Market Dips On Last Day of a Very Good Quarter

The market is seeing some selling pressure after a weaker than expected consumer confidence report came out, which showed that consumer confidence fell to 49.3 in June vs. 54.9 last month and expectations of 55.3 this time. The drop in confidence in June appeared to reflect a weak labor market. End-of-quarter window dressing by portfolio managers could give stocks another upward pull today.

The S&P 500 is up +15% this quarter, which I believe is the best quarter since Q4 1998. And some markets in Asia had their best quarter in 15 years.

The govt. is planning to roll out its PPIP program, which was once touted to be as big as $1 trillion, but is now expected to get off the ground with as little as $50 billion in investments. This is the plan aimed at lifting the toxic assets off the balance sheets of banks.

In other news:

• A report on home prices showed a decline of 18.1% compared to a year ago in the 20 largest U.S. cities. The drop was not quite as severe as anticipated.
• H&R Block rose 97 cents to 16.64 after reporting better-than-expected profit in the latest quarter.
• Apollo Group, owner of the University of Phoenix, rallied 6.01 to 71.92. Its earnings also beat estimates, and Apollo increased its share buyback.
• General Mills gained 33 cents to 56.17 after hiking its quarterly dividend.
• Corning said demand is growing faster than expected for glass used in LCD TV’s. That could be an indicator of the consumer mood. Corning shares were down 7 cents at 16.20.

Asian markets were mixed overnight; the dollar is higher, which is weighing on gold and commodity prices; the 10-year yield is higher at 3.50%; and the VIX is popping +7.8% to 27.33.

Trading comment: No big moves for me in the last few days. I am still mulling adding to some of our etf hedges and we enter July, and also may look to take some short positions (or inverse etfs) in the energy space. I think oil looks toppy, and is due for a correction similar to last summer. Intraday, I may play this market for some sort of bounce as the bulls may try to take a stand on this last day of the quarter.

Monday Morning Musings

With the lack of any market moving news this morning, I have been watching the coverage of the Madoff sentencing, which will be announced shortly. As someone who works to help people acheive their financial dreams, it is heartbreaking to listen to these victims. I hope the judge gives Bernie a heavy sentence, even if it offers small comfort to those who have lost everything.

Oil is the only real story this morning, which is higher on news of a pipeline attack in Nigeria combined with a story that China is looking to boost its oil reserves by 160%. Also, the IEA cuts its annual oil demand forecasts through 2013 by about 3 million barrels per day due to the economic slump.

Energy and industrial stocks are leading the way, while healthcare stocks are lagging. Also, while most of the indexes are higher, small-caps (IWM) are still negative.

Asian markets were mixed overnight; the dollar is slightly higher, while gold is slightly lower; the 10-year yield is drifting down a bit to 3.50%; and the VIX is lower again to 25.86.

Trading comment: The market has had its quarter-end bounce I was looking for. The S&P 500 has bounced roughly 38 points, or +4%, since tagging SPX 888 last week. That's not a huge bounce, but it is still pretty substantial. Now the test will be to simply hold those gains into quarter-end. Trading will likely lighten up as we near Thursday, as the markets are closed Friday for the 4th of July weekend.

I have not added any new trading positions so far. I am still considering adding to some of my hedges later in the week.

Quick Recap

Here is a quick recap of what was for the most part a quiet session:

• Wall Street ended the week on a mixed note. The Dow fell modestly on the day, while the Nasdaq was able to hang on to a small gain.
• Palm supported the Nasdaq. The company predicted that it will be cash-flow positive by the end of the quarter. Palm shares gained 2.23 to 16.22. Sprint, which provides services for Palm Pre phones, closed up 31 cents at 4.99.
• Energy stocks fell as oil slipped by over a dollar per barrel.
• Health care stocks weakened as Congressional rhetoric supported reform of the industry.
• Economic news appeared neutral. The U.S. savings rate jumped to a 15-year high in May. That may be good news long-term for the economy, but in the short term, it suggests lower consumer spending.
• A call by China for a global currency put pressure on the dollar.
• The Dow closed down 34.01 at 8438.39.
• Rebalancing of Russell stock indexes created a flurry of activity at the close, and NYSE volume totaled over 2.3 billion shares.
• The S&P 500 was down one point.
• The Nasdaq gained 8.68.
• Advancing issues beat decliners by 3-2 on the NYSE and by nearly 2-1 on the Nasdaq.
• The 10-year Treasury note rose 4/32 to yield 3.52%.
• For the week, the Dow was down 101 points, or 1.2%. The S&P 500 was down 2 points, or 0.3%, and the Nasdaq gained 10 points, or 0.6%.

Strong Rise In Personal Incomes

The market is down only slightly this morning, which is normal given the strong rally yesterday. We got some good economic news, with personal incomes for May rising +1.4% vs. expectations for a +0.3% increase. Personal spending only rose +0.3%, in-line. People continue to hoard money, build savings, and hopefully pay down debt. At some point, this will lead to an unleashing of pent-up demand, and result in very strong economic growth.

All 10 of the major economic sectors were trading lower, but tech (XLK) just peaked into positive territory. Semis and biotechs are also strong relative to the overall weakness, while healthcare and staples are the biggest laggards. Energy and financials are mixed.

In the ag space, POT warned of lower revenues and weak demand. I would have expected all of the ag stocks to be down a lot more today as a result, but the love affair with these stocks has kept the selling muted at best. Odd. I still think these stocks will work lower as we get into earnings season.

Today's session could see some added volatility as it is the annual rebalancing of the Russell indexes around the close. So expect volumes to rise, although its always hard to game in what direction the buying/selling will push the market.

Asian markets were higher overnight; the dollar is lower, but oil (lower) and gold (higher) are mixed; the 10-year yield is lower to 3.50%; and the VIX is up slightly, but still low at 26.53 after a big plunge yesterday.

Trading comment: Yesterday's rally was along the lines of my expectations that the oversold conditions would lend themselves to a quarter-end rally. I sold my SSO yesterday, and I also sold all of our MOO after POT lowered guidance. I have not yet added to our etf hedges, but I am leaning toward doing so if it looks like the market is running out of steam into early July.

Bernanke Unfairly Grilled Before Congress

This morning's post is a bit late because I haven't been able to take my eyes and ears off of this Congressional hearing with Fed Chair Bernanke. The real issue they're trying to get at is whether Bernanke and Paulson strong-armed BofA's Ken Lewis into acquiring Merrill Lynch.

I think these Congressmen are forgetting that we were in the midst of a total meltdown in the financial system, and I think Bernanke did a good job stabilizing the system. Hindsight is always 20/20, and I'm sure there are things that could have been handled better, but I don't think that warrants this public flogging.

And if were so easy to pressure a big bank into buying an investment firm, why couldn't the Fed have found a buyer for Lehman? They could have stemmed some of the meltdown in the financial markets last fall. Why doesn't anyone bring this up?

In other news, BBBY reported better-than-expected earnings last night, and their stock is higher. It is also helping boost retail stocks today, which are one of the leading groups. NKE also beat estimates, but disappoint future orders is hitting the stock this morning. In housing, LEN reported that cancellation rates are dropping, and that is providing a big boost to the homebuilding stocks (+3.8%).

In economic news, final Q1 GDP was revised slightly higher to -5.5%, from its previous -5.7%. But continuing jobless claims ticked higher to 6.74 million (from 6.71 million), which to me shows that this economy continues to need the stimulus, as opposed to the criticism of the Fed yesterday that they should have mentioned plans for the removal of the stimulus.

Asian markets rose overnight, with more reports of strong new lending in China; the dollar is higher today, but commodities are also higher; the 10-year yield is lower to 3.65%; and the VIX is falling -5.75% to the low level of 27.38.

Trading comment: If the market is about to embark on an imminent decline, like the bears would have you believe, it sure isn't on the radar of options traders. The VIX continues to move to lower levels, and is not signaling an immediate pickup in volatility. Speaking of bearishness, the AAII poll today showed that bears have spiked to 48.4%, while bulls have fallen to 28%.

Yesterday's rally faded after the FOMC announcement, but still finished positive. Today's session is adding to those gains so far, which would mark the 3rd straight positive session. I would not be surprised to see the market lift further as we near quarter-end. As I mentioned, I am still looking for some spots to take partial profits. I have sold my SSO position, and also taken profits on ESRX, which I added a couple of months ago.

FOMC Holds Rates Steady, Reiterates Asset Purchase Plans

The Fed didn't offer any surprises, although they did sound a touch more constructive on the economy. Here is the statement that was released:

• According to the Information received since the Federal Open Market Committee met in April suggests that the pace of economic contraction is slowing. Conditions in financial markets have generally improved in recent months. Household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Businesses are cutting back on fixed investment and staffing but appear to be making progress in bringing inventory stocks into better alignment with sales.
• Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.
• The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.
• In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.
• As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 bln of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 bln of Treasury securities by autumn.
• The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Stocks Rally Ahead of FOMC Meeting

Stocks are rallying in early trading, which is a bit of a surprise ahead of a big FOMC meeting. Usually trading is somewhat quite ahead of the meetings, and then the real action starts after the announcement. It will be interesting to see if we can build on these large, early gains after the Fed meets today.

In economic news, new home sales were a bit disappointing, falling -0.6% vs. consensus of +2.3%. Homebuilding stocks (XHB) are rallying nearly +3% nonetheless. But the durable goods orders were much better than expected, rising +1.8% vs. expectations for +0.9%. This is helping boost industrial stocks (XLI) +2.5%.

There was also a solid earnings report from ORCL last night, which is helping the tech sector as well. ORCL beat estimates, and also raised guidance a bit.

Before the open, the WSJ reported that the OECD said that the global recession is close to bottoming out. This likely improved sentiment, but it is a different picture than the World Bank recently tried to paint recently, when it reduced its forecast for the global economy.

Asian markets rose overnight; the dollar is up a bit, but so are commodities today (oil, gold); the 10-year yield is a touch higher to 3.65%; and the VIX is back down below the key 30 level, down -5.7% to 28.80.

Trading comment: Could today be the start of the oversold, quarter-end bounce I have been talking about? Holding those trading positions overnight worked out for me. I took profits on FCX and GS this morning. I am still holding my S&P 500 etf (SSO), as I think the market should hit a higher level at some point before quarter-end. If that occurs, I will look to take profits on some of our etfs, and add to my hedges. The summer months are usually sideways at best, and maybe down, so I want to decrease my net long exposure accordingly.

long SSO

Stocks Not Bouncing Yet, Despite Oversold Condition

The market experienced a nasty selloff yesterday, with most of the major indexes down by more than 3% on the day. Moreover, downside volume on the NYSE totalled 93%, so selling pressure was strong. But overall volume did not rise materially, helping the market avoid a major distribution day.

Considering the big downside volume figure, it appear that it was as much a "buyers strike" as anything. That is, there were few large buyers willing to step up and buy stock, while sellers were locking in profits from earlier in the rally, or cutting losses on newly entered positions that have quickly rolled over.

This morning, the market was slightly higher at the open, but right now the indexes have faded into negative territory. The market is now pretty oversold, so a bounce would seem normal.

The existing home sales report this morning showed home sales for May rose +2.4% month-over-month, which was slightly below forecasts. Also, due to the high number of foreclosure sales, median home prices sank -16.8% vs. last May.

Asian markets were also down sharply overnight; the dollar is lower this morning, helping commodities; the 10-year yield is lower to 3.65%; and the VIX is roughly flat at 31.20.

Trading comment: My daytrades yesterday didn't work out great, but it wasn't all bad. Actually, I let a couple of the positions ride into today. There is an old adage on Wall St. not to let a bad trade turn into an investment. While I don't want to violate that rule, I bought some GS and FCX, and just want to give the positions a little more wiggle room as I do expect some sort of bounce.

The SPX has broken below the 900 level, and many traders are now back to talking about the SPX 875 level as offering the next area of support. The SPX is already down -7% in less than 2 weeks, which is a pretty sharp pullback. It looks like right now, investors are more concerned with locking in profits they have. I still expect some window dressing into quarter end, but that may be an even that doesn't start until after the Fed meets this week.

long GS, FCX

Monday Morning Musings

The market is under some heavy selling pressure this morning. Energy and materials stocks are down the most, as commodity prices fall. Utilities and staples are down the least, but all 10 major sectors in the S&P 500 are lower so far.

There is a tendency for the market to be weak on the Monday following options expiration, so some of this weakness could be stemming from that. Otherwise there is not much in the way of market moving news.

The World Bank cut its forecast for global growth, and said that developed economies would be weaker than previously forecast. Also, George Soros told Reuters that the worst of the global economic crisis is over.

It was reported over the weekend that Steve Jobs had a liver transplant 2 months ago. AAPL stock is -1.8% lower, and the reaction to the news is mixed. He is still slated to come back to work at the end of June, although it may not be full time work.

Drug stocks are lower after drug makers agreed to help cut Medicare drug costs. Oil & gas stocks are weak as oil falls -3.5% to near $67. Gold stocks are also lower, as gold prices are under pressure due to a stronger dollar today.

Asian markets were higher overnight, amid news that new lending in mainland China accelerated in June; the 10-year yield is lower to 3.71%; and the VIX is spiking +13% higher this morning to 31.65, though still below its 50-day average.

Trading comment: The 2-month SPX 875-950 range is still intact. Today, we are testing the 900 level, which is right around where the 200-day average resides. A down day today pushes the market further into oversold territory, but I continue to think this sets us up for a bounce into quarter end.

The market quickly fell -2.0% today, and I have bought some stocks/etfs to play for an intraday bounce. I bought a little FCX and RIMM again, and also some SSO to play the S&P 500. Many of the energy and materials stocks have pulled back quite a bit, and could make for some good bounce candidates soon.

long AAPL, FCX, RIMM, SSO

Markets Open Higher On Options Expiration Friday

The markets are trading higher in early trading, with this being options expiration day. Healthcare and retail are leading the early action, while utilities and consumer staples are lagging.

Last night, RIMM reported solid earnings, but offered conservative guidance. The stock is trading -3.5% lower today, and is getting closer to a good buy point, imo. AAPL released its new iPhone today, and the lines are once again big as demand is off the charts. I think the smartphone revolution is still in its early stages, and both of these companies continue to lead this secular growth wave.

Healthcare stocks have been doing better the last couple days as reports come out that the Senate's draft of health care reform calls for most people to buy insurance, which is in opposition to the President's public option.

In economic news, the IMF indicated that the decline in the world economy is moderating. Also, officials form the European Union see a sustainable recovery without more stimulus.

Asian markets rose overnight; the dollar is down a bit this morning, but commodity prices are firm; the 10-year yield is down a bit to 3.79%; and the VIX is now -6.4% today, well below the key 30 level to 28.10.

Trading comment: Yesterday I took partial profits on our URBN position, as recent retail reports have been dismal. It is possible that URBN bucks the trend, but I want to lock some in just in case. This morning, I took small profits on a trading position in CELG, which has had a nice bounce. I have not made any big moves in our ETF accounts.

long AAPL, CELG, URBN

Jobless Claims Heading In The Right Direction

There were a couple more economic reports released this morning that show the economy is headed toward the path of recovery. The Philly Fed Index showed a much smaller than expected decline for June, coming in at -2.2 vs. expectations of -17.0. This is a small positive sign for manufacturing in that region.

Also, the weekly jobless claims data came in-line at 608,000, but the continuing claims figure fell to 6.69 million vs. expectations that they would total 6.84 million. That is a nice drop, and supports the thesis that the worst of the job losses are behind us.

The early leadership in the market is coming from financials and healthcare, while the laggards are tech and retail.

Asian markets were lower overnight; the dollar is mixed this morning, while most commodities are lower (oil, gold); the 10-year yield is bouncing to 3.76%; and the VIX is -3% lower to 30.53.

Trading comment: The market remains overbought, with added volatility due to tomorrow's options/futures expiration. The S&P 500 tested its 200-day average yesterday, and is successfully bouncing from that level today. The market also remains oversold, so my thesis that we could see a push higher into quarter end is still valid.

Yesterday was mostly a trading day for me, but two positions that I did hold overnight include new long positions in FCX and QSII. Both of those look like they should continue to bounce, but I am using tight stops. POT also looks like a good bounce candidate if it gets down to the 92 area.

long FCX, QSII

S&P Puts California on Negative CreditWatch

I was sent this article from a contact at Bear Stearns, but I think its worth posting the whole thing--

Action Comes as Budget Crisis Drags On

Bond Buyer Wednesday, June 17, 2009
By Rich Saskal

SAN FRANCISCO — As lawmakers in Sacramento this week showed increased signs of coming to an impasse over California’s severely unbalanced budget, Standard & Poor’s placed the state’s A-rated general obligation bonds on negative CreditWatch.

In its late Monday analysis, Standard & Poor’s, while stating its belief that California “retains a fundamental capacity to meet its debt service,” also raised the specter of an increased risk of missed debt-service payments should the state fail to adopt the budget actions needed to avoid a liquidity crisis.

A spokesman for state Treasurer Bill Lockyer castigated the rating agency for those comments.
“Once again, Standard & Poor’s has understated California’s ability to meet its debt service obligations and overstated the risk that we won’t,” said Tom Dresslar, Lockyer’s spokesman. “This commentary raises undue alarm over what they call the potential for missed payment.”

The Standard & Poor’s action affects approximately $59 billion of GO debt as well as $8.1 billion of A-minus rated appropriation debt. It’s the second such rating action since the end of May, when Fitch Ratings revised its outlook on California’s A rating to negative. Moody’s Investors Service retains an A2 rating and stable outlook.

The action comes as state lawmakers this week, through a special conference committee, attempt to formalize their response to Gov. Arnold Schwarzenegger’s plan for $24 billion in budget solutions, including some $16 billion in program cuts.

While that committee, over the past two weeks, has voted on aspects of the budget on a piecemeal basis, it hasn’t yet put all those actions into a spreadsheet that delivers final totals, according to a spokesman for the committee’s chair, Assemblywoman Noreen Evans, D-Santa Rosa.

The votes it has taken, however, have diverged from the governor’s proposals in a number of significant ways — mostly ways that widen the budget gap.

Lawmakers voted to preserve programs the governor proposed eliminating, and also rejected his plan to borrow $2 billion from local governments.

H.D. Palmer, finance spokesman for Schwarzenegger, said the Standard & Poor’s action underlines the severity of the state’s predicament and the need for action.

“It is independent confirmation of what we’ve been saying for some time: that the failure to adopt a solution to close this $24.3 billion budget gap in a very short period of time is going to have very dramatic consequences for the people of California,” he said.

Lockyer, a Democrat, has told lawmakers that they need to adopt budget revisions equal to the governor’s proposals, including a significant reserve in order to avoid a cash crunch by the end of July. He said those actions are needed to persuade investors to loan California up to $10 billion to manage the state’s cash flow over the course of fiscal 2010, which begins July 1.

But Dresslar said Lockyer strongly disagrees with Standard & Poor’s even hinting that the state’s liquidity crisis would have any impact on its ability to service its bond debt.

“There is zero risk that California will fail to pay its bond investors on time and in full,” Dresslar said.

California’s constitution gives debt service payment priority just under education. Standard & Poor’s, in its analysis, said the state, after meeting its education obligations, should have more than $50 billion in resources available in fiscal 2010 to pay its approximately $5.74 billion in debt service obligations.

If the state is unable to adopt a budget solution that allows it to borrow to meet its immediate cash needs, the result is likely to be that the government begins deferring payments, or issuing registered warrants, a form of IOU, to lower-priority obligations, including those to vendors, for student aid, and for tax refunds, according to Standard & Poor’s .

“A failure to address the structural budget gap leading to significant use of registered warrants, payment delays, and more acute liquidity strain could cause the rating to fall below the 'A’ category,” its analysis said.

Credit analyst Dick Larkin, a senior vice president at Herbert J. Sims & Co., said California is likely to face downgrades to triple-B levels.

“I think that the rating agencies haven’t acted sooner because they have been under pressure to recalibrate ratings higher under the 'global rating’ concept,” Larkin said in an e-mail yesterday. “As a result, I don’t think that the raters would consider ratings below investment grade. The last time a state came close to a non-investment grade rating was Massachusetts in September 1990.”

A California default is unlikely, in Larkin’s view, but not impossible.

“Could there be a situation where California tries to pay maturing short-term debt with Raws (basically IOUs)? I think so,” he wrote. “But if the crisis came to a missed payment, I believe that the state would cure it very quickly, because it cannot afford to be locked out of credit markets.”

Being on CreditWatch doesn’t mean a rating change is inevitable, according to Standard & Poor’s, but reflects short-term trends that require special surveillance from its analysts.

Standard & Poor’s last put California on negative CreditWatch in December, citing concerns about cash shortfalls. It removed it from watch in February in conjunction with a downgrade to A from A-plus.

One Inflation Indicator Shows Biggest Decline Since 1950

For those inflation hawks, I don't want to rain on your parade, but the CPI figures released this morning showed that overall CPI fell -1.3% year-over-year, which is the largest decline since 1950.

That's quite a statistic, and at the very least indicates that inflation is not a current problem and those that are microfocused on inflation are at least premature. I'm not saying inflation won't creep up at some point, but we are currently still battling with deflationary pressures, rather than inflationary.

A couple of items that weighed on sentiment and knocked stocks lower at the open were comments from FedEx (FDX) giving weak guidance, and a revised outlook from Standard & Poor's on the banking system.

FDX topped earnings expectations, but gave guidance that was well below the consensus forecast. Management said the rising fuel prices, and the slump in manufacturing make the current environment "extremely difficult" at least through November.

In the bank sector, S&P lowered its ratings and revised its outlook on 22 U.S. banks, citing less favorable operating conditions that exist.

Europe was also lower this morning, while Asia was mixed to lower overnight. The Times Online said the UK unemployment hit a 12-yr high in Q1, but the pace of decline is easing. The dollar is lower today, but that isn't helping commodity prices. Energy and materials stocks are suffering the biggest declines so far, while healthcare and consumer staples are positive on the day.

The 10-year yield is lower to 3.62%; the VIX is also lower to 31.91, after a big spike the last couple of days; and the put/call ratio opened at a very high 1.41. I cannot recall off the top of my head the last time I saw it that high, but it indicates that a lot of investors all decided to rush out and buy puts at the same time.

Trading comment: The market opened lower this morning, day 3 of weakness. But the extreme high reading in the put/call ratio makes me want to fade the early selling. I have taken some daytrading long positions in SPY, RIMM, and FCX for bounces. RIMM reports earnings tomorrow, fyi.

The market has moved further into oversold territory, and more stocks/sectors look like they are rolling over. This is likely why there was a rush to buy puts this morning, but with option expiration looming on Friday, this could add to the short-term volatility this week. Beyond that, I am still looking for a bit of a bounce into quarter-end.

long FCX, RIMM, SPY

Positive Economic Data Provides Small Boost For Stocks

The market is slightly higher in early trading after some positive economic reports. Also, the IMF has upgraded its view of the U.S. economy, while the American Bankers Association said it now thinks the U.S. economy will emerge from recession in Q3 of this year. That would be a welcome sign indeed.

In economic news, the May PPI figures came in below expectations, suggesting little inflationary pressures right now. Moreover, capacity utilization was in-line at 68.3%, but this figure needs to move much higher before we need to worry about inflationary pressures.

Housing starts were much better than expected (+17%), and building permits were above consensus as well. These figures bode well for a housing bottom, even though there are still those who feel that housing starts need to stay low to work off the current inventory glut.

Not much in the way of corporate news. Best Buy (BBY) topped expectations, but offered 2010 EPS guidance within a wide range from $2.50 - $2.90, vs. consensus of $2.79. Weekly retail sales were down -4.6%, which marks the worst 2-week slide since 1996. Not a great datapoint for the state of the consumer.

Asian markets were lower overnight amid concerns about the economic recovery. But the Bank of Japan upgraded its view of the Japanese economy; the dollar is lower this morning, helping boost gold and commodities; the 10-year yield is higher at 3.73%; and the VIX is flat near 30.80, after a big spike higher yesterday.

Trading comment: I didn't make any trades yesterday. The market was sharply lower on a rise in volume, which isn't saying that much considering how low volume was on Friday. This week is options expiration, so we should expect some increased volatility. Also, the market is now back into oversold territory, but only slightly. Nonetheless, I still think that it sets us up for another push higher into quarter-end.

I will be watching investor sentiment if such a push higher develops. If the market is unable to breakout above its recent highs, and if investor sentiment grows overly bullish, it could be time to take some chips off the table for the summer.

Monday Morning Musings

The market is taking it on the chin in early trading this Monday, after some news out of Europe spooked investors, or at least triggered more profit taking.

The chatter coming out of the Group of Eight meeting is that the G-8 countries are beginning to look at ways to unwind their recent fiscal stimulus spending. Treasury Sec. Geithner said that it is too early to start withdrawing the stimulus, which is probably right. So far, this has mostly just been a big bounce in the markets from an historic oversold position.

Additionally, there were some comments from the EU that credit conditions remain a problem. European Union Industry Commissioner Guenter Verheugen said, "The credit crunch is still a problem and the longer it lasts, the more difficult it becomes for companies."

All 10 of the major sectors in the S&P are lower this morning. Actually, the only stock I have on my screen that is up at all is Visa (V), which was down a lot the last 2 days and is bouncing off its 50-day average.

Asian markets were lower overnight; the dollar is up again today, which is weighing heavily on commodities and energy/materials stocks; the 10-year yield is lower to 3.72%; and the VIX is spiking +7% back above the 30 level (30.25).

Trading comment: Only 2 days ago we had a test of the upper limit of the SPX 925-950 range, and this morning we are testing the lower limit of that range. That makes for quite a bit of volatility, but the market is still a bit overbought, which is likely keeping a lid on a successful breakout.

Volume was extremely light on Friday, offering little conviction either way. Big picture, the market has shown more volume on up days than down days, keeping the distribution day count relatively small. Until this pattern changes, I am still willing to give the bulls the benefit of the doubt.

long V

Weekly Wrap

Here is the weekly recap from Briefing.com:

Week ending 12-Jun-09It was a relatively quiet week of trade, with the S&P 500 settling with a modest 0.4% gain.

For the week, seven of the ten sectors posted a gain, led by utilities (+3.9%). Consumer staples underperformed with a 1.3% loss.

Semiconductors had a solid showing after Texas Instruments (TXN) raised its second quarter guidance, saying all of its major product lines are growing and that manufacturing utilization has improved. The company now expects revenue of between $2.3 billion and $2.5 billion, versus the $2.2 billion consensus and the prior range of $1.95 billion to $2.4 billion. TXN forecast EPS of between $0.14 and $0.22, versus the consensus of $0.10 and the prior guidance of $0.01 to $0.15 per share. Shares of TXN rose 5.6% for the week, with the Semiconductor Index climbing 1.5%.

Meanwhile, Qualcomm (QCOM) raised its fiscal third quarter revenue and operating income guidance based on stronger-than-expected demand for the company's chipsets. QCOM rose 1.4% for the week.

In other corporate news, the Treasury announced that 10 of the 19 largest U.S. financial institutions, including US Bancorp (USB), JPMorgan Chase (JPM) and Goldman Sachs (GS), will be allowed to repay $68 billion of TARP funds.

In economic news, the Fed's Beige Book stated that there are signs that the economic decline is slowing, with several districts indicating that their expectations have improved.

Initial unemployment claims for the week ended June 6 fell 24,000 to 601,000, which was better than the consensus estimate of 615,000. Continuing claims, however, continued to rise, reflecting the weak labor market. For the week ended May 30, continuing claims rose 59,000 to 6.816 million.

The May retail sales numbers were about as expected, posting a moderate increase of 0.5% for both total sales and excluding autos. Gasoline sales, which rose 3.6%, helped boost the numbers. Excluding this component, retail sales were up 0.2%. Retail sales may be challenging over the months ahead given declining payrolls and weakening wage gains.

Treasuries had a volatile week, coming under pressure early in the week on reports that the Russian Central Bank is set to cut its Treasury holdings and a disappointing 10-year note auction. The 10-year note yield hit nearly 4.00%, but ended the week at 3.79% after a solid 30-year auction, reassuring comments from Japan and a Wall Street Journal report that the Fed may increase its purchase program.

The dollar saw swings in conjunction with Treasures, falling 0.6% for the week.
In commodity trading, oil rose 5.5%. The CRB Index rose 1.7%.

Midday Update: Stocks Lower So Far In Light Trading

The market is slightly lower so far today, with not much in the way of market moving news. The SPX continues to trade within that 925-955 range that has been in place for the last 10 trading sessions. Yesterday we had a chance to breakout to the upside, but there was not enough strength behind the move.

Biotechs and healthcare are bucking the weakness and leading the market so far, while energy and materials are the biggest laggards. BofA (+5.9%) is one standout stock in the financial sector, and AMZN (-3.6%) and RIMM (-3.2%) standout among tech stocks.

Asian markets were higher overnight, but the emerging market etfs are trading lower today; the dollar is higher again, which is weighing on gold and commodity prices; the 10-year yield is making a nice move lower to 3.76%; and the VIX is also lower, down to 27.90.

Here is a summary to the day's action so far:

• At 12:30 PM Eastern, the Dow was down 0.1%, the S&P 500 was down 0.5%, and the Nasdaq was down 1.3%. The market remains pre-occupied with oil prices and bond yields.
• A drop in yields for 10-year Treasury notes gave stocks some support. The yield on the 10-year note fell below 3.8%, easing concerns about interest rates.
• Oil prices were down slightly but were still trading near $72 per barrel.
• Technology companies are weak. National Semiconductor declined 1.03 to 13.44. The company’s results in the latest quarter were better than expected, but its chief executive said he sees no signs of a rebound yet.
• BlackRock fell 11.08 to 171.52 after agreeing to buy Barclays’ investment unit for $13.5 billion. Barclays was down 77 cents at 19.13.
• Companies that manufacture swine flu vaccine are higher after the World Health Organization declared a pandemic this week. Novartis said it’s ahead of schedule in its production of a flu vaccine, and shares gained 1.66 at 41.95.
• In economic news, the University of Michigan’s sentiment index rose in June for the fourth straight month, but was still slightly below expectations.
• May import prices rose for the third straight month, due mostly to oil, but import prices overall are still down 17.6% compared to a year ago.
• The NYSE was 8-5 negative on issues and 2-1 negative on volume.
• The Nasdaq was 2-1 negative on issues, 5-2 negative on volume.

Trading comment: Yesterday I stepped up and bought the financial etf (XLF), anticipating a break above the 200-day. I may have been early in anticipating the move, but it seems to be holding in well today. The market is still hovering in overbought territory, so I will likely hold off on any more buys until next week.

long XLF

30-year Bond Auction Results Better Than Expected

There has been a lot of anxiety in the market about the upcoming Treasury bond auctions. In particular, the bears have been saying that the 30-year auction would go terribly, as foreign central banks no longer desire long maturity U.S. bonds.

The results of today's auction may give pause to that theory, at least for the time being. The bond auction of 30-yr bonds today was met with better than expected demand.

The high yield came in at 4.72%, vs. expectations that it would hit 4.80%. The bid/cover ratio was 2.68x, one of the highest readings since the 30-yr issuance resumed. And the foreign participation was 49%, the highest reading since Feb. 2006.

This was a welcome sign for the markets. After touching 4.00% this morning, the yield on the 10-year Note has turned sharply lower, currently near 3.84%. The news is also helping boost stocks. The S&P 500 has broken above the key 950 resistance I have been writing about (currently 954). If it can manage to close above that level, and volume increases into the close, it would be another bullish sign at a time when most every investor I read is turning cautious.

The Market That Bends But Doesn't Break

No sooner had I posted my thoughts yesterday about the recent trading range, saying that I thought it would be resolved to the upside, than the market rolled over and nearly tested the downside barrier of the SPX 925-950 range.

But after reaching roughly the 928 level, the market staged another late-day rally, and finished down only a few points on the day. Talk about another frustrating day for the bears. I am pretty sure there were plenty of short-sellers pressing their bets as it looked like the market was embarking on a correction, only to have to cover those bets late in the day and this morning.

This morning's economic news wasn't bad. May retail sales increased +0.5%, avoiding a third straight monthly decline. Also, jobless claims for the week declined to 601,000 from last week's revised 625,000. This figure is still very high, but it looks like it is slowly moving in the right direction.

The IEA revised its 2009 global demand forecast for oil to a slightly improved outlook, which has oil trading higher (near $72) and the energy stocks up as well. Utilities are also strong, while retailers are lagging so far.

Asian markets were higher overall, despite declines in Japan and China. Japanese GDP declined -3.8% in Q1, and exports in China plunged by a record -26.4% yr/yr in May. That's a big drop in exports, for an economy that is supposed to be resurging.

The dollar is lower on the day; the 10-year yield is flat near 3.93%, and today there is another bond auction (30-yr bonds) which has been moving the bond market each time lately; the VIX is down another -2.85% to 27.65.

Trading comment: Yesterday I took profits in our AMZN and CME positions, both of which have had big moves higher. I still like both stocks longer-term, and would look to re-enter these positions at lower levels.

I am looking at a couple of ETFs to increase our long exposure before quarter-end. The financial etf (XLF) is nearing a breakout above its 200-day, which makes it an attractive candidate. And the oil services etf (IEZ) remains attractive as oil continues to push higher. I would also like to add to our Brazil etf (EWZ), but don't want to chase it.

long EWZ

Maybe Lower Volume Levels Recently Are A Good Thing?

I have heard a lot of market commentators complaining lately about the daily volume on the major exchanges. Their argument is based on the notion that the recent rallies have not been accompanied by strong volume levels, and as such the rally attempts are suspect.

I beg to differ with those arguments, as I think the recent declines in trading volume may be a good thing, as it is setting us up with another potential breakout to higher levels. And it is on that breakout that I want to see volume levels increase. That would be a more bullish sign.

On the chart above, you can see that I have drawn two horizontal lines, one at SPX 925 and the other at SPX 950. The SPX first broke above that 925 level on June 1. This was also its first foray above the 200-day moving average in over a year. Resistance came in around SPX 950, an area that has been tested a few times so far, including again this morning.

You can see that for the last week and half the S&P 500 has traded within this tight range. I would call the recent action a consolidation of the thrust that took the SPX from its prior 880-925 trading range into this new range. And during consolidation phases, we want to see volume levels recede, just as they have been. So I have no issue with the light volume levels in recent trading sessions.

The next event that I would watch for is the potential breakout above SPX 950. I have been saying for a while now that if the market didn't rollover and have a bit of a correction soon, then it could lead to a situation where underinvested portfolio managers have their hands forced and rush to add equity exposure into quarter end, which could lead to another thrust higher in the market.

As of now, this pattern seems to be coming to fruition, but as traders we don't want to anticipate the breakout until we see it. So keep an eye on that SPX 950 level, and on a true break above that level, we will want to see the move accompanied by a rise in volume. That would be textbook.

Market May Be Getting Close To Another Breakout

The S&P 500 opened on a positive note this morning, but quickly turned lower after bumping its head at that 950 resistance level that we have seen over the last week or so. My comments this am are going to be a bit brief, as I have a longer piece coming up going into the SPX trading range in more detail.

Asian markets were strong overnight, led by commodity related strength. The dollar is higher today, which is weighing on gold prices, but oil is bucking the trend and is trading above the $71 level. Energy and materials stocks are mostly higher, while tech is taking a breather and trading lower.

Home Depot (HD) said at a conference this morning that the worst of the housing correction is over. They also slightly raised their Q2 outlook. This is good news for the real estate sector, although the group is trading lower on the day so far.

The Fed's Beige Book is due out this afternoon, which could move the market depending on if there are any surprises. The 10-year yield is higher at 3.92%; and the VIX is higher at 28.75 after a big drop yesterday, supporting the bullish thesis on the market.

I'll try to have more tidbits of CEO comments coming out of the William Blair conference as the day progresses.

Semis Get A Boost From TXN Raising Outlook

The markets are getting a slight boost in early trading, after some positive news in the semi space, and the announcement that the Treasury would allow some big banks to repay TARP funds.

Last night, Texas Instruments (TXN) raised its outlook for Q2 profits. The company raised revenue guidance to $2.30-2.50 billion (vs. $2.21B consensus) and EPS to $0.14-0.22 (vs. $0.10 consensus). The company said analog products are doing particularly well, and that EPS will benefit from improved inventory levels. The news is boosting the chip index (SOX), which is up +2.25% so far.

The Treasury Dept. announced that 10 of the 19 largest U.S. banks will be allowed to repay TARP funds, which will total $69 billion. That figure is well above the initial $50B estimate first offered by the Treasury. This should be good news for those banks, as it will remove many of the restrictions that came with accepting TARP funds. They should be allowed to reinstate dividends, pay bonuses, and spend what they deem is appropriate on marketing.

There is also a $35 billion auction of 3-year Treasury Notes today, and these auctions have now become closely watched events due to all of the debt the Treasury is issuing these days. Right now, the 10-year yield is slightly lower to 3.83%.

The dollar is lower today, helping boost commodity prices (oil, gold, etc); Asian markets were lower overnight; and the VIX is back below the 30 level, currently at 29.59.

Trading comment: I took partial profits yesterday on our Visa (V) position. I still love this name longer-term, but want to lock in some profits while we have them, and look to add back to the position if it pulls back.

I think yesterday's action was pretty benign. It could have easily been a day where the market closed down more than -1.0%, but we rallied into the close. Since the last distribution day on 5/13, there have not been any -1% declines accompanied by higher volume. Conversely, there have been several +1% rallies that came on higher volume. So I am not alarmed by the price/volume action lately.

The SPX looks to be doing that frustrating sideways consolidation again, which could set us up for another push higher. You know that I am in the camp that is looking for just such a push higher into quarter-end, as underinvested managers make moves to "window dress" their portfolios.

long V

SPX 925 Strikes Again

Last week I highlighed the SPX 925 level as having acted as previous resistance for the market, but that now that the market was nicely above that level, it should act as support the first time it was tested.

That worked well last week for a bounce, and lo and behold today it appears to have worked again. The SPX traded down to 926 this morning, before an afternoon rally pushed the index all the way back into positive territory.

I think very few investors were playing for the late bounce today. I get several market updates each morning, and most of them were calling for a correction, especially after Friday's downward reversal.

But this market has been continually frustrating for the bears, as well as those underinvested and looking for a larger pullback to use to put cash to work.

Here is a summary of today's action:

• A late recovery on Wall Street today may have recaptured some positive momentum.
• The market seemed headed for a weak finish until a Nobel prizewinner said the economy will probably emerge from recession by September. Paul Krugman said in a London lecture there is reason to believe the economy is stabilizing.
• The Dow rebounded from a loss of 130 points, and the Nasdaq erased most of a 30-point decline.
• Apple closed down 93 cents at 143.85, but pared its early losses after introducing a faster iPhone that can record video. Chief executive Steve Jobs did not speak at Apple’s technology conference, but is scheduled to return from a leave of absence by the end of the month.
• General Mills gained 2.06 to 54.22 after hiking its earnings forecast. McDonalds reported disappointing U.S. sales in May, and shares dropped 1.15 to 5872.
• The Dow finished up 1.36 at 8764.49.
• NYSE volume was light and totaled less than 1.07 billion shares.
• The S&P 500 was down 0.95.
• The Nasdaq fell 7.02. Declining issues beat advancers by 3-2 on both the NYSE and the Nasdaq.
• Rising interest rates remain an issue for the markets.
• The 10-year Treasury note fell 18/32, and the yield increased to 3.90%.

long AAPL

Monday Morning Musings

The market is opening in a weak position, after a failed rally on Friday despite a much better than expected jobs report. That action is somewhat of a change in character for the market, and bears watching.

Financials are the standout group this morning, with most of the banks bucking the weakness and posting gains so far. The news is that the Fed will soon identify which banks can repay TARP funds. The size of the repayments could be as much as double the Treasury's initial estimate of $25 billion.

There is not much else in the way of market moving news this morning, and no major earnings announcements to speak of this week.

Asian markets were mostly lower overnight, excpet for Japan (+1.0%); the dollar is higher again this morning, which is weighing on gold and commodities; the 10-year yield is slightly lower to 3.83% after spiking to new yearly highs last week; and the VIX is up +3.8% so far to 30.73.

Trading comment: Friday I took partial profits in VMW. Bullish sentiment rose last week, which could mean investors are getting a tad complacent with the rally. Although I still think many managers remain underinvested. It could just be that the market needs a small shakeout to keep those newly minted bulls nervous.

The SPX remains above its key 200-day moving average, but not by a huge margin. The next technical milestones we need to see to confirm a new bull market would be for the 50-day average to cross above the 200-day, and for the slope of the 200-day average itself to turn upward from its recent downsloping shape.

I am using the S&P 500 as my key gauge, but you should note that if you look at the Nasdaq 100, which is full of growth stocks, its 50-day average has already crossed above its 200-day. Let's hope this is a leading indicator for the other major indexes.

long VMW

Job Losses May Have Seen Their Peak

The govt. jobs report this morning showed much fewer job losses than economists were expecting. Nonfarm payrolls fell -345,000 in May, vs. consensus of -520,000. As depicted in the chart above, you can see that the pace of job losses has slowed materially since it peaked in January.

We know that employment is a lagging indicator of the economy. So if the worst is behind us, in terms of job losses, it is safe to assume that the worst is also behind us in terms of economic growth. But I think the sharp rise in global equities and commodities already gave us a better wake up call to this notion, while today's jobs report is just another datapoint in support of that thesis.

I don't mean to gloss over the fact that the economy is still very weak, and the job losses are very real. But as investors, we need to be able to put this data into perspective and make better decisions to hopefully profit from it.

The stock market bounced sharply on the better than expected news, but it was immediately sold into, such that within the first hour of trading, the indexes reversed back into negative territory. That has some of the bears calling for a short-term market top, which a bearish reversal day could indicate. This could certainly be the case, but I would expect any pullback to again be relative short-lived.

Rising yields are presenting a worry for investors, imo, as the 10-year yield spikes higher again, reaching 3.85% currently. The dollar is bouncing hard today, which is weighing on oil, gold, and commodities. We could be seeing a mini rebound in the dollar, which would take the shine off commodities, and could keep the overall market in check at the same time. But the VIX is still below that 30 level I keep mentioning (29.85).

Trading comment: I took some partial profits in VMW on this morning's spike, but haven't done much else. I actually would welcome a bit more of a pullback. I would like to add to some of the big bank stocks (BAC, WFC, GS) as well as the oil services etf (IEZ). In trading accounts, I probably would look to add some index exposure for another push higher in the markets into quarter-end, as I expect some pronounced window dressing this time around by portfolio managers that don't want to look underinvested in their quarterly reports to investors.

long VMW

Will Home Prices In The U.S. Follow The Bounce In UK Housing?

Stocks are slightly higher in early trading, led by a bounce in the financials and tech stocks, while retails stocks are lagging.

The ECB and BoE both left their benchmark interest rates unchanged at 1.0% and 0.5%, respectively. The Wall Street Journal reported that home prices in the UK rose +2.6% last month, which marks their strongest monthly gain in more than six years.

If you look at UK home prices vs. the US over the last several years, you can see that the price patterns in the US lagged that of the UK, both on the upside and on the way down. So is it possible that a nascent rally in home prices across the pond could precede a bounce in home prices here in the U.S.? Talk about something that would lift the markets higher.

Energy stocks are also bouncing on a rise in oil prices. Goldman Sachs forecasted that oil prices will reach $85 this year (crude prices are currently near $68). Retail stocks are lagging after many companies report lackluster same-store sales growth for May.

In economic news, initial jobless claims eased lower for the fourth straight week, another good sign. And productivity data was revised higher, showing it rose +1.6% in Q1 from its previous estimate of +0.8%.

Asian markets were lower overnight; the dollar is lower today, after a big bounce yesterday; the 10-year yield is higher to 3.64%; and the VIX is still hovering around that key 30 level, currently 30.27.

Trading comment: No trades yesterday or today, so far. Yesterday, the SPX tagged that 925 level that I highlighted and bounced higher from it, right on cue. Volume ran lower yesterday than the previous day, helping the market avoid a distribution day (marked by a selloff that comes on higher volume). So it looks like just more consolidation, which is a bullish way of working off the overbought condition.

Bernanke Sees Small Signs of Economic Rebound

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

• "The U.S. economy has contracted sharply since last fall, with real gross domestic product (GDP) having dropped at an average annual rate of about 6% during the fourth quarter of 2008 and the first quarter of this year.
• Among the enormous costs of the downturn is the loss of nearly 6 million jobs since the beginning of 2008. The most recent information on the labor market--the number of new and continuing claims for unemployment insurance through late May--suggests that sizable job losses and further increases in unemployment are likely over the next few months.
• However, the recent data also suggest that the pace of economic contraction may be slowing. Nonetheless, a number of factors are likely to continue to weigh on consumer spending, among them the weak labor market, the declines in equity and housing wealth that households have experienced over the past two years, and still-tight credit conditions.
• Activity in the housing market, after a long period of decline, has also shown some signs of bottoming.
• We continue to expect overall economic activity to bottom out, and then to turn up later this year.
• Even after a recovery gets under way, the rate of growth of real economic activity is likely to remain below its longer-run potential for a while, implying that the current slack in resource utilization will increase further. We expect that the recovery will only gradually gain momentum and that economic slack will diminish slowly. In particular, businesses are likely to be cautious about hiring, and the unemployment rate is likely to rise for a time, even after economic growth resumes.
• In this environment, we anticipate that inflation will remain low. The slack in resource utilization remains sizable, and, notwithstanding recent increases in the prices of oil and other commodities, cost pressures generally remain subdued. As a consequence, inflation is likely to move down some over the next year relative to its pace in 2008. That said, improving economic conditions and stable inflation expectations should limit further declines in inflation.
• Conditions in a number of financial markets have improved since earlier this year, likely reflecting both policy actions taken by the Federal Reserve and other agencies as well as the somewhat better economic outlook. Nevertheless, financial markets and financial institutions remain under stress, and low asset prices and tight credit conditions continue to restrain economic activity.
• According to the CBO's estimates, by the end of 2010, the stimulus package could boost the level of real GDP between about 1 percent and a little more than 3 percent and the level of employment by between roughly 1 million and 3-1/2 million jobs. The increases in spending and reductions in taxes associated with the fiscal package and the financial stabilization program, along with the losses in revenues and increases in income-support payments associated with the weak economy, will widen the federal budget deficit substantially this year.
• The Administration recently submitted a proposed budget that projects the federal deficit to reach about $1.8 trillion this fiscal year before declining to $1.3 trillion in 2010 and roughly $900 billion in 2011. As a consequence of this elevated level of borrowing, the ratio of federal debt held by the public to nominal GDP is likely to move up from about 40 percent before the onset of the financial crisis to about 70 percent in 2011.
• Click here to read full testimony.

Stocks Mildly Weak In Early Trading

It looks like a small bout of profit taking in the opening hours of trading, after some mildly weak economic reports, but mostly due to the fact that the market has become overbought after its continued stairstep rally.

Energy and materials are the weakest sectors so far, as the dollar bounces and commodities get hit. Oil prices are down nearly $2 around $66.50, and gold is slightly lower also. Biotechs are the only group bucking the weakness so far, as well as a few tech names.

Fed Chairman Bernanke is testifying before Congress this morning. I will post his comments in a separate post, but he is basically talking about the outlook for the economy (sees more job losses), inflation (expects it to fall over the next year), as well as updates on the TARP and other Fed plans in their alphabet soup (PPIP, TALF, etf).

In economic news, the ISM Services Index came in at 44.0, a bit shy of expectations, but up from 43.7 in April. Factory orders increased +0.7% vs. a -1.9% drop in March. And the ADP jobs report showed 532,000 job losses in May, only slightly less than in April. On Friday, we will get the govt. jobs report.

Asian markets were mixed overnight; the dollar is higher, and commodities are lower; the 10-year yield is dipping to 3.57%; and the VIX is up +3.4% back over the 30 level to 30.65.

Trading comment: I expect a mild pullback from the overbought condition, but I think SPX 925 should offer initial support. I still maintain my thesis that most managers remain underinvested, and that performance anxiety will lead the a continued stairstep rally in the market into quarter-end. Could that lead to a July top? Possibly, but let's not get ahead of ourselves.

Raymond James' Jeff Saut confirmed my thesis in his weekly letter when he said that in his dozens of meetings with portfolio managers across Europe, most of them remain underweight equities, and that pressure from their bosses/boards could lead them to increase their weightings into quarter end.

S&P 500 Reaches Major Technical Milestone

The chart above shows the S&P 500 as of yesterday's close, when the index closed above its overhead 200-day average for the first time since Dec. 26th. This is a pretty major technical milestone for the index, as technicians will take notice to indexes moving above their 200-day averages.

It has not yet registered another major indication of a new bull market, which would occur when the 50-day moving average crosses above the 200-day moving average. The only major index where I see this condition already met is the Nasdaq 100, which is a great sign for growth stocks.

The lack of sustained downside pressure in the market continues to feel to me like there are still lots of underinvested managers, as well as tons of investors out there who continue to anticipate this market rolling over, and are shorting at every sign of weakness, only to cover those shorts when the market moves to new recovery highs.

The strength of yesterday's rally was surprising, even as we often see new mutual fund money come in on Monday's, as well as the first day of the month, both of which occurred yesterday. Breadth was very strong in the major indexes, with more new highs registered than any other time during this 3-month rally.

This morning, pending home sales spiked +6.7% (vs. +0.5% consensus), up nicely from last month's +3.2% pace. This is helping homebuilders lead the way (+2.1%), followed by consumer staples (+1.1%).

Financials are lagging today (-1.5%), after JPMorgan (JPM) is pricing a $5 billion offering to get ready to repay TARP. Morgan Stanley (MS) and American Express (AXP) have also announced new offerings.

The dollar is lower this morning, despite comments from Geithner that Chinese officials remain supportive of the U.S. dollar and there is no risk of monetizing debt in the U.S. The lower dollar is helping push gold prices higher, but oil is taking a breather after topping the $68 level yesterday.

Asian markets were mixed to lower overnight; the 10-year yield is lower (3.68%) after spiking to a new high for the year yesterday; and the VIX is back down below the 30 level, falling -2.1% so far to 29.40.

Trading comment: My only trades yesterday were to take some profits in some of our trading stocks (CLR, ANR), and this morning I took some profits in AMZN, which has had a nice pop. I have not made any moves in our etfs, although I am closer to taking partial profits in MXI, which is up ~14% since I informed readers of our purchases. (As I mentioned, if you want real-time trading updates from me, check out www.twitter.com/lagenghis)

long AMZN, ANR, MXI

Monday Morning Musings

Good monday morning. Nice start to the week, and the month, even though its still very early. Stocks surged in the last hour of trading on Friday, and that buying pressure has continued from the open this morning.

There was a batch of better than expected economic news that helped things this morning. The ISM Manufacturing Index came in at 42.8, and has now improved for the last 3 consecutive months. Construction spending for April also surprised, coming in at +0.8% vs. expectations of a -1.5% decline. And personal incomes increased +0.5% in April, better than the -0.2% expected decrease.

The positive tone in the market has pushed the S&P 500 to its highest level since January 6th. We would need to see a close above SPX 944 to register a new yearly high. But let's not forget about the Nasdaq, which is leading the way this year, and is at its highest level since October 2008, nearly an 8-month high.

In other news, Dow Jones has said that GM will be replaced by Cisco (CSCO) in the DJIA, and that Citi (C) will be replaced by Travelers (TRV), effective June 8th. I can see the CSCO addition, but I am a little disappointed that someone like Visa (V) wasn't added, as opposed to another insurance company.

In overseas news, China reported that its PMI (manufacturing index) hit 53.1 in May, which boosted global commodity prices overnight. The MSCI Asia index rose +2.8% overnight, led by a 4% spike in Hong Kong.

The dollar is mixed this morning, with oil trading higher but gold prices soft; the 10-year yield is back up to 3.65% today; and surprisingly the VIX is also higher at 29.26, after plunging back below the 30 level late on Friday.

Trading comment: I am still happy with all the positions we have added in the last month or so, although I am kicking myself for not getting back into the oil services etf (IEZ). That one has been on a tear. Our MXI is also doing well, but I have not taken any profits just yet. URBN also looks like it could be breaking out today, as well as FWLT.

I promised to write up what the sentiment indicators look like currently, and I still plan on doing so. Suffice it to say that I would have expected this 3-month rally to have brought out more bullishness, but that has not been the case.

long MXI, FWLT, URBN, V