Latest FOMC Minutes

The latest minutes from the August FOMC meeting indicated that the economy expanded at a moderate pace in the second quarter, but recent financial market developments highlighted some of the stresses that the economy faced going forward.

From Briefing.com:

Both consumer and business spending recorded gains in the second quarter, and net exports contributed importantly to the rise in real gross domestic product. However, residential construction continued to fall sharply, the labor market weakened further, and industrial production declined.

Core consumer price inflation remained relatively stable, while headline inflation was elevated as a result of large increases in food and energy prices. Labor demand continued to contract in July.

Private nonfarm payroll employment fell in July at a pace only a bit less than the average monthly rate during the first six months of the year. By industry, the pattern of job losses was roughly similar to those earlier in the year, although July's report showed a smaller decline in construction than earlier.

Although downside risks to growth remained, they appeared to have diminished somewhat, and the upside risks to inflation and inflation expectations increased. The Committee indicated that it would continue to monitor economic and financial developments and would act as needed to promote sustainable economic growth and price stability.

Heightened investor apprehension about the viability of Fannie Mae and Freddie Mac had eased following legislative action, but pressures on these firms continued. Reflecting these strains, interest rates on residential mortgages had moved upward, a development that was seen as potentially exacerbating the contraction in the housing sector.

While some financial institutions had strengthened their balance sheets with new capital issues, raising new capital had become increasingly difficult.

Participants expressed significant concerns about the upside risks to inflation, especially the risk that persistently high headline inflation could result in an unmooring of long-run inflation expectations.

Although members generally anticipated that the next policy move would likely be a tightening, the timing and extent of any change in policy stance would depend on evolving economic and financial developments and the implications for the outlook for economic growth and inflation.

Is Anyone Left On The Trading Desks?

Yesterday's volume was the lowest on the NYSE for this whole year. It seems that like most years, traders wait until the last week of August to all take vacation at the same time. I can't blame them. I am heading out tomorrow to go visit my parents in Cleveland (Go Browns!).

With volume running so low, its hard to make any decisions about the future direction of the market. I still expect trading to be choppy, especially ahead of the election, as the market dislikes uncertainty.

A lot still depends on oil, which is higher today on hurricane-related fears. Oil hit $117 earlier, but is fading. Natural gas is up even more today, as much as +6% higher earlier. This is helping the energy complex bounce, although the rally feels tepid.

Consumer confidence bounced sharply last month, up +9.6% to 56.9, according to the Conference Board. Separately, the S&P/Case-Shiller home price index showed a -15.9% yr/yr drop in home prices in June. With still falling home prices, high oil prices, shaky financials, and weak stocks, I'm not sure what caused the jump in confidence. Maybe falling gas prices!

The dollar is higher today, pushing the Euro to multi-month lows. The 10-year yield is up to 3.80%. And the VIX is down a touch to 20.61, after a 10%+ spike yesterday.

Monday Morning Musings

This is the type of action that makes me think Friday's rally was mostly short-covering, and without any big news over the weekend, traders are putting those short positions back on.

There isn't much in the way of news this morning, yet the market is trading markedly lower, with financials leading the way. South Korean regulators told the Korea Development Bank to take a cautious approach with regards to its potential acquisition of Lehman Brothers (LEH).

The one report that did come in today was the NAR existing home sales report. July sales rose +3.1%, higher than expected. But year/year home sales are still -13.2% lower, and have an inventory supply of 11.2 months. For 2007, the average inventory supply was 8.9 months.

Median sales prices are also lower, down -1.3% in July and -7.1% vs. last year. In the West, prices are down -22%. As I have said many times, there is still no sign of a housing bottom, and trying to predict one has been a fools game. There are a lot of wheels in motion to help us get there, and hopefully some time in 2009 we will be able to see some definitive signs.

Asian markets were higher overnight, following our Friday rally. The dollar is a bit lower this morning, as are oil and gold. Oil is trading near $114. The 10-year yield is also lower at 3.78%, a multi-month low.

Last week's trading was choppy, ending on a high note. For the week, the SPX fell -0.46%, while the Nasdaq 100 declined -1.33%. Volume has been running very light, which is normal for late August, and can exacerbate some of the price moves.

Technically, the SPX closed above its 50-day moving average on Friday, but is testing that support this morning. The Nazz is above its 50-day but below its 200-day, both of which continue to exhibit a downward slope.

Dollar Spikes, Commodities Fall, and Lehman Might Get A Bid

In this market, things change quickly from day to day. No trend last for very long, and that makes it difficult but for the most nimble of traders.

Today, the dollar is rallying and that is taking the steam out of the bounce that the commodity stocks enjoyed over the last 2 days. Oil is down 3% to just over $118, nat gas is down, ditto for steel, copper, etc.

Financials got a huge bounce in early trading after Reuters reported that Korean Development Bank is looking at Lehman (LEH) as an acquisition target. The stock is up roughly +12% on the news, and analyst Dick Bove said the firm could catch $20 as a price target.

$20 would be a nice pop from yesterday's closing price, but it is a joke compared to where the stock has been for most of this decade. And the company recently completed a large capital raise at round $28 per share. So I'm guessing those investors might not be too happy.

The financials stocks are leading, with retailers faring well also. Gap (GPS) reported strong earnings. Gap? Go figure. Maybe back-to-school shopping is helping them, after years of missing the boat.

Another boost for the market in early trading were comments that Warren Buffet made on CNBC that he felt stocks were more attractive at current levels than they have been in a while. He said people are now "looking at the glass as half empty, as opposed to half full". Maybe Buffett is a proponent of the 'negativity bubble' thesis I often write about?

He also said he had been buying more of his favorite financial stocks, but he declined to say which. My guess is he has been adding to Wells Fargo (WFC). Last, he said he is no longer short the dollar.

The big bounce in the first hour of trading is starting to fade some. I am undecided if we will see further short covering into the close, or more selling as traders close positions ahead of the weekend.

A Few More Positive Datapoints On Apple (AAPL)

Apple (AAPL) continues to hold up well. Technically, the stock has been consolidating on light volume after breaking above its 50-day average last week. Unless the whole tech market falls out of bed, this should set up nicely for another move higher. Also, RIMM has been acting very well also, and the two often trade in a similar fashion.

On the fundamental side, the company announced that iPhones are going to start being sold in Russia. The company said, "Apple has agreed with Mobile TeleSystems(MBT) on the sale of iPhones in Russia and retail sales will begin in October." This should be big for the company, and also start the halo effect in Russia.

Speaking of the halo effect, a friend sent me the following note on AAPL as well:

"Massive" back-to-school Mac computers sales for Apple Inc. might not mean much to the market on the surface, but when each 25 basis point increase in market share produces an extra US$1-billion in revenue, things start to come into focus pretty quickly.

The strong forecasted sales could drive upside in the company’s fourth quarter, according to Mike Abramsky at RBC Capital Markets. The analyst told clients that data from 4,400 corporate IT buyers and adopters suggest “unprecedented intentions” in the quarter. In the next 90 days, 34% plan to buy a Mac laptop and 30% expect to purchase a desktop.

As a result, he expects Apple’s share of the global PC market will rise to 4.2% in calendar 2009, up from 2.9% in 2007. In addition to the revenue gains this will produce, the analyst said each 25 basis point increase equates to US15¢ in earnings per share.

One reason for the surge in demand is the halo effect produced by the iPhone. RBC said 17% of respondents were more likely to buy a Mac after the iPhone 3G launch. Mr. Abramsky also said there is a 70% chance Apple releases a prepaid iPod/phone and/or iPhone as soon as the fourth quarter, which might push global momentum higher.

He reiterated his “outperform” rating and US$200 price target for AAPL.

long AAPL, RIMM

Dollar Drops As Commodities Surge

Oil is enjoying its best rise in over a month today, with crude prices spiking nearly $6 to $121.50. Yesterday I commented that oil looked like it was trying to bottom, and could work higher, but I didn't expect it to come in one day. The question is how long this bounce can last though.

The dollar is weaker this morning, and that is helping all of the commodities bounce. The CRB Index is up more than +2%, gold is up +3%, as well as the grains (DBA), steel, copper, etc.

Outside of rising energy stocks, not much else is working. Financials and brokers are lower after Citi lowered its earnings estimates on all of the brokers. And consumer stocks are lower on the rise in energy prices.

There was also some weaker economic news. The leading economic indicators for July fell -0.7% (vs. -0.2% consensus). And the 4-week moving average of jobless claims rose to 445,750. I should point out that while that figure is elevated, it is still below the normal levels that we see during recessions.

Asian markets were lower across the board overnight. The 10-year yield is up to 3.84%, which is right at resistance at its downsloping 200-day average.

The put/call ratios have been high all week, so we will probably get a bounce at some point. But technically, the indexes looked like they have rolled over from their July rallies and the outlook remains clouded.

Was Today Just A Light Volume Bounce?

The market looked like it was going to rollover today, but a late day rally kept it in positive territory. If you just look at the closing figures, today looked like a somewhat dull day. But intraday, it was anything but.

The financials were down, then up, then down, etc. Ditto for oil, which opened higher, reversed into negative territory, and then rallied late in the day. The big winners on the day were anything energy related. Nat gas, infrastructure, agribusiness, and steel stocks all bounce strong, anywhere from +3-7%.

But as the chart above shows, the bounce in the S&P 500 didn't even fully erase yesterday's losses. Volume ran on the light side, and breadth was flat. That is not really the kind of action that speaks to sustainability, so I am staying cautious.

I added some hedges today, including the financials. I would have thought that the Fannie/Freddie news would have weighed on the financials more, but they rallied today also. Maybe that was just short covering, who knows. The trend in the XLF still looks lower in the near-term, and that is what I am keying off of.

The chart above shows how oil is doing, and the small 2-day bounce it has enjoyed. It looks like oil is trying to find support above its 200-day average (in red). You can see how it has been rounding out in a basing formation.

Additionally, the stochastics at the bottom of the graph, and the relative strength index at the top show how oversold oil has become. I think a lot of the oil bulls have been shaken out of their long positions, and that this bounce should carry a little higher.

But again, I would use future strength to lighten my exposure as I think the oil bubble has popped, and a slowing global economy could make for softer demand.

Financials Rally Despite Fannie/Freddie Concerns

The New York Times reported that some investors feel a government bailout for Fannie/Freddie seems inevitable. The stocks opened at multi-decade lows again, and weighed on overall sentiment somewhat.

Also, oil was trading higher at the open, above $116. But the inventories report showed a big build in crude oil stockpiles, and this helped oil prices ease. The market began to bounce as oil reversed lower. The energy stocks were the biggest winners in the first hour of trading, but if crude continues lower, they might follow suit.

Hewlett-Packard (HPQ) reported better than expected earnings, and also issued guidance that was above estimates, a surprising report given the environment. This is helping give techs a boost, and the Nazz is outperforming so far.

The dollar is higher vs. the Yen and Euro today, which could pressure this early bounce in commodities. Asian markets were mostly higher overnight. China's benchmark index surged more than 7% as speculation the government may be considering a fiscal stimulus package.

The put/call ratio is very high at 1.26, which could help this bounce have legs today. The 10-year yield is lower at 3.81%.

The market has been weak the last couple of days, and I will be looking to use today's strength to put on some hedges in the event more weakness lies ahead.

Inflation Spike Worries Investors

The market is lower in early trading after this morning's PPI inflation report showed a troublesome jump in inflation.

Total PPI rose +1.2% in July (vs. +0.6% consensus), while core PPI (ex- food and energy) rose +0.7% (vs. +0.2%). This leaves year/year PPI up +9.8% and core PPI up +3.5% - the highest level since 1991.

Investors don't like to see big jumps in inflation, but I still think that inflation is a lagging indicator, and as such it is like to moderate in the near future as energy prices have come down and global economies are slowing around the world. The 10-year yield is only up slightly, to 3.82%.

A few more retailers reported earnings this morning, including Target (TGT), Home Depot (HD), and Saks (SKS). The first two topped analyst estimates, but all 3 stocks are lower nonetheless. The retail index is down -2.07% so far.

Financials remain the weakest group so far, with the bank index -2.77%. Energy stocks are the only ones bucking the weakness so far. Natural gas is trading higher, while oil is lower. Housing stocks are also lower after housing starts fell -11.0% and building permits were down -17.6%.

Asian markets were lower overnight, and the dollar is slighly weaker this morning. The VIX is up another +4.85% today, bouncing above 22. The put/call ratio is high at 1.11.

The August Doldrums Are Here

The market action was decidedly negative today, but volume ran extremely light. This is likely an indication that the August doldrums are here, when most traders take time off from the market and squeeze in a summer vacation.

There were less than 1 billion shares traded on the NYSE today, which is very light. But although volume was light, angst was high among investors. The volatility index (VIX) spiked +7.2%, the ARMS Index closed at 2.04, and the put/call ratio closed at 1.05. All of these are very elevated levels.

Today's session, in and of itself, does not mean much. It's the follow through that counts. The financials rolled over today, but any talk of a retest is premature until we see some follow-through to today's move. That said, I am in the camp that fears continued weakness in the financials.

As for the rest of the sentiment indicators I follow, most of them ticked higher on the complacency scale last week, which is another reason that the market bounce from the July lows might be due for another pullback. To wit:

• The bull/bear spread on AAII bounced back to +4, after 9 straight weeks of negative readings (i.e., more bears than bulls)
• Bulls on Market Vane bounced for a 4th straight week, to 43%
• As for the put/call ratios, they remain in neutral territory, looking at the 10-day averages of these indicators

So overall, sentiment has not moved to the bullish levels we saw in May, but this bounce has also not been as strong as the one that followed the March lows. As such, I am closely monitoring the technical action in the market and not waiting for the sentiment indicators to match their May highs.

Monday Morning Musings

I am having connectivity issues this morning, which is always fun, let alone on a Monday. Ugh.

The market is only slightly weaker in early trading. Banks and housing stocks are the weakest, while biotechs are bucking the trend and higher to start the day. Ag stocks are up, but most energy stocks are lower. Oil was higher before the open, but has since faded again. Talk about trading heavy--

In earnings news, BHP Billiton (BHP) reported record profits and issued an upbeat outlook, but the stocks is only up slightly. Lowe's (LOW) also beat earnings expectations, but offered a mixed outlook. Its stocks is higher so far.

Mitsubishi Financial Group raised its bid for UnionBanCal (UB) to $73.50 after its bid for $63 last week was rejected.

The dollar is slightly weaker this morning; the 10-year yield is lower at 3.83%; The ARMS Index is high at 1.40.

Technically speaking, the Nasdaq is now trading above both its 50-day and 200-day moving averages, a step in the right direction. The S&P 500 is hovering above its 50-day, just barely, but still a ways below its downsloping 200-day. This indicates that the senior index is far from being out of the woods. I actually used last week's market strength to take some profits and raise additional cash, fwiw.

After my tech guy comes out and straightens out my system, I'll try to post an update on investor sentiment indicators.

Retail Stocks Bounce On Earnings Reports

Everyone knows consumer spending is down, right? But the action in the retail stocks today is an example of what happens when expecations get too low. Kohl's (KSS), Nordstrom (JWN), JCPenney (JCP), and Abercrombie (ANF) all reported earnings, and all of their stocks are bouncing nicely this morning.

The University of Michigan consumer sentiment survey came in at 61.7, which is up slightly from its prior reading of 61.2.

The dollar is up again, and this is pressuring commodities. Oil and gold are both lower, with oil getting closer to $111. The drop in oil from its highs, with barely a bounce along the way, has been breathtaking. But now that lower oil is becoming so obvious, we will probably see some sort of relief rally, just to keep the majority of investors on their toes.

The 10-year yield is lower at 3.85%, and the volatility index has broken below 20 and bears watching. The markets are all higher in early trading, and we'll have to see if any Friday profit taking sets in later in the session.

No Signs Of A Bottom In The Housing Market

For those looking for signs of a bottom in the housing market, today's NAR Metropolitan home sales report for Q2 offers little hope.

Overall, single-family home sales in the U.S. fell -7.6% in Q2. The strongest region was the Midwest (-0.9%) while the weakest region was the West (-17.4%). Here are some of the top and bottom performers:

Top 5

• +8.9%: Yakima, WA
• +7.1%: Charleston, WV
• +6.0%: Des Moines, IA
• +5.1%: Greenville, SC
• +4.7%: Buffalo, NY

Bottom 5

• -35.6%: Sacramento, CA
• -33.1%: Ft. Myers, FL
• -32.7%: Riverside, CA
• -29.5%: Los Angeles, CA
• -23.9%: Anaheim, CA

Other notable cities:

• -5.3%: New York NY
• -9.0%: Chicago, IL
• -10.8%: Boston, MA
• -16.8% Washington, DC
• -17.0%: Cleveland, OH
• -19.1%: San Francisco, CA
• -19.3%: Miami, FL
• -22.5%: Phoenix, AZ
• -23.6%: Las Vegas, NV

Obviously, states like California are in a world of hurt. But any signs of a bottom in the housing market overall remain elusive at best. This report for Q2 actually is an acceleration in the pace of declines. First we need to see signs of stabilization before we can start talking about a bottom, and then possible appreciation.

Preferred asset class: U.S. stocks

Inflation Looks High, But May Have Peaked

The market opened under a bit of pressure, after the most recent inflation report sparked concerns about the economy. But inflation is a lagging indicator, and with economic growth slowing around the globe, and energy prices coming down well off their highs, it is likely that inflation has peaked for the time being.

As this realization set in, the market has bounced back, and the Nasdaq is up nearly +1.0% currently. Homebuilders and bank stocks are leading the way, while energy shares are lower after profit taking from the recent rally.

The July CPI index climbed +5.6% yr/yr, but when you exclude food and energy, the core CPI rose +2.5% yr/yr, still higher than the consensus of +2.4%.

There was a small flurry of merger news this am. Wells Fargo (WFC) said it was buying Century Banchsares, Skechers (SKX) offered to buy Heelys (HLYS), and UnionBanCal (UB) refused a $63 buyout offer from Mitsubishi UFJ Financial.

In earnings news, Wal-Mart (WMT), Smuckers (SJM), and Urban Outfitters (URBN) all topped expectations, and are helping the retail stocks bounce.

Asian markets were mixed overnight, with Japan lower but several other markets higher. Oil is higher so far this morning, adding to yesterday's gains. The dollar is also a bit stronger vs. the Yen and the Euro. And the 10-year yield is steady at 3.90%.

long QLD

Are Financials Starting To Roll Over?

The chart above shows the action in the Financials ETF (XLF). Today, this fund broke below recent support. I know that one day does not make a trend, but if there is any follow through to this move, it could be an early warning sign not just for the financials, but for the overall market as well.

The Nasdaq bucked the weakness again today, with the NDX closing in positive territory. Small and mid-cap indexes were also positive. But financials have a way of pulling everything else down, just like they did in March and again in June-July. So this bears watching-- closely.

Energy stocks were the big winner on the day, with many stocks bouncing +5-10%. Unfortunately, they are still well, well below their highs, and still below more resistance levels. I will be looking to use further strength to lighten up my exposure to energy/commodities/ag.

There is no, new clear-cut leadership that I can identify right now. As such, my game plan is to remain a bit defensive, raise some cash on up days, and implement some hedges in the event of a pullback into the September/October timeframe.

long SKF

Boone Pickens Takes A Hit

If you wonder who was panicking to sell their energy and commodity holdings over the last month, it wasn't just the newly minted oil bulls. Even veterans like T.Boone Pickens got hurt in the correction.

Here is a copy of an article from the New York Post:

T. Boone Pickens has been an oilman for nearly 60 years, but all that experience counted for little last month as the well-schooled octogenarian tycoon took a beating on oil and natural gas bets, The Post has learned.

Sources say the commodity half of the legendary wildcatter's hedge fund BP Capital sank about 35 percent in July. The fund is believed to be down about 10 percent currently for the year.

"We notified our commodity-fund investors last week that the steep decline in natural gas and oil prices has had an adverse impact on our performance," a Pickens spokeswoman said in an e-mail.

"We continue to analyze the market and adjust accordingly," she added, declining to comment further.

The embarrassing losses come as Pickens, 80, has shelled out millions to promote a major alternative-energy policy campaign designed to break the US of its addiction to foreign energy.
In his pitch, Pickens pushes harnessing wind energy from Middle America and using it to replace natural gas as a source of electricity. The freed-up natural gas could then be used to power cars, and thus cut America's reliance on oil from the Middle East.

To be sure, volatility has pinched many savvy hedge funds recently as commodity prices have plunged, but Pickens' stumbling is particularly biting since the oil-and-gas magnate has been portraying himself as a energy sage to the US presidential candidates.

Dallas-based BP Capital manages about $7 billion in assets through two funds, BP Capital Commodity and BP Capital Equity. About half of the hedge-fund holding entity is owned by Pickens.

Back in April, Pickens was predicting that oil prices would hit $150 a barrel due to high demand and insufficient global production. He also downplayed the view that speculative investors were driving up energy prices.

"When you have 85 billion [barrels of oil] to cover 87 billion, the price has to go up," he said during an energy conference hosted by his alma mater, Oklahoma State University's business school.

And Pickens was very nearly right when crude oil hit a record high of $147.27 on the New York Mercantile Exchange in mid-July.

However, since then oil has plummeted about $35 to about $113 a barrel. Ironically, the retrenchment might be due to expectations the US and other developed nations might be scaling back on oil usage.

Energy Stocks Rally on Oil Bounce

Oil has another rally fade into the close yesterday. This morning, it is bouncing near the $115 level, which is helping put a bid under all of the oil and gas stocks, as well as ag. Let's see if this bounce has more legs than the last few attempts.

Retail stocks are lower after a soft retail sales report, but Best Buy (BBY) is higher after reporting that it will be the first independant retailer to sell the iPhone.

In merger news, CVS Caremark (CVS) said it will buy Longs Drug (LDG) for $71.50 per share, representing a +32% premium to yesterday's close. Also, Goldman Sachs (GS) has agreed to pay $1.5 billion for some of ABN AMRO's private equity assets (I'm sure they got a good deal).

The Nasdaq is outperforming for a 2nd day after solid earnings reports from Applied Materials (AMAT) and Nvidia (NVDA). Apple, Google, and RIMM have also been trading well lately.

Asian markets were lower across the board overnight, on renewed credit concerns. The dollar is mixed this morning vs. the Yen and Euro. The 10-year yield is down a tad to 3.90%. And the put/call ratio remains high at 1.04 after finishing yesterday at 1.05.

long AAPL, GOOG, GS, RIMM, QLD

JPMorgan Says Conditions Have Weakened

The market is pulling back this morning on the heels of some negative headlines in the financial sector. The brokers are down the most so far, with that index -3.38%, followed by the bank index. Semis are bucking the weakness so far, and helping keep the Nasdaq 100 in positive territory so far.

In the financial sector, UBS reported disappointing earnings. Also, JPMorgan disclosed in a filing that trading conditions have deteriorated compared to last quarter (gee, thanks). And Morgan Stanley (MS) was downgraded one notch by Moody's. Last, Goldman Sachs (GS) had its earnings cut by Meredith Whitney at Oppenheimer.

Oil is slighly higher after BP said it shutdown a pipeline in the Georgian Black Sea due to safety concerns. But oil's bounce looks feeble compared to the way it would have bounced a couple of months ago. Regardless, the oversold energy complex is bouncing today.

Asian markets were lower overnight; the 10-year yield is lower at 3.93%; and the put/call ratio opened at a very high level of 1.06.

long QLD

Investor Sentiment Update

The market put in a very solid day today. It didn't close at its highs, but the fact that it could rally on a Monday after a huge Friday rally was impressive.

Oil dropping was the catalyst for the big, early rally, and when oil started coming back late in the day it looked like the rally might be in jeopardy of completely fading. But the market bounced again in the last hour, and closed on a strong note. Oil finished down slightly to $114.60.

I feel like the energy stocks are getting oversold and are due for a relief rally, as well as the ag complex.

Retail stocks led the way all day, with the retail index finishing +4.75%. Banks bounced back, and the bank index rallied +3.16% for the day.

As for investor sentiment, here are some updates:

• The Investor's Intelligence survey showed more bears than bulls for the 8th straight week, a rare occurrence
• The AAII survey registered more bears than bulls for the 10th time in 11 weeks
• The Market Vane survey showed bulls back up to 42%, but this is still well off the 55% reading in mid-May
• The public short ratio hit another record at 73.1%; there remains a huge amount of short interest in this market (one day the mother of all short-covering rallies will begin - MOASCR)
• The 10-day put/call ratio rose slighly for the week to 0.94; in terms of recent readings, this is pretty neutral. If it gets down into the mid-80s, it will be time to get defensive again

Monday Morning Musings

The market is mixed in the first hour of trading, with the Dow trading slightly lower but the Nasdaq moving into the green, led by tech. Actually, retailers are the strongest group so far, with the retail index +1.7% so far, and many of these names trade on the Nasdaq. Biotechs and semis are also higher.

Amazon (AMZN) is one of the standouts, after Citi (C) said that sales of its Kindle book reader are much stronger than expected. I have never even seen anyone using one of these products. Have you?

Oil is slightly higher this morning, near $115.50, on concern about how the conflict between Russia and Georgia could impact the supply of crude. Natural gas is higher as well. This is helping the energy stocks get a bounce.

Asian markets were higher across the board, except for China, which fell again by a large amount. The dollar is mixed this morning, and the 10-year yield is up a bit to 3.96%.

Last week was a big week in the market. I am still updating my sentiment indicators and will post an update later to see if last week's rally brought out more bulls.

long QLD

Dollar Surges vs. Euro, Oil Tumbles Again

The dollar is getting a big boost this morning, while the Euro is suffering its largest loss in 7 years. This is also helping to push oil lower again, nearing the $116 level. I have heard some traders say they are looking for support to come in around $110 for oil.

With the strong dollar, most other commodities are lower as well, including natural gas and gold. The trend lower continues to bode well for inflation expectations. This morning's unit labor cost report supports this, as labor costs fell for a third consecutive quarter to +1.3%. And the message is not lost on the stock market. The Dow is up +200 points this morning.

Asian markets were mixed overnight, with strength in Japan and Tawain, but huge weakness in China. This is ironic, as today's marks the start of the Olympics in Beijing. The number 8 is a lucky number in China, so it is no coincidence that the 2008 Olympics are slated to begin at 8pm on 8/08/08. Too bad all those 8's couldn't help boost their markets.

Despite the early gains in the market, optimism looks pretty subdued. The put/call ratios are high so far, while the ARMS Index is also elevated at 1.22. I don't like to see too much early morning strength, due to the propensity for late-day reversals. But maybe this short squeeze can hold up ahead of the weekend?

Softer Retail Sales, Higher Jobless Claims Raise Economic Concerns

The market has opened under some selling pressure this morning, on the heels of another weak earnings report from insurance giant AIG. The company reported a massive loss of $5.4 billion, which weighed on the financials immediately last night, and carried over this morning.

This morning, less than stellar retail sales from Wal-Mart (WMT) and Target (TGT) hit the retailers and raised concerns about the strength of the consumer and just how much impact the rebate checks are having.

Also, jobless claims came in above expectations, although I am hearing there were some one-time items that may have skewed the figures on the upside. Nonetheless, the figures raised concerns about the labor market, and the 10-year yield is falling below the 4.0% level as a result.

Asian markets were mixed overnight, with Japan trading lower after Japan's cabinet office described the economy as "worsening". Also, the European Central Bank left its benchmark rate unchanged at 4.25%. The dollar is up this morning vs. the Euro.

Oil is also bouncing this morning, back above $120. Natural gas is up +2.1% also, helping the energy patch stocks bounce.

The market seems to be handling the trifecta of negative news this morning well so far. I think it would be constructive for the market not to give back too much of the last 2 day's rally, and would signal that there is probably more upside ahead.

Investor Sentiment Update

Today was a pleasant surprise for the bulls. I was hoping that the market didn't give back too much of yesterday's gains, but I would much prefer to build on it.

The Nazz led the way all day, and finished up more that +1.2%, vs. a +0.34% gain for the S&P 500. Growth stocks were strong, including tech, semis, and biotech. Energy and materials stocks led the way for the broader market, while bank stocks and homebuilders lagged.

The Nasdaq has now broken above its overhead 50-day resistance, a nice technical accomplishment. But both its 50-day and 200-day moving averages are still trending downward, which means there remains plenty of resistance at higher levels.

A few stocks on my screen had an outstanding day, with all of them up more than +10% for the trading session. They were: Foster Wheeler (FWLT), Freeport McMoran (FCX), and Tesoro (TSO). Not bad, even though these stocks have been terribly depressed recently.

As for investor sentiment, the Investor's Intelligence survey came out today, and for the 8th consecutive week bears outnumbered bulls. That is a very long streak historically. Moreover, last week while I was out, bears in the survey totalled 50%. According to Merrill Lynch, that is the highest reading since late 1994.

I find this astonishing. That means that there were more bears last week among institutional investors than at any time during LTCM in 1998, after 9/11, and the bear market bottom in October 2002. And who says there is no negativity bubble?

The AAII survey of individual investors has registered more bears than bulls for 9 of the last 10 week, also a lengthy streak.

The put/call ratios are less bearish, and have faded since reaching their recent highs in mid-July. They are not yet back to levels that signal too much confidence, and thus the need to hedge or raise cash. Right now they are merely back in neutral territory, but I will continue to monitor them.

Market Shows Accumulation On Yesterday's Rally

The market had a nice rally yesterday, and volume rose on both exchanges, signaling accumulation. This is a good sign. Merrill's technical analyst noted that the accumulation since the 7/15 lows has been much better than the last 4 rally attempts, and as a result they think this rally could have "legs".

The market is a bit weak this morning, led down by financials. Freddie Mac (FRE) reported a loss and cut its dividend to $0.05 from $0.25. No surprise there. There was also a report that Morgan Stanley (MS) froze the home equity lines of thousands of customers. Doesn't sound good.

On a positive note, Cicso (CSCO) topped expectations and reiterated its long-term growth guidance. Also, Blackstone (BX) topped expectations nicely. Devon Energy (DVN) and Foster Wheeler (FWLT) also beat expectations, and all those stocks are higher.

Asian markets were up across the board overnight, following yesterday's big rally in the U.S. The dollar is also up again today. Oil and nat gas are positive, with oil back near $120. This is helping the energy and materials stocks lift. Freeport (FCX) is up nearly +10% after speculation that Vale (RIO) could be looking at it as a takeover.

The normal pattern after big Fed-day rallies has been for the market to give most of it back the next day. I would say if the S&P 500 can close with single-digit losses today it would be viewed as a constructive pullback. Yesterday it surged +35 points. The Nasdaq looks like it is getting close to testing its 50-day overhead resistance.

long DVN, FCX, FWLT

Market Rallies Sharply Into The Close

Now that is the kind of rally this market has been missing. The S&P 500 unofficially rose +2.85%, which according to my records looks like the largest rally since April 1st. Financials rallied sharply, with the bank index surging +5.5%, probably on lots of short covering.

Retails stocks also fared well, with the retail index gaining +5.4%. Transports spiked back above their 50-day, rallying +4.9% for the day. And tech stocks also acted well today.

The market obviously was not worried about the Fed's comments on inflation, and took to heart the message that they are likely on hold for the time being (from raising rates). Oil continued to plummet into the close, which helped boost the broader market.

All of those folks who were citing high oil prices as a major problem, and one that could result in a global recession (I was one of them) should now recognize the fact that a 20% drop in crude prices from their highs is akin to a global tax cut, as one of my colleagues put it.

The dollar was solid all day, which also helped take the bloom off the commodity rose. Now we just need to see some follow through from the market on top of this rally. The VIX fell -10.3% today to 21.08. The breakdown in the volatility index is another bullish sign, in addition to the rally in the financials and the drop in oil.

I have been busy catching up all day, and will try to post on the sentiment indicators later (sorry)

Fed Leaves Rates Unchanged, Walks Tightrope On Inflation

As expected, the FOMC decided today to keep its target for the federal funds rate at 2.00%. Here are some of the highlights from its statement:

• Economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports. However, labor markets have softened further and financial markets remain under considerable stress.
• Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.
• Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated.
• The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.
• Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

It sounds to me like the Fed is walking a fine line here, saying on the one hand that inflation remains a significant concern, but on the other hand saying it expects inflation to moderate later this year and next year.

I have been on record as saying that inflation is a lagging indicator, and that with U.S. growth having already peaked, and global growth slowing, inflation was likely to follow in the intermediate-term. The recent drubbing of oil and commodity prices confirms this thesis.

Longer-term, a lowering of inflation expectations should bode well for equities and growth stocks. I am not yet ready to proclaim the bull market in energy and materials over. Right now, it remains a sharp correction within a well defined multi-year uptrend.

The Dow is currently up +265 points as of this post

Market Rallies Ahead of Fed Meeting

The market is rallying in the first hour of trading, on another drop in the price of oil and anticipation that the Fed will make dovish comments at today's FOMC meeting.

The Fed meets today and will hold interest rates steady at 2.00%. Investors will watch closely for the accompanying announcement from the meeting, and whether the Fed makes dovish comments about inflation expectations that could help boost the market.

My worry is that the markets rally too much before the announcement (2:15 EST), leaving the market vulnerable to another late day pullback into the close. We shall see.

In earnings news, Molson Coors (TAP) reported earnings that fell short of consensus, and the stock is trading lower. P&G also reported earnings, but its profits were better than expected. TAP cited challenges of energy and commodity inflation. Funny that PG didn't cite the same factors.

Asian markets were lower overnight, but European bourses are rallying today. The dollar is higher vs. the Euro, and helping to push gold lower again. Oil is also lower, trading below $120 this morning, which likely helped boost the market before the open. The 10-year yield is up slightly at 3.98%.

I am finishing updating my sentiment indicators from last week when I was out. I will be back with a quick update a bit later.

Back In The Saddle

Always hard settling back in from vacation, with piles of research and emails to follow up on. But hey, I'm not complaining. As for the market, with all of its daily volatility last week, I was surprised to see that the S&P 500 finished the week with a +0.2% gain, while the Nasdaq was flat for the week, aided by some nice gains in biotech.

This morning the news is kind of light. The Fed's preferred inflation guage, the core PCE (personal consumption expenditures), came in at +0.3% (vs. +0.2% expected), while personal incomes and spending were above expectations.

Citi (C) said that it is shutting down the rest of its Tribeca hedge fund, and I'm wondering if this didn't add to last week's volatility. It sure did feel like there may have been some large liquidations at work.

Asian markets were lower overnight, and the dollar is mixed this morning. Oil is trading lower, below $125. I heard that the CRB commodities index had one of its worst months last month in decades. That should bode well for inflation expectations. The 10-year yield is flat at 3.94%.

The Fed meets tomorrow regarding its interest rate decision. Odds are that they will do nothing, so the market will take its cue from the ensuing statement and outlook. That could make for light trading today as investors take a wait and see approach.

The bounce from the July lows has certainly not been as strong as the bounce from the March lows, but the major indexes are still in good shape in terms of not making any lower lows since July 15th. I am still looking for more lift from this market as it further unwinds some of that pessimistic sentiment.