2 Hours To Go

With 2 hours to go in this week's trading, the indexes are near their highs for the session. If the markets were to close at these levels, the S&P 500 would be up +1.9% for the week, while the Nasdaq 100 would be up a whopping +3.9%.

Oil briefly dipped below $126, but has since rallied back to $128. The 10-year yield is lower today, trading near 4.03%.

Put/call ratios are around average levels, with the CBOE put/call at 0.87 and the ISEE is at 135. The VIX, after spiking higher on Monday, has been down 3 straight days and is now at 17.66.

Overally, the action in the market this week has been constructive. Rallies have come on higher volume for the most part, and growth stocks have led even without leadership from energy and commodity stocks. Financials continue to languish, but have not broken back down to new lows.

Monday starts a new month, and we could see fund inflows support the market early next week also. I continue to look for any pullbacks to put some of the cash to work that I had raised a couple of weeks ago.

The Oil Bubble - Part 2

In Part 1 of “The Oil Bubble”, we looked at the current price appreciation in crude prices and tried to determine if it was sustainable or not. We compared the recent run-up to other various commodities, all of which have corrected sharply, and also compared the multi-year advance to other bubbles like the tech bubble of the late 90s and the more recent housing bubble. Our conclusion is that oil is indeed a bubble, but that it is difficult to determine what inning of the game we are in, to use a mixed metaphor.

In this missive, we are going to look at the causes of the sharp ascent in oil prices. The media has run countless stories about who is to blame, and Congress has even hauled in big oil executives to point the finger and demand answers from them. But as we will discuss in a bit, Congress should really take a more introspective look if they want concrete answers.

Economics 101 tells us that the rise in the price of a good is purely a function of supply and demand, and specifically the intersection where the two reach equilibrium. As such, if demand rises while supply is held constant, prices need to rise for the market to remain at equilibrium. So let’s take a look at both supply and demand, both of which have played a role in the oil bubble.

First, most observers consider it a foregone conclusion that demand has skyrocketed, due to the large number of new consumers that have emerged in countries like China and India. But the recent run-up in oil prices has far outpaced anything seen on the demand side.

Global oil consumption grew +2% in the first quarter of this year, while production increased +2.5%. So there is not an outsized amount of demand being physically consumed. That means that a large amount of demand is coming from speculators, who drive the futures prices of oil higher purely for investment reasons.

Institutional investors, battered by the bear market in 200-02, turned to a new so-called asset class in the form of commodities. Investment demand came from all sorts of institutions, from hedge funds, endowments, pension funds, Sovereign wealth funds, and exchange-traded funds. In the first quarter of 2008 alone, global investments in commodity indexes rose $40 billion (+28% yr/yr) to $185 billion, a larger gain that all of 2007, according to Citigroup.

Hedge fund manager Michael Masters testified before Congress last week that while China’s demand for oil has increased by 920mn barrels in the past 5 years, demand for petroleum index futures has increased by 848mn barrels. This means the effect of speculators in just about as large at all the growth from China. Pretty amazing.

So it’s clear that demand is rising, but it’s not just from growth in emerging market economies. That part of the equation is relatively easy to quantify. The wildcard, and the one which I believe has more to do with the recent parabolic spike we’ve seen in crude prices, is from the new “Index Speculators” as Mr. Masters has called them, or institutional investors.

In Part 3, I will delve into the supply side of the equation, and how Congress is really trying to deflect blame by casting the big oil companies as the enemy.

Charts of the Day

The market rallied nicely today as oil pulled a double reversal. After this morning's data, oil rallied back to around $132. But as the chart below shows, it then proceeded to rollover, and finished at its lows for the day.

Not only was this one of the biggest downward reversals for oil in weeks, but the volume in the oil ETF (USO) was the highest its been, I believe since inception. You can also see that its relative strength line is rolling over, and the stochastics are coming off of very overbought levels. If this were a stock, I would be predicting lower prices ahead and taking profits.

I have long been harping on the (inverse) relationship between the Yen and the U.S. stock market. Whenever we saw the Yen moving higher (represented above by the Yen etf), it would correspond to a down move in the stock market. So it is a bullish sign to see the FXY consolidate below its 50-day average, and then start to break out of that consolidation to the downside. This is also occurring amid a bounce in the U.S. dollar.

You can see similar price action in the Euro ETF (FXE). This one also broke below its 50-day today, and has left a lower high in the chart above. Relative strength is on the decline, and the stochastics are curling lower after reaching overbought territory.

Away from currencies and commodities, I wanted to highlight the bullish move in Google (GOOG) today. Today's comScore data was bullish for GOOG, as it showed accelerating paid clicks. The action in the stock is also bullish, as GOOG broke above its overhead 50-day average, and reversed last week's weakness. A break above $600 would be even more bullish, and likely usher in a new uptrend.

Last, I wanted to highlight the biotech ETF (XBI), which is breaking out of a consolidation today with a sharp move higher. The ASCO biotech conference starts this weekend, and will likely spark renewed interest into this growth industry.

These stocks are representative of growth stocks, which have fared well lately and continue to move higher even as energy and commodity stocks have moved lower this week. This is a bullish sign of investor rotation toward growth stocks.

long GOOG, XBI

Oil Starting To Weaken, Until Report Released

If I had written this post a few minutes earlier, I would have said that oil was breaking down further, below the $129 level. But then a report on crude inventories hit the wires and showed a big drawdown in supply. This caused an immediate sharp spike higher in oil, such that prices are now north of $131 again.

This also caused a brief hit in the overall indexes, which were starting to bounce higher. Q1 GDP was revised higher this morning, up to +0.9% from +0.6% originally. While this growth is still sluggish, it is getting further away from the recessionary fears with which the media was fixated.

Asian markets were higher across the board overnight. The dollar is also higher today vs. both the Yen and the Euro. This is weighing on gold and material stocks a bit. And the 10-year yield is spiking above its 50-day average, hitting its highest level of the year at 4.10%.

I remain constructive on the markets, especially following what has been a nearly 5% pullback in the S&P 500. I put a little money to work yesterday, and will look to use further upcoming weakness to put more cash to work.

Into The Stretch: Oil Reverses Higher

Stocks continue to hover slightly in negative terrritory. Its interesting that they haven't sold off more, given that oil has reversed higher after touching 126 this morning. It is now trading near $131.

The financials remain very weak today, down roughly -3%. The 10-year yield is higher still at 4.01%.

In terms of investor sentiment indicators, the VIX is +1% higher near 19.80; the CBOE put/call is around average at 0.85, and the ISE call/put is at 123; the ARMS Index is around 0.97.

The number of bulls in the Investor's Intelligence survery fell this week, knocking the bull/bear spread down to +6 from +17 a week earlier.

BE Aerospace (BEAV) gave a very bullish presentation today at an investor's conference, but the stock is still down a full -4%. I am perplexed by the action of this stock. My work shows that the stock is worth much more than its current value, but I am leery of buying more. Often when stocks trade this bad, there is a shoe out there to drop.

long BEAV

Stocks Pull Back In Early Trading

The market got a boost near the open on a better than expected economic report and falling oil prices, but it has since traded back into negative territory.

The April durable goods report fell -0.5%, but rose +2.5% ex-Transportation. Both figures were better than expectations. Also, oil fell below $126 this morning before rebounding back near $129. So far, oil has pulled back roughly 5% from its highs.

There were some good earnings reports in the specialty retail sector, which is helping lift the retail index. Homebuilders are also bouncing, but financials are showing considerable weakness and it looks difficult for the market to bounce with financials this weak.

The transportation index is getting a lift from a big upgrade on UPS from Hold to Buy at Merrill Lynch.

Asian markets were mixed to lower overnight, while the dollar is up again vs. the Yen and Euro. The 10-year yield is bouncing to 3.99%, its highest level since Jan. 2. I still believe the positive slope of the yield curve is a bullish prediction for the year ahead.

Happy Birthday, Taylor

4 years ago today, I brought a little munchkin named Taylor Reese Kahn home from the hospital. I was nervous about being a dad, and scared about handling this fraile little being in my arms. The first night did not get off to a great start--

Taylor was crying a lot. First, we ran through the normal checklist of possibilities: diaper change, botttle, burp her, etc. None of them really worked. It was very hot in LA that evening, so I figured she might be hot. With nothing but her diaper on, I laid her on my chest and tried to sooth her. Small comfort. She kept crying, and suffice it to say, it was a long night.

The next morning, the baby nurse showed up. Hooray!! The first thing she did was wrap Taylor up in a head-to-toe onesy, put her little hat on her, and fully swaddle her in a blanket. She immediatly became comfortable. The answer was that she was cold, not hot! How could I have been so stupid?!? And was this just a foreshadowing of my parenting skills?

But things have steadily improved since then, such that Taylor's is a true daddy's girl. Her favorite part of the day is when I get home in the evening, and I have to admit, it's mine also. I keep saying that I can't wait until she gets a little older and more self-sufficient. But friends with older kids tell me to enjoy this age, and soak it up while it last. I'll try...I'll try.

Is Early Bounce Today Sustainable?

The stock market is getting a bounce in early trading, but I am sitting here wondering if it is sustainable? I am always leery of strong opens, as they have a tendancy to fade by the close. We shall see. Last week was pretty weak for the market, so this could be bargain hunters looking to buy the pullback.

There wasn't a whole lot of market moving news before the open. The Case-Shiller Home Price Index for March came in at 172.2, which is lower than the reading of 176.0 the previous month. But the homebuilder stocks are up so far.

Oil is falling again today, dipping below the $130 level. This is weighing on the energy stocks, but I suspect we will get some dip buyers in this area soon also.

Asian markets were higher overnight, while the Yen (and Euro) is lower this morning vs. the dollar. The 10-year yield is bouncing to 3.90%. And despite the rally, the VIX is up another 3% to 20.16.

There were more broker estimate cuts, which are weighing on those stocks. I think GS is a buy here, but I am trying to decide if I should wait for them to report earnings. Retail stocks are also getting a big boost, probably on the Barron's article on dining stocks.

Also, I want to thank everyone for all the comments on Part 1 of my "Is Oil In A Bubble?" article. Seeking Alpha ran the piece last week, and it received 106 comments! I am still working on Part 2. Given the strong response, I wanted to make sure I did my homework before posting on this subject again. Boy, did people get riled up at the notion of oil being a bubble.

long GS

Midday Update: No Buyers Ahead of Holiday Weekend

The market opened on a weak note and has stayed that way all morning. Down volume is running about 84% of total volume on the NYSE so far. So there does not seem to be many buyes around ahead of the long weekend.

I was saying all last week that I wanted to sit on the cash I had recently raised until we got a pullback, which I felt was overdue. That pullback showed up big-time this week. The S&P 500 is currently off -4.5% from its Monday highs. That's about as much of a pullback as I was looking for. At the time, I thought something in the 3-5% range could be in the cards.

Also, the S&P is right about at its 50-day average, where the market could find some support. I am reviewing my buy list, and will look to put some money to work either toward today's close or on Monday.

The hard part is figuring out where to add exposure. I think energy and materials need to pull back more, and probably the same for tech. So I will look for select names that have already pulled back, as well as areas where I recently took profits to add back to (steel, ag, nat gas).

Oil has given back most of its early gains today, which is a good sign. Yesterday's high volume reversal still looks like a short-term top to me.

The dollar remains weak today vs. the Yen and Euro. And the 10-year yield is falling 9 bps to 3.83%. The VIX is really spiking, up +9.3% today alone, and +23% for the week. The ARMS Index just hit 2.31, as the selling pressure increases.

Is Oil A Bubble? (Part One)

Oil is now front and center on everyone's radar. CNBC is running a special tonight about oil, and has a banner running across their ticker titled "America's Oil Crisis". Congress is looking for scapegoats to blame for high oil prices, and is hauling in oil executives to testify, and propsing stupid ideas like a windfall profits tax.

Funny, look at the first chart below of wheat (and the chart for corn looks identical). Looks like wheat and corn have had parabolic moves higher, but I haven't heard any talk of windfall profit taxes on the farmers. Rather, Congress is trying to pass further subsidies for the farmers, who are arguably in the best position of any industry in the country.


The next 2 charts show the extreme, straight up moves in other commodities. I have included lead and nickel, but there are several that fit the bill. What I am highlighting is that these parabolic moves higher are never sustainable. And when they eventually run out of steam, they usually succumb to large corrections.

Given what we have seen in many of the other commodities, take a look at the chart below for oil. Look similar? If I showed you the charts for all of the other commodities, a logical conclusion would be that the trajectory of the upward moves was unsustainable, and susceptible to a sharp pullback.

But for oil, for some reason, people think that the recent high prices are a sure signal that $150 and then $200 are right around the corner. Now I want to be the first to say that I have no idea how high oil will go. To be honest, I am surprised it ever reached $135.

But unlike stocks, which can shoot to the moon, high oil is self-defeating. As prices skyrocket, it slows economic activity and can bring some forms of transportation to a halt (just look at the news from AMR that it is cancelling flights, and Ford is curtailing production on some of its gas guzzling vehicles). That, in and of itself, would cause a correction in the price of oil (as demand trails off).

The chart below is from the good folks at Bespoke. It shows the relationship of the current oil bubble to the last 2 big bubbles in tech stocks and then the housing market. This week, the rise in oil eclipsed the mammoth rise in tech stocks in the late 90s. Pretty incredible, huh?

And we know what the end result of those 2 bubbles were, right? They both ended very badly, especially for folks who got sucked in anywhere near the top. Which brings me to the million dollar question: where is the top?

No one knows for sure where the top is, and those that tell you they do are simply lying. If you had bailed on tech stocks in 1998, you missed quite a move higher still. If you sold your house in 2004, you left a lot of money on the table. So my hunch is that I want to remain long oil/energy names, although I do not want to chase the recent move higher.

That said, when this bubble bursts, most people won't believe it and will continue to buy on the way down. But history tells us that we should look for those signals as a reason to lock in profits for good, and then simply move to the sidelines.

Tomorrow in Part 2, I will delve into who is really to blame for high oil prices (hint: its not the oil companies)

Bond Yields Move Higher After Jobless Claims Fall

Jobless claims fall by 9,000 for the week, and came in at 365k, which is below expectations. These levels are still below those normally associated with recessions, and the 10-year yield is spiking higher as a result.

The 10-yr yield is up a full 12 bps to 3.95%. If it closes up here, it would be the highest close so far this year. I continue to think that the 10-year yield reflects that the economy is not in recession. Additionally, ace economist Ed Hyman was on CNBC earlier this week and said that he doesn't see the U.S. in recession either.

The brokers are weak this morning after more downgrades from analyst Dick Bove, as well as news that UBS plans to raise some $15 billion in capital.

Asian markets were mostly lower overnight; the dollar is higher vs. the Yen and Euro today; and oil is lower after touching $135. It is currently trading near $132. The world seems micro-focused on oil right now, and I think that the recent price rise is both unsustainable and entering bubble territory. I will try to post more thoughts on this later.

Late Day Market Selloff Accelerates After FOMC Minutes Released

Every headline in the media will likely say that the cause of today's selloff was the release of the FOMC minutes, where the Fed basically said that they see no more rate cuts in the cards, inflation is creeping higher, and GDP growth will likely be slower.

But these aren't really new revelations. We already knew this. There is a saying in the market that the 'news breaks with the cycle'. I have been saying for over a week that the market was due for a correction, and that I was waiting before putting any cash to work.

So today, the market was already setup to add to yesterday's downside move. The release of the FOMC minutes was just news, but the market was already moving down and would have likely declined today regardless of what the news was.

The S&P 500 has now declined roughly -3.5% from Monday's intraday highs. I am not looking for more than a 3-5% correction right here, so we are getting in the range where I will be looking to put some of my cash to work.

The sentiment indicators spiked higher today, which is a good sign. I would be more worried about this selloff if it was greeted with a yawn by investors. But this does not appear to be the case. Here is a quick look at today's levels:

• The ARMS Index closed very high at 1.94
• The CBOE put/call also closed high at 1.17
• The ISEE call/put was fairly low at 115
• The VIX spiked another +5.8% to 18.6

The big wildcard is obviously oil. Oil is in a full blown bubble, no doubt about it. The surprising reaction today was that even the energy stocks all closed lower despite the record spike in oil. So no one is winning with oil this high, except for the oil speculators themselves.

FOMC Minutes Show Continued Concern On The Part of the Fed

Here are the highlights from the just released minutes of the most recent FOMC meeting:

• Fed says cuts '08 GDP forecast to +0.3-1.2% from +1.3-2%
• Fed says they expect U.S. GDP to contract slightly in 1st half 2008, recover in 2nd half
• Fed says food, energy prices to keep boosting overall inflation
• Fed says core inflation improvement probably temporary
• Fed says that most members viewed growth risk still to 'downside'
• Fed says unemployment to rise in 2008 and 'stay elevated' in 2009
• Fed says sees no sign of bottoming out in housing activity or home price declines
• Fed expects growth rebound in 2008 second half
• Fed says housing 'bleak,' consumer spending 'slowed to a crawl'
• Fed says 'most' Fed officials viewed April rate cut as 'close call'
• FOMC minutes signal no more rate cuts even if economy contracts

Oil Tops $130, Airlines Get Hurt

Inventories of crude oil fell for the week, which pushed oil prices further into record territory above $130. The airline index is getting crushed, down -5.5% after AMR announced it is cutting its 2008 domestic capacity by 11-12%.

The company said the airline industry is not build to withstand oil prices at $125 per barrel. First off, I don't remember any of these guys doing such a great job operating their businesses even when oil was at $25. Second, since fuel costs are one of their biggest inputs, shouldn't these guys have sophisticated hedging programs on to reduce the risk of a big spike in oil?

There were a few more earnings reports last night (INTU, ADI, BJ), which actually came in better than expected. But most of the stocks are lower this morning.

Financials are weak again, and the major indexes were briefly higher after the open but have since slipped into negative territory.

Asian markets were mixed overnight, while the dollar is down again vs. the Yen and Euro; the 10-year yield is back up to 3.80%.

On the plus side, the put/call ratio closed at 1.10 yesterday, and has again opened at a high level of 1.26. So at least traders aren't taking these declines lightly. The ARMS Index just hit a high level of 1.64. My gut tells me this pullback might not amount to much more than a 2-3% wiggle.

The Energizer Oil Bunny

I can't remember the last time oil was down. Well, that's an exaggeration, but the relentless ascent that has taken oil to $129 this morning has been astounding. You can see why no one wants to short oil.

The energy stocks are again higher, while the rest of the market is sharply lower. Financials are weak after AIG said it plans to raise a total of $20 billion, and the brokers saw more earnings estimates cuts this morning.

The semis are also weak, following the cautious comments yesterday from SNDK's management. Retailers are also lower after a weak earnings report from Home Depot (HD). Drug stocks and biotechs are bucking the early weakness so far.

The core PPI rose +0.4%, above expectations; Asian markets were lower across the board overnight; the dollar is down vs. the Yen and Euro; gold is back above $900; the 10-year yield is lower at 3.80%.

I have commented recently about the low put/call ratios and declining volatility index, but this morning they are flashing renewed signs of investor angst. The put/call is very high at 1.28, while the VIX is +6.3% higher to 18. Let's see if this helps keep this selloff from getting out of hand.

Market Wrap: Stocks Reverse Early Gains, Close Lower

The market gave up all of its early gains, after waves of profit taking knocked stocks from their highs. It looked like profit taking started in the dry bulk shipping names, then rolled over to hit the ag stocks also. And comments from SanDisk (SNDK) out of a tech conference led to selling in all the tech stocks late in the day as well.

The 2 most important charts for today to me look like the S&P 500 chart and the Dow Transportation Index chart.

The S&P 500 broke through its overhead 200-day moving average this morning, but that move proved unsustainable. This often happens the first time a stock or index test major overhead resistance. It also often marks a natural area for that stock or index to take a little breather. I have been looking for stocks to take a little rest here, and today's action looks like one could be at hand.

But the most surprising chart to me is that of the Dow Transports (TRAN). This index contains all of the railroads, truckers, and shipping stocks that are often the most economically sensitive. This index has also been very sensitive to rises in the price of oil over the years, as fuel costs are the major input costs for most transportation companies.

So it was very surprising to see the continued rise in the transport stocks, in the face of rising oil prices. Today, oil continue to move higher into record territory. But guess what? So did the transport index. The chart shows how the index today made a new high, surpassing the former highs set back in July 2007.

On the surface, this is a very bullish indicator for the strength in the economy as we emerge from this period of weakness. These stocks are looking past the valley, and saying that economic growth will be okay, and that the global economy will continue to hum along next year.

This is a longer-term bullish sign. In the short term, I continue to worry just a bit about the low VIX, which hit lows not seen since last July before reversing much higher. The put/call ratio also opened at very low levels. This makes me think a little shakeout might be in order, just to keep the newly minted bulls on their toes.

Monday Morning Musings

The market is once again higher this morning, and must be giving fits to the bears as well as those looking for a pullback to put money to work.

And there was not a whole lot of news to get things going this morning. The leading indicators report came out a touch better than expected, which is good for the economic outlook. And Microsoft (MSFT) said it is still talking with Yahoo (YHOO), but about some other form of business alternative as opposed to a full acquisition.

Also, Lowes (LOW) reported better than expected earnings, but the stock is lower after the company issued a cautious outlook.

Asian markets were mostly higher overnight, while the Yen is lower today; oil is higher again, near $126.67; and the 10-year yield is roughly flat at 3.85%.

In another sign that complacency is creeping in to the market, the put/call ratio opened this morning at the low level of 0.51. This, combined with a multi-month low in the VIX still has me cautious at this market juncture. Sometimes patience is difficult, but I still think a much better buying opportunity is still ahead of us.

Weekly Wrap

Here is a look at Briefing.com's Weekly Recap:

Oil prices came within a hair of $128 this week, industrial production was reported to have declined 0.7% in April, Moody's expressed new concerns about the financial strength of the bond insurers, Fed Chairman Bernanke said conditions in the financial markets are still far from normal, Wal-Mart's guidance for the current quarter was conservative and the stock market... well, the stock market gained 2.5%.

It was another example this week of the marked improvement in sentiment since the bailout of Bear Stearns in mid-March. While bad news was attended to, it was the good news - and the thought of good news - that carried the market this week.

On this note, it wasn't lost on participants that the effects of the fiscal stimulus are starting to kick in with the arrival of tax rebate checks. Additionally, it's starting to register that this is just about the time the first of the Fed's rate cuts should start to impact the real economy. Since last September the Fed, in a series of eight rate cuts, has knocked 325 basis points off the fed funds rate.

These pleasing considerations helped mitigate the effects of bad news and placed a higher premium on relatively good news such as retail sales, weekly initial claims, the consumer price index and April housing starts all being better than expected.

The retail sales report was arguably the most pleasant surprise in this week's economic reports. On Tuesday the Department of Commerce reported retail sales rose 0.5% in April, excluding autos. The better news, though, was that retail sales were up about 0.6%, excluding autos and gasoline. This positive number suggests there is still a decent underlying trend in consumer spending despite the macro headwinds.

If not the most pleasant surprise, the report that housing starts rose 8.2% in April to an annualized rate of 1.032 million units may have been the biggest surprise. Granted that increase was driven by starts on multi-unit dwellings, yet the April number was almost exactly equal to the average level of 1.031 million for the prior four months.

This doesn't mean the housing recession is over, but it does provide some hope that stability is returning to the housing market such that residential construction won't be near the drag on GDP growth that it has been in past quarters.

The industrial production report, admittedly, wasn't good news from an economic standpoint and both the Empire State Index and Philadelphia Fed Index showed negative readings that signaled a contraction in manufacturing activity in those respective regions. Strikingly, though, the business outlook component for those regional manufacturing surveys was in positive territory and comfortably above the prior month's level, which reflects a more favorable view of the outlook for the economy.

Earnings news this week slowed noticeably from prior weeks, but like past weeks, the majority of reports were better than expected. Dow component Hewlett-Packard (HPQ), which announced an acquisition of Electronic Data Systems (EDS) for $13.9 billion, also reported preliminary fiscal second quarter results that topped consensus estimates.

Separately, Freddie Mac (FRE) reported a sizable first quarter loss, yet its loss wasn't as great as feared and its stock rallied as a result, gaining 9% the day of the report.

Numerous retailers also beat quarterly expectations. Wal-Mart (WMT) was one of them, but its conservative guidance and the understanding that its stock had gained approximately 15% in the two months leading up to its report, left the stock pretty much flat for the week.

In other corporate developments, Carl Icahn made proxy fight waves for Yahoo! (YHOO) while General Electric (GE) said it is reviewing strategic options for its appliance business.

Friday's session, which included an options expiration, marked a fitting end to the week. Stocks sold off early on profit-taking activity, with the S&P 500 dropping 9 points, or 0.7%, before mounting an afternoon recovery that left it with a slight gain at the closing bell.

Into The Stretch: Stocks Resilient Again Despite Record Oil Prices

This market has shown amazing resilience in its ability to shake off declines this week, and continue to rise despite oil making record highs.

The S&P has made up all of its earlier losses, and the Nazz is trying to make it 5 straight up days in a row.

Oil and gold are still up, while the dollar is down. The 10-year yield has bounced some, and is currently 3.85%.

The put/call ratio is around average at 0.91, and has been slightly low all week. This is one the the concerns I sighted for a market that looks like it might need a little breather. Also, the VIX is back down to 16.50, a level that marks a fair amount of complacency has crept back into the market.

Offsetting this is what I beleive to be a lot of investors with too much cash on the sideline, and looking to use any little pullback to get more invested. Also, there are a lot of shorts who probably begin to salivate with each small decline, only to become disheartened and cover when the market fails to follow-through and rebounds higher.

Tough market.

Consumer Sentiment Still Depressed

The Univ of Michigan consumer sentiment survey came in below expectations this morning, and at 59.5 it was the lowest reading since 1980. Are things really that bad? Or are consumers taking their cue from the doom and gloom media who love to prop up the negativity bubble?

The market is trading lower, but a pullback is well overdue given the relentless advance stocks have enjoyed lately.

Oil is the big mover this morning, topping $127 for the first time. This has all the energy stocks trading higher, while the financials and retailers are lower. Tech is mixed.

Asian markets were mostly higher overnight; the dollar is lower vs. the Yen and the Euro, and dollar weakness is helping both oil and gold trade higher; bond yields are lower, with the 10-year yield down to 3.79%.

I think that this week's upside move was also exacerbated a bit by option expiration, which occurs today. If too many traders were leaning short, this can result on upward pressure on stocks to adjust exposure ahead of expiration. It will be interesting to see how the market holds up next week, and if it experiences the options "expiration hangover" that we used to see from time to time.

Market Wrap: Nazz Breaks Above 200-day Average

The market powered higher again today, showing both surprising resilience as well as outright strength. Even oil, which reversed lower midday, quickly turned tail and rallied back to even. Nearly every sector saw gains today.

What the charts above have in common is that all 3 of these major indexes have now broken above their 200-day moving averages. It may take some time, but once the 50-day averages can get back above the 200-day lines, it will confirm the bull market is back.

I still did not put any new money to work today, choosing not to chase the strength. Two things that continue to give me pause are the low put/call ratio (0.87) and the plunging volatility index (16.30). These indicate a few too many bulls have entered the picture, and I would prefer to wait for a little shakeout before putting my cash to work.

Economic Data Comes In Fairly Sluggish; Oil Up Again

There were several economic reports that came in this morning, but nothing really stood out. They were all fairly sluggish, and didn't seem to have much impact on the market.

GE announced that they are putting their appliance business up for sale. I think this is a good move, although in this environment there are probably not that many buyers. It would probably be a good fit for a foreign company, who would get a good buy in terms of the weakness of the dollar making the purchase price cheaper.

Asian markets were mostly higher overnight; the dollar is lower vs. the Yen and the Euro; gold and oil are higher, with oil topping $125 again; the 10-year yield is down a bit to 3.89%.

The market reversed lower yesterday in the last hour of trading. It looked to me like profit taking set in. When the tech stocks like AAPL, GOOG, and RIMM rolled over, it pretty much took the whole market down with it. I continue to think that the market needs a bit of a rest after the big rally since March, but it keeps stair-stepping higher.

long AAPL, GOOG

Doug Kass and the Negativity Bubble

Today on RealMoney.com, Doug Kass posted that the negativity bubble has burst, and thus a correction is at hand. He cited the Investor's Intelligence numbers as one aspect.

Here was my response:

As a resident proponent of the 'negativity bubble', I feel compelled to respond to Doug's earlier post. I would expect Doug to say it has burst at the first signs of bearishness lifting, but he is looking at a very short time frame.

The bull/bear spread in the II survey is up to +16, which may be the highest level since January, but it is still far, far below October's levels of +42. Ditto for the Market Vane bulls, which are back to 55%, but still well off last October's level of 69%.

I could also make the same argument for the put/call ratios. They are not as bearish as they were in March, but still not close to levels associated with outright bullishness. But beyond that, let's look at the big picture:

There is a record $1.2 trillion in retail money market accounts, an all-time record. That money mountain is so scared to move off the sidelines, that it is willing to accept paltry 2% returns just to remain safe. There also remains record levels of short interest on the NYSE; record inflows into absolute return/low-correlation type strategies; and consumer sentiment is at multi-decade lows.

And what about the bears' prediction of a nasty recession? With each datapoint, it seems the odds of an official recession continue to drop. So I will concede that sentiment has moved more towards the 'neutral' camp, and that a pullback would be a normal result of this. But don't expect the negativity bubble to burst until stocks move meaningfully higer and drag money in off the sidelines, kicking and screaming.

Market Cheers CPI Inflation Report

The market opened on a weak note yesterday, and then reversed all of its losses into the close. Today, the market has opened on a strong note. So I am wondering if we can maintain this into the close, or if the early gains might fade?

Investors cheered the CPI report before the bell, which showed that the CPI rose +0.2% (vs. +0.3% consensus), and the core CPI (ex- food and energy) rose just +0.1%. High inflation is usually bad for stocks, so this report that shows that maybe inflation is moderating is a big positive for stocks. Of course, it doesn't help that food costs rose the most since 1990, but is that sustainable?

Oil is trading a bit lower after the Dept. of Energy said that crude inventories rose, albeit by a smaller amount than forecast. Oil is still trading near $125. And with oil this high, solar stocks look increasingly attractive.

Deere (DE) and Whole Foods (WFMI) are trading lower after missing earnings estimates, while Freddie Mac (FRE) is trading higher after topping expectations.

Asian markets were mostly higher overnight, and the Yen is lower vs. the dollar for the 3rd day. The 10-year yield is steady at 3.90%, after a big day yesterday. And the VIX is another -3.3% lower at 17.40. With volatility this low, its probably not a bad idea to buy some puts for protection, if you're so inclined.

Metro Home Sales Report Shows Big Drops in California Real Estate

The NAR metropolitan home sales report for Q1 came out this morning, and showed some nasty declines. For the most part, falling home prices accelerated sharply in the first quarter, with California getting hit particularly hard.

Overall, for the U.S. as a whole, Q1 home prices fell -7.7% from year ago levels. But as California had held up better than most markets for a while, those cities now look like they are playing catch-up on the downside.

Here are some of the cities showing the largest declines:

• -29.2%: Sacramento, CA
• -27.7%: Riverside/San Bernadino, CA
• -22.9%: San Diego, CA
• -22.2%: Sarasota, FL
• -21.3%: Los Angeles, CA
• -20.7%: Grand Rapids, MI
• -20.2%: Las Vegas
• -18.5%: Memphis, TN
• -17.2%: Miami, FL
• -17.0%: Ft. Myers, FL
• -16.9%: Cleveland, OH (Go Cavs!)
• -15.4: Phoenix, AZ

There were few cities showing big increases, but here are a few showing gains:

• +11.8%: Binghamton, NY
• +10.4%: Peoria, IL
• +10.1%: Spartanburg, SC
• +9.0%: Yakima, WA
• +6.3%: Farmington, NM
• +3.5%: Salt Lake City, UT

And here are how some other notable large cities are faring:

• -13.1%: Washington, DC
• -9.6%: Atlanta, GA
• -7.8%: Boston, MA
• -6.6%: Chicago, IL
• -6.1%: San Francisco, CA
• -3.9%: New York, NY
• -2.1%: Dallas, TX

While I think that the pace of the declines has seen its worst levels, I still do not have the sense that real estate markets overall have bottomed. I think the fact that credit remains hard to obtain has made the pool of buyers permanently lower. I also think there are many sellers that remain unwilling to lower their prices.

Unlike stock markets, real estate markets often form long and shallow bottoms that take years to take shape. As such, I think it will be many years before we see the highs in residential real estate values that peaked around 2006.

Retail Sales Stronger Than Expected

The market had a nice bounce yesterday, although it came on very low volume. This morning, despite a strong retail sales report, the market is giving back some of yesterday's gains.

April retail sales rose +0.5%, excluding autos, vs. expectations of +0.2%. This is a pretty good sign for the consumer, and doesn't even include the rebate checks that are coming out. And Wal-Mart (WMT) topped earnings expectations, so it isn't just the luxury items that seeing buying.

Bernanke spoke this morning, and didn't really have much new to say. But he did say that the credit markets are not yet back to normal, and that the Fed is ready to increase its Term Auction Facilities as needed.

Asian markets were mostly higher overnight, except for China following the earthquake. The dollar is up vs. the Yen and the Euro. And oil is slightly higher again, back near $125. Bond yields are higher also, with the 10-year up to 3.85%.

The NAR metropolitan home sales report came out this am, which shows strength and weakness by region. I'll be back later with a follow-up of that report.

Sentiment Check: More Signs of Bullishness

You never really want to argue with the price action of the market, and today looks like a strong day on the surface. But the volume behind the move is really low, which makes me more cautious in that there seems to be little conviction behind today's rally.

As for the sentiment indicators, they are flashing more signs of slight complacency lately, or at least a lessening of bearishness.

• The ARMS Index is below average today at 0.79;
• The CBOE put/call is slightly low at 0.83
• The ISEE is about average at 0.83
• And the VIX is plunging -7.2%, and nearing its lowest levels of the year

Here are some stocks making strong moves today on above-average volume:

• GEOI, ERES, TRLG, EXM, VISN, SINA, SOHU, ABV, NVEC, RIMM, GENC, CRYP, IMCL, OMG, AIG, V, ATVI, CLR

Monday Morning Musings

Looks like a pretty slow morning for news flow. The big news was FedEx (FDX), which lowered guidance late Friday afternoon on rising energy costs and weak economic activity.

The financials are higher despite news that MBIA (MBI) reported a massive first quarter loss. But the stock is trading higher, another indication that all of the bad news may finally be priced in. The bank index is one of the leading indexes this morning, along with the retail index.

Also, Cablevision (CVC) is acquiring 97% of Newsday for $650 million from Tribune Company. I don't think I have ever read that periodical, but at least someone sees value there.

Oil is trading lower for the first time in its life, just kidding, but still high near $125. The energy stocks are taking a breather today as a result.

Asian markets were higher across the board overnight, while the Yen is lower vs. the dollar this morning; the 10-year yield is down slightly, to 3.75%; and the put/call ratios are also low, which I don't like to see.

The increase in complacency lately leads me to believe that the market has more room to go in this little pullback. As such, I have not employed any of the cash I raised recently.

Weekly Wrap

Here is a look at Briefing.com's Weekly Recap:

For the first time in four weeks the market lost ground. To be exact, the S&P 500 declined 1.8%.

The pullback in many respects was not unexpected. After all, with the S&P 500 up 11.0% since the Bear Stearns bailout in mid-March, many participants believed it was due to take a breather.

That feeling was on the mark, even if few people predicted the specific causes for the selling pressure, which were rapidly rising oil prices, a faltering financial sector and an inability to hold above 1400 on the S&P, which has been viewed as a key technical point.

Oil dominated the headlines throughout the week with crude futures closing at new record highs each day. The final settlement of $126.13 per barrel marked an 8.4% gain for the week. That move was underpinned by weakness in the dollar, supply concerns and speculative buying interest as momentum investors chased returns.

The spike in oil prices took its toll on sentiment and knocked the wind out of the market's sails. Its effect was punctuated at the end of the week when FedEx (FDX) issued an earnings warning late Friday that was pinned on rising fuel costs.

By the same token, the financial sector also had a heavy hand in the action, falling 6.3% for the week following a batch of ugly earnings reports from the likes of Fannie Mae (FNM), UBS (UBS) and Dow component American International Group (AIG).

The latter company helped grease the selling wheels on Friday after reporting a $7.8 billion net loss for its first quarter and revealing that it intends to raise $12.5 billion in new capital. Earlier in the week Fannie Mae said it would be raising $6 billion in new capital.

Separately, Citigroup (C) announced Friday that it would be pursuing a plan to sell $400 billion in noncore assets over the next two to three years. Although this initiative is deemed to be necessary by many pundits, it, along with AIG's news, exposed the ongoing challenges that continue to confront financial companies in their bid to restore earnings power in the aftermath of the credit market mess.

Dow component Disney (DIS) for its part demonstrated this week that it still has ample earnings power. The entertainment giant reported a 35% increase in fiscal second quarter earnings per share on growth in each of its business segments. Disney ended the week 2.4% higher, but its influence was mostly company-specific.

Cisco (CSCO) was the other heavyweight that reported earnings this week. It posted a 12% increase in fiscal third quarter earnings per share and reaffirmed its long-term growth targets. Still, its news failed to advance the market given the acknowledgment that its U.S. business is soft and the understanding that Cisco had gained 12% in the three weeks leading up to its report.

There wasn't a lot of economic data this week, yet the majority of the data released provided relatively good news.

The ISM Services, Q1 Productivity, Initial Claims and Trade Balance reports were all better than expected. Pending home sales for March fell 1.0%, which was in line with estimates, while consumer credit in March expanded to $15.3 billion from $6.5 billion in February.

Naturally, with the spike in oil prices and the jump in consumer credit, concerns persisted about the state of the consumer. However, the April same-store sales results reported Thursday showed consumers are still alive and kicking. Granted their preferences have shifted to lower price points, and many have cut back on discretionary purchases, yet even Wal-Mart reported it is still seeing strength in sales of flat-panel TVs and video games.

Next week the Retail Sales report for April will be a standout on a very busy economic calendar, which will also feature CPI, industrial production and housing starts data for April.

Trade Deficit Comes In Below Expectations

The market is lower this morning, after a big loss by AIG and more highs in oil seem to be weighing on sentiment. The weird thing is that many of the financials are higher, despite the debacle that is AIG. And most of the energy stocks are lower, even as oil makes new highs. Go figure.

AIG posted an $8 billion loss, much larger than expected. The stock has fallen -10% in the last 2 days. And Fannie Mae (FNM) priced a stock offering below yesterday's closing price, a sign of slight weakness. I though this news would have dragged the financial sector down more, but they are pretty steady. This could be a sign that all of the bad news is priced in here.

The March trade deficit came in at $58.2 billion, vs. $61.0 billion estimates. This should have a positive effect on the revisions to GDP, further dampening the recession call.

Oil is continuing its nonstop stampede higher, and touching $125 today. Hard to believe, but it is what it is. The fact that the energy stocks are trading lower hints at the notion that many investors think the move in oil is long in the tooth, and due for a correction.

Asian markets were lower overnight; the dollar is lower again today vs. the Yen and the Euro; and the 10-yr yield is down again today to 3.75%. The ARMS Index is high at 1.49, signifying heavy selling pressure.

Retail Sales Roundup

The retails sales reports for April that came out this morning were fairly mixed. There were quite a handful of companies that beat estimates, but for the most part the stocks in this sector are trading lower today.

I think concerns over high gas prices are weighing on consumer sentiment, even as the rebate checks began being mailed this week.

Here is a sample of some of the reports:

• ANF: +6.0% (vs. +2.4% estimate)
• ARO: +25.0% (vs. +8.0%)
• AEO: +2.0% (vs. -0.4%)
• BJ: +17.8% (vs. +9.8%)
• PLCE: +15.0% (vs. +5.3%)
• KSS: +3.5% (vs. +1.8%)
• SKS: +23.9% (vs. +0.9%)
• WMT: +3.2% (vs. +2.1%)
• ZUMZ: +4.1% (vs. +2.5%)
• GPS: -6.0% (vs. -1.8%)
• HOTT: -2.5% (vs. +0.3%)
• JWN: -3.8% (vs. -1.6%)
• TGT: +3.1% (vs. +4.2%)

The reaction in the stocks, even for some of the ones that beat estimates, is pretty disappointing. That makes me think most of the stocks in this group have more downside, and I would hold off putting new money to work in this sector.

Morning Look: Financials Trade Heavy

The market is a touch lower in early trading. The dollar is weak today vs. the Yen and Euro, and financials are weak again for a second day. The brokers are the weakest group so far this morning, and it might be hard for the overall market to rally today without the financials.

Energy stocks are up again, with oil hovering near $123 and natural gas higher also. Many industrials are higher as well, while tech is a mixed bag.

Retail sales reports came out this morning, and it was pretty mixed as well. I will have a roundup later, but for every strong report, there seemed to be an offsetting weaker one. Hard to draw any conclusions in terms of trends.

Asian markets were mostly lower overnight, except for Shanghai which bounced. It is weird how often China's market moves in the opposite direction as the rest of the region.

The ECB and BoE both left interest rates unchanged, as those central banks worry more about inflation than slowing growth in the regions. Our 10-yr yield is lower today near 3.80%.

Midday Update: Market Pulls Back As Oil Back At Highs

Earnings season is a busy time for portfolio managers, and I have been inundated with conference calls lately. That is why I haven't been making as many posts to this blog as usual. But as earnings season is winding down, I plan to step it back up soon.

The market was up early this morning, but quickly faded. There were more solid earnings reports last night, and some good economic data this morning to boot.

Cisco (CSCO) reported better than expected earnings last night, but gave kind of muddled guidance. So the stock is flat today. Disney (DIS) reported great earnings, and that stock is nicely higher. Ditto for Foster Wheeler (FWLT), which I have been bullish on. And out of nowhere, Quanta Services (PWR) is spiking +12% on huge volume on its strong earnings report. Nice.

The productivity report this morning showed that Q1 productivity rose +2.2%, much stronger than estimates. And unit labor costs came in well below consensus also. So that is a good economic datapoint.

The dollar is up today vs. both the Yen and the Euro, another good sign. Although it simply can't keep oil down, which is making more record highs around $123. This seems to be weighing on the rest of the market, which is likely overdue for a pullback anyway.

Asian markets were mostly lower overnight, led by a -4.1% drop in Shanghai. The 10-year yield is higher at 3.91%. And the put/call is around average at 0.89.

long FWLT, PWR

Morning Update: Financials Lead Market Higher

The market was under pretty heavy selling pressure in early trading, but it has since bottomed and moved back into positive territory.

The news before the bell was all bad: UBS was cutting 5500 jobs and Merck (MRK) was cutting 1200 jobs; oil is hitting new highs above $122; and Fannie Mae (FNM) reported a bigger than expected loss, cutting its dividend -30%, and raising $6 billion in capital.

But as FNM's conf call wore on, the stock began to turn higher and erase all of its losses. That helped the financial sector bottom, and pretty soon the rest of the market followed. Energy stocks are leading the way on the oil spike, but the bank index is the 2nd best performer in the early going.

Asian markets were mixed overnight, and the dollar is lower vs. the Yen and Euro today. Bond yields have also moved higher, with the 10-year yield up to 3.86%.

The ARMS Index is low at 0.74, and the put/call ratio is also low at 0.78. These remain a bit of a concern, and could limit the extent of this little rally attempt. I have not put any cash to work yet this week.

Monday Morning Musings

The market got a brief bounce in early trading on a better than expected economic report, but the enthusiasm has quickly faded, and the Dow is flirting with triple digit declines currently.

The ISM Services Index came in higher than expected at 52.0 (vs. 49.1 consensus), reflecting renewed expansion. This is another good sign for the recession doubters.

Yahoo! (YHOO) has been down as much as -20% this morning after rejecting another raised bid from Microsoft (MSFT), this time for $33. I am not sure what these guys are thinking, as they are unlikely to get another offer that good. But maybe this does bode well for Google (GOOG) as YHOO mgt. may now be more likely to outsource search to GOOG.

Asian markets were mostly higher overnight; oil is surging again, near $119.50; gold is also higher this morning; the 10-year yield is up slightly to 3.86%.

The put/call ratio opened at a fairly low level of 0.79. We are starting to see lower put/call readings as sentiment grows more neutral. This could lead to a pullback in the near-term, as the market has enjoyed a nice rally from the March lows.

long GOOG

Weekly Wrap

Here is a copy of Briefing.com's Weekly Recap:

There were five trading sessions this week, but for the most part it ended up being a three-day work week. That's because things didn't get really interesting for market participants until Wednesday.

Sure, there was the news Monday that Mars is going to buy Wrigley (WWY) for approximately $23 billion and the news Tuesday that Mastercard (MA) had a blowout quarterly earnings report, but that, and other items like the FDA shooting down a new cholesterol drug from Merck (MRK), led to a James Bond-like trade in that the indices were shaken, but not stirred.

The stirring action was reserved for the latter part of the week, which brought the Q1 GDP report, the FOMC meeting and the April employment data. In addition, it also brought some noteworthy movement in the dollar and some volatile activity in the commodity arena.

If there was a theme to be identified beneath the action, it was one of reassurance. Specifically, there was reassurance that the economy isn't nearly as bad off as has been advertised. That said it's important not to confuse the message here. The economy isn't very good right now, but clearly, the recession so many alarmists have been talking about remains quiescent.

To begin, first quarter GDP was up 0.6%, driven by a 1% increase in personal consumption expenditures. Contrary to popular belief, the consumer continues to spend in the face of rising gas prices, falling home prices and declines in payrolls.

Importantly, the trends in personal spending, business investment and net exports suggest real GDP growth for the second quarter should be close to flat, but that is without the fiscal stimulus. The latter will provide a meaningful boost to consumer spending that should lead to real GDP growth in the range of 1% to 2%. In brief, things are shaping up in such a way that there won't be a decline in real GDP for any quarter this cycle.

The Fed appears to be feeling better about the economy's prospects, too. After cutting the fed funds rate Wednesday another 25 basis points to 2.00%, it issued a directive that was different in tone from prior directives. In particular, the directive omitted a prior reference to the idea that "downside risks to growth remain."

The Fed's statement acknowledged some indicators of inflation expectations have picked up, yet it stuck with its view that it expects inflation to moderate in coming quarters.

Overall, the Fed's directive implied it would now be in a wait-and-see mode and that the rate-setting committee would act in appropriate fashion to incoming data. However, in removing the downside risk phrase, the Fed left the impression that it would like to believe it is at the end of its rate-cutting cycle.

The stock market was in rally-mode ahead of the Fed decision and got an added boost shortly after the headlines hit the wires. In striking fashion, though, it sold off sharply late in the day and ended Wednesday in negative territory. The knee-jerk explanation was that there was disappointment in the directive and the idea that the Fed didn't sound more hawkish on inflation.

That explanation didn't fly with us seeing that the inflation-sensitive back end of the Treasury curve rallied after the decision.

Other probable causes for the sudden turn of events included the inability of the S&P 500 to hold above a key technical resistance point at 1400 and month-end selling activity. Whatever the case may have been, Thursday's trading action quickly confirmed that we were right to be skeptical of the mainstream excuse for the selling.

On Thursday the S&P 500 jumped 1.7% while the Nasdaq Composite soared 2.8%. Huge gains in the financial and technology sectors powered the advance, as did a noticeable drop in commodity prices that were impacted by a strengthening dollar.

For the week the dollar index advanced 1.0% while the CRB Commodity Index, which tracks 19 different commodities, slipped 2.3%. The CRB Index had been down as much as 5.0% for the week at its low on Thursday. Oil prices, which nearly hit $120 per barrel last Friday, dipped to $110.30 on Friday before rallying back sharply to close the week at $116.32. Gold prices, meanwhile, fell 3.6% to $862.10 per ounce.

The dollar's strength was rooted in the assumption that the Fed is likely done with cutting interest rates. The Fed showed Friday, though, that it isn't done with its efforts to improve liquidity to ease the pressures in some term funding markets. It raised the amounts available for depository institutions at its biweekly Term Auction Facility from $50 billion to $75 billion and said it will now accept AAA/Aaa rated asset-backed securities at its Term Securities Lending Facility Auctions.

Market participants seemed pleased with the Fed's announcement, but their focus Friday was primarily on the April employment report, which was better than expected on most fronts.
Nonfarm payrolls declined 20K (consensus -75K), the unemployment rate fell to 5.0% from 5.1% (consensus 5.2%), hourly earnings rose just 0.1% (consensus 0.3%) and the average workweek dipped a tenth of a point to an expected 33.7 hours.

The nonfarm payroll decline is statistically insignificant on a base of 137.8 million workers, but it was quite significant in that it indicated there hasn't been a deterioration in payroll trends, which is what is typically seen in recessions. There has been a 260K decline in nonfarm payrolls the last four months or an average of 65K. In the 2001 recession nonfarm payrolls declined 281K in the month of April alone.

Like the message we conveyed earlier, this employment report is not indicative of a strong economy. Still, in the context of eradicating the worst economic fears, it was very supportive.
The stock market made a nice move in the wake of the jobs report, but succumbed to some week-end selling interest that pared its gains considerably. Nonetheless, the market ended Friday's session higher to close out what technicians will see as a breakout week with the S&P 500 ending above 1400 and at its highest level since January.

The Recession That Wasn't

The market got a big boost this morning from a better than expected jobs report. Nonfarm payrolls declined by -20,000, which was far less than the -75,000 forecast. Also, the unemployment rate ticked down to 5.0%, while economists predicted it would move higher to 5.2%.

Moreover, most of the job losses came in the manufacturing and construction sector, while the much larger services sector actually added 90k jobs. And the private household employment component of the report soared, after two months of losses. Hardly the stuff of recession.

Yesterday I mentioned that although the media had declared it a foregone conclusion that the economy was in recession, the data simply didn't support that notion. Today's data goes even a step further towards that argument, and the odds of an official recession are falling by the day. (note: the odds on Intrade for a recession have fallen below 25%)

I got some flack for my call yesterday, but it was all from people in the real estate sector. So let's be clear: there IS a real estate recession going on, and it is severe. The credit crunch on Wall St. has also made it very tough for anyone in the lending business. But outside of those areas, there simply isn't enough weakness to drag the entire U.S. economy into a full blow recession. Are we clear?

And with the government rebate checks in the mail, consumer spending is about to get a big shot in the arm. That should boost Q2 and Q3 GDP. So if you need two consecutive quarters of negative GDP to declare recession, and we didn't even see negative GDP in Q1, it is becoming increasingly difficult to see we get to recession.

Separately, the Fed announced this morning another step toward coordinated efforts with European Central Banks to increase liquidity and stem the credit crunch. It said it is increasing its TAF facility to $150 billion from $100 billion.

The dollar is up this morning on the above news, with both the Yen and the Euro lower. Despite the rise in the dollar, oil is moving higher, back up to $115. This is supporting a big bounce in all of the energy and commodity stocks and weighing on tech.

Money is also flowing out of bonds, leading to lower prices and higher yields in fixed income. The 10-year yield is spiking 11 basis points to 3.86%.

Sick Humor

Charts of the Day

Today was an incredibly strong day in the market. After the market began to rally this morning, I noticed that the put/call ratios were still at very high levels, indicating much skepticism that the rally could last.

Not only did it last, but it rallied into the close to finish at session highs. The Nazz led the way, with the NDX surging +3.27%. The banks and brokers also closed at their highs, leading all other sectors. Goldman Sachs (GS) closed above its overhead 200-day and nearly hit $200.

The ag and energy stocks closed off of their intraday lows, and look like they are due for a bounce. But it appears that the rotation out of energy and into tech and financials still has room to go.

The surprising strength was the rally in the dollar. The chart below shows the Euro ETF (FXE). You can see that yesterday, the FXE touched its uptrending 50-day average and looked like it was successfully bouncing higher from it (see chart below).

But today it gapped lower and closed well below that support level. Additionally, volume spiked materially higher, indicating conviction behind the selling. The Euro has had quite a run, and today's action looks like it is the beginning of a well deserved breather for that currency.



The next chart I wanted to highlight is the volatility index (VIX). I have been saying that a move below the 20 level by the VIX would be a welcome sign for the equity markets.

Yesterday, the VIX bounced off that 20 level, and looked like it was bottoming and turning higher. Most often, this move would have been accompanied by a move lower in the equity markets. But today, the VIX fell out of bed and plummeted -9.2% to close at 18.88.

This is a good sign that anxiety in the markets is easing. Of course, you also don't want complacency to set in. Last October, the VIX fell down to 16, but that market a top in the market. Regardless, if the VIX can meander around in this range below 20, it should provide a supportive backdrop for the markets.

long GS

What A Difference A Day Makes

After the FOMC announcement yesterday, the stock market sold off and the dollar dropped in a big way. That left many thinking that those moves would continue today. Wrong.

This morning, stocks started higher out of the gate, while the dollar got a big boost. The surge in the dollar hit commodities hard. Oil and gold are both plunging. Crude is now near $110.50, and gold gapped below $850.

The ag stocks are also continuing to go lower, as are the energy stocks. It didn't help that despite the big rise in energy prices, Exxon (XOM) missed its earnings estimates, and the stock is down by more than -4% so far.

But for the first time in awhile, although the former leading energy and commodity stocks are all lower, tech and financials are surging higher. This is a welcome sign for many, and another indication that growth stocks should do well in this environment.

AAPL, GOOG, RIMM, etc. are all higher. The semi index is currently up +2.8%, and the bank and broker indexes are both up +3.0%. Very strong.

Asian markets were mixed overnight, and the Yen and Euro are both lower vs. the dollar. The 10-year yield is also lower, trading at 3.71%, indicating an easing of long-term inflation worries.

The Nazz is leading the way, but it is still very early. I have noted that the market is currently overbought, and I am taking some profits this morning to raise cash. Let's see how the day shapes up.

long AAPL, GOOG