Thursday, June 07, 2012

China Cuts Rates Again

The market is higher in early trading, adding to yesterday's outsized gains.  The S&P 500 got as high as 1329 this morning before running out of steam.  Last week's high was 1335, so we see where near-term resistance is for the time being.

Overnight China cuts its benchmark rate another 25 basis points to 3.25%.  That follows a rate cut yesterday by the Reserve Bank of Australia.  The Bank of England stood pat at its current rate of 0.5%, half that of the ECB's 1.0% level.  I still think the ECB should have cut rates, but maybe they are trying to save some ammo.

Asian markets rallied overnight on the news of the Chinese rate cut and also in response to the rally here in the U.S.  Europe's markets are higher again this morning on continued optimism that Europe's leaders will come up with some solutions to address Spain.

Our markets lost some of their early steam after remarks from Bernanke were released.  He said that our banks have improved their strength, that inflation remains contained, but that the fiscal cliff looms large as a significant threat to the fledgling recovery.  He is now getting grilled by Congress, which is always comical due to their lack of true understanding of complicated monetary policy.

Outside of the above, there is little in the way of market moving economic data or corporate news.  On report of note was LULU's earnings, which were okay but the company reduced guidance which is the kiss of death for a growth stock.  The stock is currently down -9% on big volume and weighing on other growth retailers. 

The dollar is slightly higher this morning as the euro takes a breath after yesterday's spike.  That has commodities mixed.  Gold is easing back to $1609 while oil prices are higher near $86.10.

The 10-year yield has had a nice bounce from last week's lows.  It got back to 1.65% today and is currently just below those levels.  As for the VIX, it plunged yesterday and was down further this morning to 20.75 before bouncing.  It is currently up on the day near 22.43.  I don't see it getting below 20 and staying there on this rally.

Trading comment: I have been talking about how investor sentiment had gotten very bearish and that was likely setting us up for a bounce.  We have certainly seen that bounce with a nearly 5% move in the SPX from Monday's lows to this morning's highs.  That puts the market at an interesting juncture here.  I think if the market can digest this recent bounce without giving too much of it back, it is possible to see another push higher for the major indexes.  But of course, a lot will have to do with the fluid situation in Europe.  Greece's elections are June 17th, and the financials markets and European leaders will be anxiously awaiting those results.  We are still more in defensive mode than aggressive, and we have used this recent strength to add to some of our ETF hedges.


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