Monday, January 03, 2011

Monday Morning Musings

The market is strong out of the gate on this first trading day of the New Year. Several overseas markets remained closed for the holiday, but the ones that were open in both Asia and Europe were nicely higher.

Before you start making predictions based on this morning's action, recall that last year the first trading day of 2010 was a huge day, and the strength lasted into mid-January before the plug was pulled and the market actually finished lower for the month. I'm not trying to get too bearish, just pointing out what happened.

Financials are the strongest group so far, led by Bank of America (BAC) which spiked nearly 5% on news that it plans to take a $3B provision related to the repurchase of residential mortgage loans sold to the GSEs Fannie and Freddie. While that sounds like a big number, it is the removal of uncertainty that is allowing investors to better gauge the impact to earnings.

The only big economic data this morning was the ISM Index, which came in a little light at 57.0, but that was up from last month's 56.6.

The dollar is up a bit, but that isn't hurting stocks today. The correlation between weak dollar - strong stocks has diminished a bit in recent weeks. Commodities are mixed, with gold prices lower near $1417 but oil prices higher to $92.30. Rising oil prices remain a concern, as they could provide a potential headwind to the economy and to consumer spending.

The 10-year yield is higher to 3.38%; and the volatility index (VIX) is a bit lower near 17.67.

Trading comment: Tough juncture here as the market is overbought, investor sentiment seems too bullish, but new money is coming in and the market is breaking out to fresh highs. I'm trying to let our winners run a bit, but I admit I'm a bit leery of putting new money to work right here. I think a better buying opportunity awaits after a little shake out that brings about a bit more bearishness back into the market. Buy the dips.

long BAC, VIX calls


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