Commodities Continue To Power Ahead

The market is slightly higher in early trading, after a solid session yesterday. The leading sectors so far today are energy and materials, as a weak dollar today is boosting commodity prices.

Oil prices topped $66 this morning, new highs for this year. Gold is also higher, near the $975 level, but this is still below the year's highs that were reached in February. Financial stocks are taking a breather, which I would view as healthy.

In economic news, Q1 GDP estimates were revised to show that the economy shrank at a -5.7% rate, which is less bad than the original -6.1% estimate, but it was still below expectations (-5.5%).

In corporate news, solid earnings reports from DELL and Jcrew (JCG) are boosting those stocks.

Asian markets gained overnight, after industrial production in Japan rose, and India reported GDP in that country grew +5.8%; the 10-year yield has backed off to 3.55% after spiking as high as 3.75% yesterday. Mortgage hedging has been cited as one of the drivers the last couple of days in the bond market; and the VIX is still floating just above that 30 level, currently down -2.3% to 30.94.

Trading comment: Volume rose on the NYSE yesterday, making for a nice accumulation day for the SPX on yesterday's bounce. The SPX continues to consolidate, and trade within a broad range. Of course, at some point the market will likely breakout of this range. That is how markets often work, they thrust, then pause to catch their breath, then thrust again. Let's just hope its on the upside.

Yesterday I bought IBM in client accounts. The stock still looks cheap relative to the upwardly revised earnings estimates. Also, IBM has a big stock buyback, which should support the shares on a pullback. I took some partial profits in CLR this morning, even as I still like the oil service stocks. This sector is volatile, so I would look to buy back the shares I sold on a pullback.

long CLR, IBM

Investors Closely Watching Bond Market Moves

As the chart above shows, yesterday bonds experienced a huge selloff in price, driving yields dramatically higher. The 10-year yield surged to 3.70%, taking the bloom off the equity rose. Stocks closed near their lows, and have opened slightly weak this morning also.

Yesterday's Treasury auction was not weak, so I'm not sure what sparked the selloff, but there sure was a big move out of bonds. Today there is another auction, this time it will be a 7-year Note auction, which will be very closely watched.

One of the things that hit the market after the open was a report showing that new home sales for April were up only +0.3%, vs. expectations of +1.1%. But the small increase was still better than the -3.0% decline seen in March. Also in economic news, durable goods for April showed an increase of +1.9%, much better than the +0.5% consensus.

In oil news, OPEC agreed to leave output unchanged for the 2nd time in two months. This is helping support a rise in crude oil prices, which neared the $65 level this morning after an inventory report here in the U.S.

In corporate news, GM bondholders have agreed to a new deal, which appears to be a better restructuring plan for the company. Although the govt. has agreed to provide massive assistance to the ailing automaker. (bailout nation)

There was a story out after the close yesterday that the big hedge fund Pequot, run by Art Samberg, was closing down. I'm assuming that the press release of its closing would not have gone out ahead of them liquidating their positions, so there was some chatter on the Street that maybe some of the selling pressure yesterday stemmed from liquidations at Pequot. I'm sure more details will be forthcoming.

Trading comment: The SPX continues to trade above that 875 support I've mentioned, and lately has been rangebound between 875-925. So the best strategy seems to be to continue to trade around positions. I didn't make any trades yesterday, but I am still looking to add a little energy exposure via the oil services etf (IEZ). And stockwise, I would like to add a little to the financials, if we get more of a pullback in names like WFC, BAC, or GS.

Retail Stocks Bounce On Solid Earnings Reports

The market looked slightly weaker near the open, but has since firmed up a bit. Retail stocks are gaining on some solid earnings reports, housing stocks are higher on some good housing data, and tech stocks (semis) are simply leading the way.

The existing home sales report for April showed that home sales increased +2.9% month over month, which is above expectations and a nice turnaround from last month's -3.4% reading.

Among retail stocks, there were a handful of better than expected earnings reports this morning, including: Dollar Tree (DLTR), American Eagle (AEO), AutoZone (AZO), and Ralph Lauren (RL). All of those stocks are higher, expect for AZO, which is down. (note: AZO is a big target of the short sellers; I tried to short some last week and couldn't even borrow any shares)

Semi company CREE also raised guidance last night, and its stocks is seeing a huge bounce. On the flip side, ag company Monsanto (MON) gave downbeat guidance, and its stocks is -5% lower and weighing on the ag sector today.

In other news, GM is moving closer to bankruptcy, after bondholders wouldn't agree to big concessions in restructuring, and feel they would be better of in bk court. And Bank of America (BAC) has raised more capital, nearly the full amount suggested under the govt stress test.

Asian markets were nicely higher overnight, following our markets; the dollar is higher, weighing on gold prices, but oil is a bit higher; the 10-year yield is creeping up again, hitting 3.56% (a 6-month high); and the VIX is slightly lower, near 30.25.

Trading comment: The SPX is back into positive territory for the year, and closed slightly above that uptrend line I have been referring to. The Nazz is well above its 200-day right now. If the correction that so many have been looking for doesn't materialize soon, I would expect this to add to the performance anxiety on the part of the big hedgies, and could lead to additional upside pressure in the market heading into quarter-end (June 30th).

I am seeing more and more growth stocks breaking out, and need to force myself to spend more time studying these new names and not worrying so much about the day to day moves in the overall indices. I know that there are traders out there making a mint, and I don't want to be left out of the party (nor do my clients!).

Happy Birthday, Sweet Girl

Happy Birthday, Taylor!

Today my daughter turns 5 years old. For the first few years of her life, I wished she would grow up quicker, so that she would start walking and talking and we could do more things together.

This morning, I looked at this big girl and wondered not only where did the five years go, but how I could slow it down?!?

Some of my older friends have told me that if I blink a few more times, she'll be getting ready to leave for college. I hope to pack in more memorable experiences than any little girl has ever had between now and then. I think that is better than any financial goals I have set for myself :)

Chart of the Day

My Chart of the Day is the Nasdaq 100 etf (QQQQ). This leading growth index looked like it hit a double-top last week, and then reversed lower. On Thursday and Friday last week, it sold off and tested support at its 200-day average.

Today was day 3 of that support testing, and we got a very solid bounce from those levels. In the chart above, you can see how the index touched that red line, and then rocketed higher. The index rose +3.5% today, a big one-day move. Moreover, volume rose, making for a nice accumulation day.

As we have seen for awhile now, since the March lows, the market continues to stairstep higher. Each time it looks like it is on the verge of rolling over, buyers step in to put money to work. This provides a nice backdrop for growth stocks, which continue to offer good trading opportunities.

At some point, we will need to see the number of new highs on the Nasdaq expand. But for now, I am content to try to take advantage of trading opportunities, trading around positions and looking for new buys on breakouts. I would highlight stocks like JOYG, QCOM, SXCI, and AVID as falling into the latter group.

The second chart (above) shows the insurance etf (KIE), that I have been eyeing. I stepped up and bought it today, as it also has been consolidating nicely, and looks ready to move higher again.

Today's action lifted the etf back above its 200-day average, which could bring out more buyers. Also, if you step back and look at the chart for this year, you can see what looks like a big cup-and-handle formation developing.

If the KIE can break above its early May highs on expanding volume, it would be a bullish acknowledgement of this technical formation, and portend even higher prices. Fundamentally, I think that the access to TARP funds and the improving equities market makes the case for these stocks more compelling as well.

long KIE

Back In The Saddle

Good Tuesday Morning. I'm back in the saddle after a long weekend in Cleveland where I took my daughter to visit my folks. A great time was had by all, expect for the Cavs which head into tonight's game trailing 2-1 to Orlando. But I have to admit LeBron's game winning shot Friday night was probably the greatest game winning shot I have ever seen.

Now back to the markets. The turnaround this morning was very surprising. The futures were down all night and this morning. Asian markets were weak overnight after the nuclear tests in N. Korea. Then we heard that GDP in Germany contracted -3.8% to a record low in the 40 years of record keeping. And early this morning the CaseShiller Home Price Index for March came in at 140.0, down from the prior reading of 143.1, and showed a -18.7% decline in home prices. Ugly.

But soon after, the Consumer Confidence Index for May was released, and it was much better than expected. The index rose to 54.9, its highest reading of this year, and well above the 42.6 consensus expectations. Since much of the economic rebound revolves around confidence, this is a welcome sign, and stocks immediately turned higher. As fo this post, many of the major indexes are up more than +2.0% on the day.

The dollar is higher this morning, while oil and gold are a bit weaker; the 10-year yield is up again, to 3.46%, after another big bounce higher last week; and the VIX, which also bounced higher last week, it down -6% today near 30.60.

Trading comment: The S&P 500 is rallying back to the 900 level, which is right around the uptrend line that I have posted before going back to mid-March. And the SPX has yet to break below that 875 support I have been talking about, despite nearly every commentator I can think of saying that a move below those levels was a done deal.

Our recent position adds are hanging in there, still midly positive. I am still looking at adding the insurance etf (KIE), as those stocks remain undervalued in my opinion. The only trade I have made so far today is to take partial profits on CME, which is up roughly +25% since we added to it back in April.

Be back later with a chart of the day, and for those who have requested a sentiment analysis update, I will try to get one up this week.

Good luck trading--

long CME

Scheduling Conflict

I was travelling yesterday, and am visiting with family today, so that is why there have been no updates.

I highlighted the outside reversal day on Wednesday, and said that the pattern usually portends further weakness, so yesterday's selloff was not all that surprising. The SPX is still above the 875 support levels that we noted during the last selloff.

Today is the last trading day ahead of the holiday weekend, so I would expect volumes to be lighter than normal.

I will be back with an update later today. Good luck trading.

Note: I have not made any new trades

Market Wrap: S&P 500 Experiences Outside Day

As the chart above shows, the S&P 500 (SPX) put in an outside reversal today to the downside. This happens when the market rallies above the previous day's high, but then reverses and closes below the previous day's low (and vice verse).

This pattern bears close watch, as it often has bearish implications for the overall market. And today it was accompanied by rising volume. On the chart you can see that volume had generally been declining since it peaked on 5/7. But today volume levels rose on both the NYSE and Nasdaq.

This makes me think that the market isn't ready to overtake its recent high at SPX 930 just yet. The downside today was led by the banks and financials, while energy and materials bucked the general weakness.

Trading comment: Despite the bearish price action today, I am not ready to get aggressive with short positions. I put on a small inverse financials etf (SKF) position late in the day, but just for a trade. The market has continued to act resilient on the downside, and despite some brief consolidations, the market has continued to stair-step higher.

Some other trade updates include a couple of trading longs in CHKP and CLR. I also added to our URBN positions yesterday. And today I took final profits on our MOS position, which has had a big run and looks due for a deeper pullback.

Note: I try to update my trading activity on this blog, but if you would like quicker updates on trades I am making, try checking out www.twitter.com/lagenghis

long CHKP, CLR, URBN, SKF

The Energizer Bunny Market

The market is up again this morning, continuing its stair-step pattern higher, to the extreme dismay of the bears. Anecdotally speaking, I can't count the number of talking heads I have seen on CNBC and elsewhere who have been calling for a pullback in this market.

It just goes to show you that the notion that the market often moves in the direction that frustrates the most poeple is often true. I also think that the fact that so many investors are all looking for that elusive pullback leads me to believe that many managers remain underinvested in this market, and will likely have to chase stocks higher if the market goes to new highs.

Last night the news of the big capital raise by BAC and the in-line earnings report from HPQ led to some selling after hours, and as I went to bed last night the futures were pointing to a lower open. But some positive earnings reports before the bell from the likes of TGT, BJ, and Deere (DE) seem to spark renewed buying, and lo and behold a higher open.

The SPX got as high as 924.60 so far this morning, while its recent high is 930, so we're not that far away. Moreover, the Nasdaq has recaptured its 200-day moving average, another positive technical sign. And the VIX is making another sharp move lower, down -4.3% so far to 27.50, and nearly getting back into what might be considered "normal" levels.

Asian markets were mixed overnight; Japan's economy shrank a record -4.0%, though the decline was less than expected; the dollar is weak today, helping boost oil, gold, and commodity prices; oil has topped the $61 level again, as we near Memorial Day weekend which kicks off the summer driving season; the 10-year yield is flat near 3.24%.

I'll be back with my trading comments--

Chart of the Day: ITRI Makes Big Move

Shares of Itron (ITRI) are making a big upside move today, on very heavy volume.

There was news of a small contract win for its PC division, and also a price target upgrade from RBC (to $62). The price target bump was in response to the DOE's increase of its smart grid project, which seems to be the major catalyst. The DOE increased the project size to $200 million.

The firm believes ITRI is the best positioned company to benefit as utilities place orders for smart meters, etc. The company has the most comprehensive suite of products for grid networks and security.

I was stopped out of a trading long position in ITRI a couple of weeks ago, but this move is getting my attention. The heavy volume makes me think some big players want in on this stock. And while I would normally scoff at a +14% one-day move as too much-too fast, I'm thinking this one could have legs.

The stock is not expensive, trading at roughly 16x next year's estimates. And with this increase in the size of the DOE project, estimates for next year could prove too low. Last year, this stock topped the $100 mark, so there is plenty of potential upside.

I will have to make a decision by the close of trading today, but I am leaning toward buying a half-size position at current levels, and would look to round out and add to that position on a pullback.

Other stocks that are adding to their recent sizeable runs include: IPI, ANEN, SNDA, SYNA, NEU, QSII, GS

Will The Early Bounce Hold?

The market is showing its resiliency again, after some weak housing reports weighed on the market in the opening hour, but it has since clawed its way back into positive territory.

Housing starts for April (458k) came in below expectations, and below March levels. Also, building permits were also below expectations, and hit new record low levels. This was taken as indicative of weak economic conditions, causing some to question the health of the economy.

I think the silver lining is that we are still coming off a housing bubble, with a glut of homes on the market. So few housing starts and permits mean that the supply of existing homes will get sopped up quicker, and that will lead to firmer home prices and a healthier supply and demand picture going forward. So this is actually bullish in the sense that it should help pricing stabilize quicker.

Asian markets were nicely higher overnight; the dollar is lower this morning, but gold prices are higher; the 10-year yield is higher to 3.25%; and the VIX is breaking below the 30 level for the first time since Sept. 2008. This is a bullish development, and signals that the extreme volatility and wild swings in the market continue are behind us.

Trading comment: Yesterday I noted that the test near the SPX 875 level should find support and lead to a bounce in the market. So far that has been a good call. With the insurers qualifying for TARP funds, I would like to buy the insurance etf (KIE) on any pullback.

Energy and materials are leading today, and our materials etf (MXI) is starting to work. Individual stock plays also continue to work, and I will try to start highlighting more charts and breakouts each day. (shoot me a note of what you would like to see more of--)

long MXI

Monday Morning Musings

Good Monday Morning. The market is getting a big bounce, although news is relatively light. Banks stocks are leading the action, +6.0% so far, and those gains are being matched in the housing sector. Drugs stocks and biotechs are lagging, as well as a few large tech stocks.

The most positive news of the day comes out of India, where the ruling Congress party won a big election. India's stock market surged overnight, so high that the market had to be halted. The India etf (INP) is up +21% this morning, and most Indian stocks are up huge as well. Not bad.

In the bank sector, BAC was added to Goldman's Conviction Buy list. That is boosting BAC +12%, with most large financial stocks following suit. I still believe financial stocks are heavily underweighted in most manager's portfolios, and I speak from experience. We sold most of our financials very early in 2007, and have not yet added back to the sector in any material way, but I am growing increasingly bullish.

One of the catalysts behind the housing rally is that Lowes (LOW) reported better than expected earnings, and also raised guidance all the way out to 2010. Pretty bullish. The housing sector is another contrarian sector that is likely underweight in most portfolios.

Asian markets were mixed overnight, with many higher on the heels of India, but Japan was lower; oil prices are rallying back to $58, but gold is lower as the dollar bounces; the 10-year yield is up slightly to 3.13%; and the VIX is down -5.74% to 31.22.

Trading comment: I thought the market might dip to my SPX 875 level today, but it doesn't look like it so far. Friday's low was 878, which is close enough for govt. work. So far, it looks like you had to buy Friday's low if you wanted to play the bounce, but I suspect this bounce has further to go after a big down week last week (SPX -5.0%).

It seems like everyone is looking for a continued pullback, so I'm trying not to get micro-focused on the levels of the major indexes. That just distracts one from finding profitable trades, which continue to surface. I want to continue to trade around my stock and etf positions, buying pullbacks and selling rallies as long as this rangebound market holds up (which could be longer than expected).

Small Bounce For Stocks In Early Trading

The market is getting a small bounce in early trading. Tech is mostly higher, while energy and utilities are lagging.

Yesterday's bounce came on lighter volume vs. the previous day, which was a high volume distribution today. Usually you want to see the reverse - rising volume on rallies and declining volume on pullbacks. So I am still in the camp that expects more of a pullback, but I am still watching that SPX 875 level for initial support.

The Treasury reported this morning that it will make $22 billion in TARP funds available to several life insurers, but the stocks are lower at the moment. This could be a little 'buy the rumor, sell the news' effect, but I admit I am a little disappointed by the reaction.

In economic news, CPI was flat month/month, and down -0.7% year/year. Capacity utilization rose a touch to 69.1%. I don't think we can start worrying about inflation until capacity utilization gets above 80%, which is likely years away. And the Empire Manuf. Survey rose nicely to -4.55 from -14.65 last month.

Asian markets rose overnight. In Europe, reports showed that GDP in the euro zone dropped -2.5% in the first quarter, marking the fourth consecutive quarter of decline. The dollar is up today, but gold prices are up also. Other commodities are mostly weak. The 10-year yield is up to 3.13%. And the VIX is at new lows for the year at 30.85, levels we have not seen since September 2008.

Trading comment: Yesterday I took profits on our SSO position, and partial profits on MOO. I still like the ag space very much, and will look to use a pullback to buy back into it. I also like the insurers on the TARP announcement, and will be looking for a spot to add KIE. I didn't pull the trigger the other day on RIMM, although I should have, and would still like to buy that one near $70. I also recently added VMW to our accounts, and still like that one as well.

long MOO, VMW

S&P 500 Bounces From Key Support Levels

The chart above shows the uptrend for the S&P 500 (SPX) that has been in place since mid-March. It is not drawn from the March lows, but rather from the first dip in the daily chart that the SPX experienced after its initial bounce.

Yesterday and today we saw the SPX again test this uptrend support, and so far it has held. Yesterday saw sharp selling pressure, with more than 90% of the volume coming from the downside. The last time we saw this was on 4/20, from which the market bounced and continued to rally.

I am suspicious that we can see a repeat performance. The Nasdaq has already broken its uptrend (ditto the Russell 2000), and I think the SPX will likely follow. That doesn't necessarily mean that we have to go back into bear market mode. It could just be a consolidation that lasts a bit longer than we have seen recently.

The SPX has already -5% from its recent highs. Remember, in 2003 all the bears that were waiting for that 10% correction before committing funds were sorely disappointed. We could see the same thing this time around.

As I mentioned earlier this week, the 875 level acted as resistance for the SPX for several months. After breaking sharply above that level, it would not be surprising to see it now act as support on a further pullback.

So far today, the market has responded positively to a worse than expected jobless claims report. This is a good sign, as we want to continue to see optimism in the market. Big picture I still get the sense that a lot of funds are underinvested for a continuing bull market.

Trading comment: Ag stocks continue to act well, but I am taking some trading profits on my MOO position. I am still bullish on this space, and will look to use a pullback to add back to the position. I am also bidding to sell our SSO positions that I have held for several months. The market has had a big move, and going forward I think the proceeds can be better put to use in sector etfs as opposed to the major indexes.

long MOO; selling SSO

Now On Twitter

For those of you that are active traders, and like intra-day updates, you can now follow my comments on Twitter:

www.twitter.com/LAgenghis

Let's tweet!

A Change In Character? Or Just Profit Taking?

For 2 months now, the market has viewed all news events as positive. The rally has endured even as less favorable economic reports came out, as even bad news was greeted with buying, and the worst was viewed to be behind us as investors.

The last couple of days has been a bit different, as the market has sold off on some news reports. This morning it was the retail sales report. Yesterday, the market rallied back into the close to mitigate its early losses, but how many days can that happen?

The Nasdaq has rolled back over below its 200-day average, and the S&P 500 is nearing its uptrend line that has held since the March lows. To be sure, the market had gotten overbought, and many investors are looking for a pullback to refresh things. That is what makes this juncture interesting.

A 3-5% pullback is definitely warranted, and right now the SPX has pulled back roughly -4.4% from its highs last week. Pullbacks are healthy. The true character of this nascent bull rally will be revealed not in how fast it rises, but in how it handles the pullbacks. Bull markets are defined by higher highs and higher lows. So far that has been the case, but we need to see that if a larger correction ensues, that the market holds above previous lows.

In 2003, investors were also anticipating a 10% pullback, but it never came. The market continued to stair-step higher that year, and investors had to step up on every slight pullback and consolidation if they wanted to participate in the new bull market. Could the same thing happen this year? I think what we've learned over the last 18 months is that in the market, anything can happen.

Trading comment: I mentioned last week that SPX 875 acted as resistance several times until it was finally penetrated. So that level should now act as support on the first trip down. The SPX is currently at 888, getting close to this support level. I will look to add long exposure as we near this important area.

Yesterday I added the global materials etf (MXI), as I think those companies should benefit from the global stimulus efforts and the reflation attempts in China in particular. I also took some trading profits on MOS, and added a trading long position in AMZN. Tomorrow, URBN reports earnings, and I will have a roundup of the conf. call later that day.

long AMZN, MOS, MXI, URBN

Median Home Sales Report Shows Some Huge Drops in Prices

The NAR released its median sales price of existing homes report (that is broken down by metroplitan areas) today, and there were some VERY large drops. As I usually do each quarter, first let's look at 5 of the biggest U.S. cities that I track: (note: prices are vs. last year)

• Chicago: -25.6%
• Los Angeles: -34.1%
• Miami: -35.4%
• New York: -16.0%
• San Francisco: -42.7%

The Top 5 gains were paltry last quarter:

1. Cumberland, MD: +21.1%
2. Davenport, IL: +13.8%
3. Columbia, MO: +6.0%
4. Beaumont, TX: +5.0%
5. Oklahoma City, OK: +4.0%

Okay, now for the Top 5 losers:

1. Ft. Myers, FL: -59.1%
2. Saginaw, MI: -53.7%
3. Akron, OH: -48.0%
4. San Jose, CA: -42.3%
5. Las Vegas, NV: -37.3%

Ouch. Those are some steep losses, to be sure, and basically repeal all of the gains that were experienced from 2003-2007. Overall, the national rate for the U.S. last quarter was -13.8%. This report doesn't offer much comfort that things are improving for housing, but maybe sellers finally threw in the towel and were ready to accept realistic offers. Given that Q1 market the bottom in several other indicators, I would not be surprised if this report market the low for median sales prices also.

Monday Morning Musings

The market opened sharply lower this morning, but is seeing a strong bounce as I type this post. The Nasdaq has already moved back into the green, after being down nearly -2%.

Last week was an odd week for the Nasdaq, in that the S&P 500 rose +5.9% for the week, while the Nasdaq 100 actually fell -0.2%. That is quite a divergence, and something that could correct itself over the next few weeks. The main reason for it was the surge in banks and financials after the govt. stress tests.

There were no major earnings announcements nor economic reports this morning. Here is a quick summary of the early action:

• Stock averages declined in early trading, with the market getting hit by some profit-taking.
• The S&P 500 rose nearly 6% last week, and was up 37% in the last nine weeks heading into today.
• The Dow was down as many as 151 points in the first hour of trading.
• The Nasdaq has been down as many as 29 points.
• General Motors declined 14 cents to 1.47 as the automaker released a statement saying a bankruptcy filing is more probable.
• Bank stocks are in the spotlight again. BB&T dropped 1.15 to 25.18 after announcing a plan to cut its dividend by 68%. U.S. Bancorp and Capital One Financial were both lower after announcing they will sell stock. U.S. Bancorp dropped 82 cents to 19.72. Capital One Financial was down 2.80 to 28.54.
• Alcoa retreated 53 cents to 9.48 and energy stocks declined as oil and metals prices fell.
• Copper dropped the most in almost two weeks in London.
• The NYSE was 5-1 negative on issues, 10-1 negative on volume.
• The Nasdaq was nearly 3-1 negative on issues, nearly 2-1 negative on volume.
• The 10-year Treasury note was up 23/32 to yield 3.20%.
• Asian markets were mostly lower overnight; the dollar is mixed this morning; oil prices are lower, after a big move higher last week; gold prices are also down slightly; and the VIX is up +3% to 33

Trading comment: Investors are still looking for that illusive pullback. On Friday, I took partial profits on HANS and added to our CELG long a bit. I am still looking to add some etf exposure, but have not pulled the trigger yet.

long CELG, HANS

Bank Stress Tests, Jobs Report Both Come In Less Than Feared

The market is higher in early trading, after the release of the bank stress tests last night offered results that were more benign than initially feared. The government said that 10 of the 19 banks will require additional capital, estimated at $75 billion. Wells Fargo (WFC) already raised $13.7 billion in an overnight share offering. The bank index is again leading the upside action so far.

Another eagerly anticipated report was the nonfarm payrolls report this morning, which showed the economy shed 539,000 jobs. This is a big figure, but it is below expectations for -600,000 jobs. The unemployment rate rose to 8.9%. Again, unemployment is a lagging indicator, and always continues to rise after the stock market as well as the economy have already bottomed. So don't try to use it as a leading indicator.

Asian markets were higher overnight, after results from our stress tests were released; the dollar is weaker so far, while oil is higher again near $58. Gold is roughly flat; the 10-year yield is lower to 3.27%, after a big spike higher yesterday; and the VIX is -2.4% to 32.63 so far.

Trading comment: For the second day (so far), the SPX has rallied up to the 925 level only to turn lower. So it looks like 925 is shaping up as near-term resistance. We saw this earlier with the 875 level, but now that the SPX has broken above that former resistance, I would look to 875 as an area of support.

Yesterday I added to out biotech etf (XBI) positions. Biotech stocks have not kept pace with the recent rally, but I think they could play catch-up as the broader market pauses to catch its breath. Also, the positive news in the HMO space has me thinking about adding a basket of those stocks. One way to play it would be via the etf, IHP.

long XBI

Stress Test Results Less Onerous Than Feared

Here is a summary of the stress test results from the WSJ.com:

WASHINGTON -- Ten of the 19 largest U.S. financial institutions will be required to raise a combined $75 billion in capital, as the U.S. government for the first time divided healthy banks from those which may need help to weather a worsening economy.

U.S. Treasury Secretary Timothy Geithner, in a press conference, said he was "reasonably confident" the banks could raise the needed capital. Federal Reserve Chairman Ben Bernanke said the results should provide "considerable comfort" about the health of the banking system.

Bank of America Corp., Citigroup Inc., Wells Fargo & Co., GMAC LLC and Morgan Stanley were told they need to raise capital due to the results of the government's stress tests.

Regions Financial Corp., Fifth Third Bancorp, KeyCorp, PNC Financial Services Group Inc. and SunTrust Banks also were told to bolster their reserves.

By contrast, J.P. Morgan Chase & Co., Goldman Sachs Group Inc., American Express Co., BB&T Corp. , State Street Corp., MetLife Inc., Bank of New York Mellon Corp., US Bancorp and Capital One Financial Corp. don't need to raise additional capital.

Bank of America must raise nearly $34 billion in capital, more than any of its peers. All 10 banks will need to raise Tier 1 common capital to bolster their reserves.

The Treasury painted a grim picture of the toll of the financial crisis on the banking system. It said total losses at the 19 banks due to the crisis that began in mid-2007 could reach $950 billion.

Meanwhile, losses in 2009 and 2010 at the 19 banks could total $600 billion under the government's scenario of a deepening economic downturn. Mortgage loans and consumers loans could account for 70% of the potential losses.

The directives come after the government's weeks-long exercise testing how the 19 banks would fare under darker economic scenarios. Mr. Bernanke said the tests weren't "tests of solvency."

The Recession Is Over

The large drop in the jobless claims number supports the notion that the recession is over. Every other major recession has seen its end marked by a large drop in the jobless claims figures. So while Q2 will likely be a small negative figure for GDP, I think the odds have gone up that it will be the last negative quarter of GDP for this recession.

We will only now with hindsight, when the NBER officially declares the end of the recession, but you know where I stand. And this opinion differs widely from many Wall St. strategists, who think that we could continue to see negative GDP quarters into Q1 of 2010. They will be wrong.

Many of the same-store sales reports for retailers also came in less bad than feared, which is helping boost those stocks and adding to the notion that maybe the consumer is starting to peak her head out of the cave. Wal-Mart posted strong results, but said that it will no longer issue monthly sales figures. I hope that isn't a trend that gets widely adopted.

The govt. will release the bank stress test results after the market close today, but so much of the news has already been leaked out that I don't expect it to be a huge market moving event. JPM, GS, MET, AXP, BK, and COF were already indicated to have adequate capital levels. And the companies that were indicated to need more capital still saw their stocks go up! Go figure.

Tech stocks are leading the downside this morning, despite Cisco (CSCO) reporting better than expected results and raising guidance. Maybe this is just profit taking after a huge run in the market, but watch out when stocks start falling on good news. That would be a change in character.

The ECB cuts its interest rate 25 basis points to 1.00%, as Trichet acknowledges that inflation is likely to be contained. The Bank of England said it will step up its asset purchase program by 50 billion Pounds. And Japan's stock market surged +4.6% after being closed for a string of holidays.

The 10-year yield is higher to 3.24%; the dollar is weak so far, helping boost commodities, oil, gold, and the Baltic dry index; and the VIX is higher today to 33.75.

Trading comment: Could today be day one of the pullback? I hope so. I certainly don't root for the market to go down, but I would like it to rest a bit and catch its breath. This would give me a chance to put some cash to work before another push higher which I still expected.

ADP Jobs Report Boosts Stocks In Early Trading

The market was set for a lower open, after news leaked out that regulators told BAC and Citi that they both need to address capital requirements. But when the ADP jobs report came out, it quickly reversed any early selling pressure, and the market actually opened considerably higher (it has since faded).

The latest ADP employment report showed that job losses in April totaled -491,000, which is well below the 645,000 in job losses expected. The official jobs report from the govt. comes out on Friday, and while the ADP report hasn't been the best indicator of the govt. report, it does reflect the general direction. The consensus for the Friday payrolls report is -610,000.

As for the banks need to raise capital, subsequent reports indicate that BAC might not need to raise more outside capital, but instead need to increase the proportion of its common equity, which can be done through conversion of preferred shares. This is esoteric stuff, but the stock's reaction (+7.5%) today speaks to the fact that this outcome could be less onerous than initially feared.

Asian markets closed higher overnight, led by Hong Kong (+2.5%); the dollar is mixed so far, while oil and gold are both trading higher; the 10-year yield is up a bit to 3.17%; and the VIX is near new low levels for the year at 33.40.

Trading comment: No change to my near-term outlook yet. The higher opening was a bit frustrating, but currently the Nazz is back in the red, and the SPX has given up most of its gains as well. I am still trying to be patient awaiting a little more of a pullback. Yesterday, I took some profits on my URBN position, and was stopped out on MYGN.

long URBN, SSO

Bernanke Sounding Incrementally More Positive On The Economy

Here are some of the highlights from Bernanke's congressional testimony today:

• Bernanke says "The most recent information on the labor market--the number of new and continuing claims for unemployment insurance through late April--suggests that we are likely to see further sizable job losses and increased unemployment in coming months. However, the recent data also suggest that the pace of contraction may be slowing, and they include some tentative signs that final demand, especially demand by households, may be stabilizing.
• Consumer spending, which dropped sharply in the second half of last year, grew in the first quarter. In coming months, households' spending power will be boosted by the fiscal stimulus program, and we have seen some improvement in consumer sentiment.
• Nonetheless, a number of factors are likely to continue to weigh on consumer spending, among them the weak labor market and the declines in equity and housing wealth that households have experienced over the past two years. In addition, credit conditions for consumers remain tight.
• The housing market, which has been in decline for three years, has also shown some signs of bottoming. Sales of existing homes have been fairly stable since late last year, and sales of new homes have firmed a bit recently, though both remain at depressed levels. Although some of the boost to sales in the market for existing homes is likely coming from foreclosure-related transactions, the increased affordability of homes appears to be contributing more broadly to the steadying in the demand for housing.
• In particular, the average interest rate on conforming 30-year fixed-rate mortgages has dropped almost 1-3/4 percentage points since August, to ~4.8%. With sales of new homes up a bit and starts of single-family homes little changed from January through March, builders are seeing the backlog of unsold new homes decline--a precondition for any recovery in homebuilding.
• We continue to expect economic activity to bottom out, then to turn up later this year. Key elements of this forecast are our assessments that the housing market is beginning to stabilize and that the sharp inventory liquidation that has been in progress will slow over the next few quarters."

Will This Morning's Pullback Last?

The market surged higher yesterday, on very strong volume. There have been few pullbacks along the way, since the recent market lows in March. This morning, the market is a bit lower, probably on profit taking. But the question is, will it last? Everyone seems to be waiting for a pullback to put more money to work, yours truly included, but as I have often said, the market rarely accomodates the herd.

In economic news, Chairman Bernanke testified before the Joint Economic Committee this morning. I'll post the jist of his comments in a bit.

Also, the April ISM Services Index came in better than expected at 43.7. This is still below the 50 level that marks expansion, but it is up from last month's 40.8 reading, and I believe has been up for 6 or 7 months now.

Asian markets were slightly higher overnight; the dollar is lower this morning, while gold is a bit higher; the 10-year yield is roughly flat at 3.15%; and the VIX is higher to 35.08.

Trading comment: Yesterday I took some trading long positions (short-term) in some stocks like MOS and VMW. Both of these look like good bounce candidates short-term. This morning, I took some profits in URBN, which has had a very nice bounce and reports earnings next week.

For the most part, I have just been doing these small trades lately, as I continue to wait for more of a pullback to add to my etf exposure. It can be frustrating to wait while the market is moving higher, but risk is always 2-sided in the market, and opportunites are easier made up than losses.

long MOS, URBN, VMW

S&P 500 Turns Positive For The Year

The S&P 500 rallied hard today, outpacing the Nasdaq, and managed to close above its year-end 2008 levels (903.25). That puts the index in positive territory for the year (+0.44%) for the first time since Jan. 8th.

Here is a quick summary of today's action:

• Wall Street extended recent gains, driving the S&P 500 above 900 and allowing the index to wipe out its loss for the year.
• Better-than-expected economic reports and positive analyst comments were the catalysts for the advance. March pending home sales posted their first back-to-back increase in almost a year, while construction spending ended a sixth month slide.
• Commodity producers rallied as China’s manufacturing expanded for the first time in nine months and the price of oil hit a five-week high.
• Intel led the technology group higher following an analyst upgrade. The shares rose 82 cents to 16.66.
• Financial stocks rose as the market anticipated banks have avoided the worst case scenario. Bank of America denied a report it was trying to raise $10 billion and shares closed up 1.68 at 10.38.
• On the earnings front, Sprint Nextel reported a surprise profit and the shares jumped 33 cents to 5.00.
• The Dow closed up 214.33 points at 8426.74.
• NYSE volume totaled over 1.7 billion shares.
• The S&P 500 was up 29.72 points.
  The Nasdaq gained 44.4.
• Advancing issues beat decliners by 5-1 on the NYSE and by 7-2 on the Nasdaq.
  The 10-year Treasury note was steady to yield 3.16%.

Monday Morning Musings

I had the travel day from hell yesterday. After spending the weekend in SF, actually Stinson Beach, and enduring rain all weekend, we spent over 6 hours sitting in the airport trying to get on various standby flights only to have the eventual plane break, de-board, and start over again. Not fun.

Turning our attention to the market, I am running out of words to describe the resiliency of this market. The fact that the market has continued to stair-step higher, despite being heavily overbought, is impressive. No wonder people are comparing it to the 2003 market that turned higher in the spring of that year and never really suffered a correction. I am both glad I put some money to work last week, and mad that I didn't pull the trigger on the other buys I was looking at. Ugh.

The positive news this morning was the strong pending home sales report, which showed pending sales for March rose +3.2% for the month, better than expected. Construction spending was also stronger than expected. This news is boosting the housing index by +4.85% in early trading.

There were also some positive comments from Warren Buffett about banks like Wells Fargo (WFC) and US Bancorp (USB), saying they should come through this period just fine. His comments are boosting those stocks considerably, as well as benefiting the whole bank index.

There are still concerns about the stress tests that will be released May 7th, and which banks will have to raise how much capital, but those concerns are being trumped so far today.

Asian markets also soared overnight after Asian finance ministers said they would pool $120 billion for an emergency liquidity fund. Also, China's PMI for April was better than expected at 53.5.

The dollar is lower this morning, which is boosting commodities. Gold is back above $900, and oil is closer to $54 so far; the 10-year yield is flat at 3.17%; and the VIX is only slightly lower to 35.25. Given the strength of this rally so far, I would have expected the VIX to be down a bit more.

Trading comment: If I am feeling frustrated by the incessant advance of this market, I have to assume those feelings are rampant on the Street. The shorts are screaming, and the longs are scrambling. I am still eyeing the same positions I mentioned last week, but at this point, I might just have to admit I didn't time it as well as I would have liked and pay up a bit.

some clients own WFC, USB

S&P 500 Can't Hold 875 Level for Second Day

The market is lower in early trading, which is a bit of a change vs. the last few days. I am a bit surprised the market isn't down more, given the news that the government will delay the release of the stress test results on large banks.

The news is that the govt. will not announce the results on May 4th, as originally planned. This came about after executives continue to debate the findings, which investors are taking to mean that the results didn't exactly paint a rosy picture of banks.

There seems to be concern about what the disclosures could mean for certain banks' stock prices. No, really? So my takeaway is that there are obviously some banks that still need more capital. But the banks stocks, which opened lower, are all rallying now. Talk about a confusing market. There must still be tons of people short these financials. Given how these stocks are reacting today, maybe they should just release the results now!

In economic news, the ISM Manufacturing Index came in above expectations for April at 40.1 (vs. 38.4 consensus). This is up from the 36.3 reading in March, but overall still shows that the manufacturing sector is contracting (any reading below 50 signals contraction).

Asian markets were mixed overnight, with Japan higher as the Yen weakens (boosts exports); the dollar is lower vs. the Euro and higher vs. the Yen; oil is trading higher, while gold is down again; the 10-year yield continues to spike higher, touching its overhead 200-day average near 3.18%; and the VIX is +1.9% higher so far to 36.25.

Trading comment: The chart at the top of the page shows the difficulty that the SPX is having breaking above that 875 resistance (see pink line). On Wednesday, the SPX touched 882 but closed lower at 873. Yesterday, it spiked as high as 888 before closing lower at 872. So this resistance is strong around the 875 level, and the high volume churning yesterday without a convincing close above this key level has me leaning for a further pullback coming.

Today we could see new money that comes in at the beginning of each month being put to work, so I will hold off on drawing any conclusion until next week.