Monday, September 13, 2010

Monday Morning Musings

The market is sharply higher in early trading, following on the heels of strong action abroad overnight and this morning. The news out of the Basel III conference was met with a big sigh of relief, and banks felt it did not contain any unpleasant surprises that would have required them to raise additional capital. That is helping financials lead the action so far this morning.

Asian markets rose overnight, and European bourses were higher this morning. The European Commission also raised its GDP forecast for the eurozone to 1.7% from 0.9%.

There were also a few M&A announcements this morning, including HPQ buying ArcSight (ARST) for a hefty premium, Hertz (HTZ) offering $50 for Dollar Thrifty (DTG), and 3M (MMM) offering to buy Cogent (COGT).

The dollar is lower, as euro and other currencies rally today. Commodities are mixed, with oil higher near $77.50 and gold prices lower at $1242.

The 10-year yield is lower to 2.78%, and the VIX is also lower to 21.19.

Among the sector ETFs, financials (+2.30%) are leading, followed by materials (+1.86%). Utilities (+0.44%) are lagging.

Trading comment: You can see in the chart below that this morning's rally has pushed the S&P 500 up through its 200-day moving average. This is an important resistance area to get through. Additionally, it was also the level where the SPX began the year, so as of now we are back into positive return territory for the year. This is the area above which I believe performance anxiety starts kicking in, given that we hold these levels.

If you look at the stochastics at the bottom of the chart, you can see how overbought the market is. The oscillators are painting the same picture. So I don't want to chase stocks here, as I think some consolidation lies ahead. The most bullish way to consolidate these gains would be for the market to just trade sideways and work off this overbought condition. A more bearish outcome would be for the market to have some sharp 1-2 day selloffs.

Many of the leading stocks (FFIV, CMG, VMW, CRM, NFLX, ISLN, PCLN, etc) continue to make new highs, but they look extended on the charts. Hopefully the will pull back or consolidate also, as that would offer better buying opportunities vs. chasing them at these levels.



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