Monday, February 01, 2010

Monday Morning Musings: Solid ISM Report Points To Strong Economic Growth

The market is getting a nice bounce in early trading, on the heels of a strong economic report and a general oversold condition.

The ISM Manufacturing Index rose to 58.4 in January, above estimates and well above last month's 55.9 reading. This marks the highest index level since 2004, and correlates to very strong GDP growth.

The dollar is weaker this morning, and that is helping boost commodities. Oil is higher near $73.80, and gold is nearing the $1100 level (currently $1097). A weaker dollar, and a solid earnings report from Exxon (XOM) are helping boost the energy and materials sectors, which are the two leading sectors so far today. Real estate and financials are also solid, while utilities and healthcare are lagging so far.

The strong manufacturing data was matched in the UK, where its manufacturing index hit a 15-year high. This helped boost European bourses this morning, but Asian markets closed mostly lower again amid continued concerns about further loan restrictions in China.

The 10-year yield is higher to 3.65%, and the VIX is -6.6% lower to 22.98.

Trading comment: This looks like the start of that oversold rally that I wrote about last week. The markets became very stretched on the downside, and some relief in the form of a rally certainly seems likely. The sentiment indicators have come off their recent highly bullish levels, and are beginning to show signs of rising bearishness. I still think the most likely scenario is for the markets to rally back to resistance (maybe SPX 1100-1120), and then for us to see another pullback.

That is the game plan I'm working with at the moment, and while I am looking for good buys here, they will likely be earmarked as trades rather than investments, as I still want to have dry powder in case we get another pullback.


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