its still early in the session.

Bond Yields Reverse Lower, Stocks Rally

The core PPI came out in-line this morning, which is helping ease inflation worries. Tomorrow's CPI report will probably be a better indicator of near-term inflation trends. Nonetheless, this recent run-up in yields is more of a signal that the economic growth slump is likely behind us, and stronger economic growth lies ahead.

That is not a bad thing, and the stock market agrees. The yield curve has been inverted for quite some time, which pressures the financial complex. So a more positive slope to the yield curve is another welcome event, even if the move was a bit abrupt.

But today, for the 2nd day in a row, bond yields spike early and have reversed lower from there. If you looked at the 10-year yield chart like a stock, you would probably say it looks like it has topped.

Asian markets were up strongly overnight, with S. Korea spiking +2.7% and Hong Kong up +1.4%. Those are very solid gains, and the Yen continues to slide vs. the dollar, so the yen carry fears are not about to resurface right now.

Goldman Sachs (GS) beat estimates handily, but there is still some profit taking in the stock. The CFO said there is likely "more pain in the subprime market", and that we have not seen the bottom yet. But the bank index (BKX) is looking stronger, and I think is already looking past the subprime mess.

long GS

Stock of the Day

My Stock of the Day is Akamai (AKAM).

AKAM is a great growth company, that often trades at a premium multiple. The stock suffered a tumble after reporting earnings in April. It wasn't that the earnings were bad, but that investors had lofty expectations, and punished the stock unfairly when they didn't raise guidance more.

The stock has been undergoing a correction for the last couple of months, but the recent action leads me to believe that the correction is almost over, and the stock is ready to resume its uptrend.

A look at the chart shows that last week, the stock vaulted out of its recent consolidation range on a big spike in volume. The next day, the stock added to its gains on another big volume day. Since then it has been trading sideways, despite the big down day in the market.

I think the stock is ready to overtake its 50-day average resistance that lies just ahead. Over time, I expect the stock to go on to make new highs again before the end of the year.

As for the rest of the market, it too has been adding to its gains throughout the day. The market is still oversold, so I think this bounce should last a bit longer.

long AKAM

Market Likely Bouncing From Oversold Levels

We got some strong economic news this morning, in the form of retail sales. May retail sales rose +1.4% (vs. +0.6% consensus), bouncing back from a weak April. The bond market doesn't like to see the strong economic news right now, as it continues to put pressure on higher rates. But the stock market also was worried that economic growth was slowing too much, so this data helps refute that notion, and also points to a still strong consumer.

Bond yields are slightly lower, after a brief spike higher, with the 10-year yield around 5.20%. Bond investors will likely take advantage of yields at these levels, which have risen nearly 60 basis points in the last 10 days.

Asian markets were mostly lower overnight, except China which bucked the weakness. And our stock market, which opened higher, has been building on its gains so far this morning. I think much of this has to do with the fact that the rececnt selloff in stocks pushed them into oversold territory, so a bounce is certainly in order.

The SPX closed right at its 50-day last night, another area where you usually see the index find support. If the 50-day level is broken in the next week or so, it will likely indicate a bit longer correction is in order. But let's take it one day at a time.

Big Spike In Bond Yields Worrying Investors

Bond yields are higher again this morning, with the 10-year hitting 5.21%, and getting closer to a new 52-week high. And while the Fed is on hold, other central banks around the globe have been tightening. The trend towards higher rates is obviously worrisome to equity investors.

But I believe this is just a cyclical uptick in interest rates, and not a sign that rates will continue to move indefinitely higher. It actually could set us up quite nicely for a rally later in the year if rates eventually decline from today's levels.

Lehman (LEH) reported very strong earnings this morning, with record revenues. Also, the CFO said he sees positive signs in the subprime mortgage market, as weaker players have exited the business.

Asian markets were mostly higher overnight; the dollar is higher vs. most currencies, and oil is basically flat. If the put/call ratios spike early today, we could see some recovery into the close.

Sentiment Still Showing Ample Skepticism

They say a bull market likes to climb a 'wall of worry'. So you need to have fairly persistance skepticism that the rallies can continue. And as the market stairsteps higher, only slowly does it drag investors away from the sidelines and into the market. The incremental buying power continues to drive share prices higher, until the last marginal buyer is in the market.

So we continue to monitor investor psychology, especially with each little pullback in the market. And true to form, each time the market pulls back from its highs, the chorus of bears come running out to exclaim that the bull market is over and a new bear market is imminent.

The SPX is roughly -2% off its highs right now, but there is ample skepticism by investors. To wit, the put/call ratio has average 1.10 over the last 5 days, and over 1.01 for the last 10 days. That is a lot of put buying, as options investors worry about protecting their portfolios from losses, and speculators continue to look for any opportunity to bet agains this market.

The AAII survey has also showed few bulls than bears in 5 of the last 6 weeks. This is another anecdotal piece of data showing how pessimistic individual investors are. And even the big Wall St. strategists are cautious, with price targets barely higher than where we stand today.

The chart above shows that June is not the best month for the market, on a seasonal basis, but I think that the 2nd half of the year will be very good.

Sopranos: Worst Finale Ever?

I read a review today that praised the finale of The Sopranos. Huh? The journalist said that writer and director David Chase stayed true to his vision, and didn't shoot the bloodbath-type ending many expected.

He may have stayed true to his vision, but the show was just plain boring. I think the last 3 or 4 episodes were equally as boring. What does this guy have against giving viewers what they want to see? The reason why many viewers turned on the show in the first place is that Americans have a fascination with the Mafia.

I will admit that what made the show unique was that it tried to humanize these charactes by showing their real lives. But Tony's suffering and trying to come to grips with the "human condition" seemed to take up too much of the show, imo.

I love almost any Mafia show, but this one got to the point that it was barely interesting. If it wasn't for the fact that this was the last season ever, I may have simply stopped tuning in every week. So say what you want about the writer/director, I think he did a poor job in the end.

Hopes Of Monday M&A Activity Fade

The market closed higher for the 12th straight Friday last week. Mostly due to the fact that every Monday we hear some big M&A news. But this morning there is little merger activity to report, and the markets are a bit sluggish.

An earnings warning from Nucor (NUE) for Q2 is weighing on the steel stocks, making it today's worst performing group so far. Utilities are bouncing back, despite the fact that the 10-year note is up again, with yields at 5.14%.

Piper boosted its target price for CROX to $96. But for the most part, there are few catalysts to keep this market moving higher in the near-term. Sentiment is already fairly bearish, so I still believe any pullback will be short-lived and the market will go on to new highs.

Valuation models are still very attractive, and we haven't really seen much yet in the way of multiple expansion.

After Three Day Selloff, Stocks Will Likely Bounce

Stocks took a nice drubbing yesterday, but it wasn't much of a surprise given how far this rally had gone. Now that stocks have been down for 3 consecutive days, they will likely bounce from an oversold condition.

The real schmeissing was in the bond market, where yields on the 10-year have risen to 5.12%. This makes bonds more attractive, and we could see some asset allocation shifts out of stocks and into bonds in the short-term.

The trade deficit reported this morning narrowed more than expected, which could provide a little boost to Q2 GDP forecasts. And comments from Chicago Fed President Moskow indicate the Fed is comfortable that inflation remains well contained.

Asian markets were lower overnight, but the weakness didn't spillover and hurt the opening of U.S. stocks this morning. Let's see if the early bounce can last into the close as traders prepare for the weekend. With summer starting, you begin to see the pattern of folks on Wall St. heading out early as they make their way to the Hamptons.

And please don't get me started with the Cavs last night, who looked terrible. Let's hope they can grab game 2, and go back to Cleveland with the series tied.

Market Takes It On The Chin

The market didn't get any late-day bounce today, and finished at session lows. The S&P 500 declined -1.76%, the same as the Nasdaq. Mid-caps underperformed a bit, falling -2.1%. Among the subsectors, brokers, biotechs, homebuilders, and utilities were hit hardest.

The rise in bond yields was the biggest culprit for today's weakness. I have been saying for quite a while that this market was overdue for a pullback. So when it comes, most people want to look for a big negative headline to hang their hats on. But suffice it to say, the news was just an excuse to take profits off the table.

The weakness today was notable, though the declines in the major indexes were half as much as we saw at the end of February when the markets plunged. One surprising stat I noticed was that downside volume on the NYSE made up 93% of total volume. That is one heck of a buyer's strike.

And looking at the Hi/Lo index, the NYSE went from having 319 net new highs on Monday, to having -65 net new lows today. That is a big swing. I suspect that many of the new lows came from closed-end bond funds and the like.

What was nice to see, was that again this selloff was met with high levels of bearishness. Investors are not taking this latest pullback in stride. The CBOE put/call ratio closed at 1.25, an elevated level. And the ISEE finished at the put/call equivalent of 1.35, a very high reading. Likewise, the ARMS Index closed at 1.56. These are good signs, and should help stem the tide of selling at some point.

I don't think this correction will be too deep, as there is still too much underinvested money on the sidelines. But I still think the market could take 3-6 weeks to form another base from which to launch higher. Patience.

Rising Rates Contine To Provide Excuse To Take Profits

I should just start out my post by saying "ditto". That is because once again we see the market under pressure at the open. For most of the last few weeks, any early weakness has dissipated by the market close. But yesterday the market did close with mild losses.

Of course, the silver lining of yesterday's selloff was that the investor sentiment indicators spiked higher quickly. This is a good sign, in that it means that investors are still skeptical of this market, and that should help any pullback be relatively shallow.

New Zealand unexpectedly raised interest rates yesterday, which is adding to the rate worries among equity investors. The 10-year U.S. T-Note spike higher, to 5.05%. That is the highest yield since July 2006.

And oil is spiking also this morning, with crude prices topping $67 on worries about storms in the Persian Gulf. May same-store retail sales were also released this morning, and were a bit of a mixed back. (I will have a roundup later).

On a positive note, UBS upped its target on Apple (AAPL) to $160, saying investors are underestimated its potential free cash flow and strong demand for iPhone.

long AAPL

Higher Interest Rates Just An Excuse To Take Profits

The market is lower once again this morning, after the ECB raised interest rates in Europe. They raised their benchmark rate to 4.00%, which is still well below the 5.25% fed funds rate in the U.S. Also, Morgan Stanley issued a strong sell rating on European equities, helping push those markets to greater than 1.0% losses.

The yield on the 10-year note here in the U.S. is approaching 5.0%, a level it last reached back in August 2006. But this 5.0% level is still below our fed funds rate. So it isn't a level that is going to choke earnings growth of GDP in our economy.

Rather, it is just a convenient excuse to take some money off the table after what has been an extraordinary run following the March correction. And seasonally speaking, the market often has difficutly making significant headway as the summer begins.

Google Makes New Highs

My Stock of the Day is Google (GOOG).

After a period where tech investors wondered why GOOG wasn't performing better, and why it's valuation trailed that of other Internet stocks, GOOG has now rallied back to new yearly highs.

The fundamentals at the company have remained strong. Earnings and revenue growth have been robust, and they continue to gain incremental market share in the search market. Additionally, they have started to make acquisitions both for online advertising, as well as the burgeoning video ad market.

As one of the great growth stocks of this cycle, I believe GOOG should get a premium, growth stock multiple. I think the stock will reach $600 by year-end, which isn't even that big of a stretch.

A look at the chart above shows the stock hit new highs yesterday, which removes any future resistance levels. This consolidate pattern has been a long time in the making. GOOG first hit $513 in November 2006. So this breakout is even more meaningful, imo.

The stock looks a little short-term overbought. But I suspect that after some mild consolidation, GOOG should enjoy a nice second half of the year, and so should investors.

Bernanke Says Housing Downturn Sharper Than Expected

Bernanke gave a speech this morning, in which he said that the housing downturn was sharp and longer than expected. I'm not sure I agree though. Given the strong, multi-year runup we experienced in housing (driven by low interest rates), I think that the reaction has been fairly muted in most parts. There was some carnage in the subprime sector, but the pain was pretty concentrated.

Regardless, his comments are weighing on the markets in early trading. I can't count how many days the market has opened weak, only to rally into the close. Yesterday was another great example of this, following the morning weakness stemming from China. This is classic bull market action.

We also got a strong economic report, with the ISM Services Index coming in stronger than expected (59.7 vs. 55.5). This has many market participants feeling that the Fed isn't likely to lower interest rates. But I'm sure that's just how the Fed likes it. They certainly aren't going to telegraph it and make it easy for investors to predict. Though maybe they should.

Oil is trading lower a bit, weighing on the energy complex. And bond yields are higher, with the 10-year closing in on the psychological 5.0% level (currently 4.97%).

I am almost fully settled in at the new office, so my blogging should be up to full speed in no time.

Monday Morning Musings

The markets capped off a very positive week with a strong close on Friday. Growth stocks and the Nasdaq were the week's best relative perfomers. This morning, the markets are opening under a bit of pressure following another big selloff in China.

The Shanghai Composite plunged -8.3%, on top of last Wednesday's drop of -6.5%. That is some extreme volatility, but not out of the ordinary when you are talking about the kind of bubble we are seeing in China.

What is interesting is that many of the other major indexes in Asia shook off the action and took it in stride. Both the Nikkei and Hang Seng actually finished higher on the day. Last week, the U.S. market also shook-off the "Shanghai Surprise" and closed higher by the close. We could see the same thing today, although a normal bout of profit taking makes that call tougher.

There was some M&A news this morning, as you would expect, but nothing of the blockbuster variety. Flextronics (FLEX) is buying Solectron (SLR) for $3.6 billion. Both of these names are blasts from the past, and can probably benefit from the consolidation.

Crude oil prices are higher, pushing back above the $65 level. Bond yields are slightly lower, with the 10-year at 4.94%. Gun to my head, I think stocks will finish mixed today.

Go Cavs! LeBron Soars To New Heights

I got an e-mail from a reader today asking me what kind of Cavs fan I am, and how could I not even comment on their victory? Rest assured, I had every intention to. But I moved offices today, and got so bogged down in getting all my tech stuff set up, that I had little time left for posts.

Suffice it to say, that was one of the best games I have ever seen for the Cavs. And I have been a fan for a long, long time. I haven't been that excited/nervous/riled/exhausted by a Cavs game since Mark Price, Brad Daugherty, Larry Nance, and "Hot Rod" Williams were in the conference finals.

If you didn't see the game, the highlights and box score simply don't do it justice. There were more lead changes in this game than I can count. The shots LeBron took, and made, were simply out of this world. If I was a Detroit fan, I would surely be deflated. But as a Cleveland fan, I have been there so many times I haven't the least bit of sympathy.

LeBron did have a career high 48 points, and 9 rebounds and 7 assists to boot. But what was the most shocking was that he scored 29 of the Cavs' last 30 points! I'm not sure even Michael Jordan ever carried his team that much (and I'm not saying LeBron is Michael, far from it). It was truly a sight to be seen.

Even University of Colorado alum Chauncey Billups acknowledged the effort, saying "He put on an unbelievable display out there. It's probably the best I have seen against us ever in the playoffs."

Strong Economic Data Boosts Stocks To New Highs

The market got more good news this morning in the form of better than expected economic data. The important May payrolls report came in above consensus estimates, with a gain of 157,000 jobs last month.

There were also some other positive datapoints, in the form of the ISM Index coming in better than expected (55.0 vs. 54.7), and the core PCE inflation guage coming in below expectations (+0.1%). This latter point is important, in that lower inflation pressures would allow the Fed to cut rates sooner.

Bond yields are reacting to the news by moving higher, with the 10-year yield hitting 4.94% and closing in on the psychological 5.0% level, which it has not seen since August 2006. The dollar is also doing well, getting a bounce vs. both the Yen and the Euro.

Retail stocks are strongest group so far this morning, along with energy stocks. Healthcare and utilities are lagging.