Commodities Continue Their Recovery

SUMMARY:
- Jobs report, additional Fed action rev up stocks, but the stronger start doesn't last.
- Stock market still looking for some power in its move higher.
- Commodities continue their recovery despite that rising dollar.
- Jobs report provides encouragement, and economic data improved, but with energy and food prices surging, can robins be on the economy's yard.
- Watching the commodities, tech, financials, and transportation as indicators of the rally's health.

Stocks sprint out of the gate, but it was Friday, and that was used to sell.

The jobs report was better than expected with a 20K loss (-75K expected) and a lower unemployment rate (5.0%, 5.2% expected) was a nice bonus. The Fed was active as well, showing it meant what it said about using its facilities to continue adding liquidity as needed. It increased its auction amount to $150B from the $100B it bumped it to in March, it included triple A asset back securities as acceptable collateral, it jumped its ECB swap volume to $50B from $20B, and it doubled the swap amount with Switzerland to $12B.

The combination had futures bouncing, the dollar running, and bond yields rising. Basically the same action seen in the several markets of late as the understanding of the Fed's liquidity steps grows. Of course, after a good move Thursday, a strong open on a Friday begged some sellers to come in, and indeed the stock market was already peeling back in the first hour. First half-hour for that matter.

A better than expected factory orders report (1.4% versus 0.2%) reinvigorated stocks with a caffeine injection and they rallied higher, moving to new session highs after that quick pullback. The caffeine high did not last long; less than an hour into the session stocks were turning over again.

We used the move higher to take some gain off the table. We were not buying on the move. As noted in Thursdays report, it was Friday after a pretty good week, and that left the market vulnerable to some profit taking. We noted that any decent jobs report would be a head fake as we know that report lags other economic data, and despite some modest improvement in some reports (e.g. the ISM, factory orders) it would be a head fake as we know jobs lag all other economic data and the other data has not indicated any economic bottom.

The surprise on the day was the strength in commodities. They rallied back sharply Thursday afternoon post-FOMC even as the dollar ran higher. Same on Friday: dollar up, so were commodities. Is it a situation where there is such demand that a rising dollar won't blunt the commodity advance? Could be. We will know more about that this coming week when the end of month/beginning of month trade is over and things 'settle down' into a more normal routine.

TECHNICAL. Well, it was the old high/low routine: high at the start, lower at the close. A little too much excitement that we lost 20K jobs, and when you factor in that the numbers likely don't reflect reality, it didn't take too long for the early surge to start to purge. Within in an hour as it turned out. Not great action, but when you see futures that strong on data that conflicts with reality, you typically get this response.

INTERNALS: Modest. That is about it: modest. Breadth was slightly positive on NYSE (1.3:1), slightly negative on NASDAQ (-1.3:1). Volume faded on both exchanges, remaining below average on NYSE while remaining above average on NASDAQ. Now NYSE volume never did break above average on this move other than back in mid-March when it was putting together the bottom. That means it hasn't been there through a month and one-half of gains. Not the best price/volume action though volume was mostly up on upside sessions and lower on downside sessions, which is what you want to see. As discussed Thursday, however, you want to see some power in the moves and that means volume. Below average volume means that not everyone is participating, and if things turn it doesn't take much for the sellers to send a rally packing. As SP500 is heavy into financials and investors remain pensive about them, even though they are rallying there is not much support.

On the other hand, NASDAQ is showing above average trade on key sessions, i.e. when it breaks higher. That shows significant accumulation and the market needs growth stocks to grow in price if it is going to continue rallying. Financials are also key and they have low volume; definitely a tension here as the market really needs financials to be successful. NASDAQ's increased trade is very good. It needs to spill over into the financials, however, for a rally to be really successful.

CHARTS: Great moves . . . intraday. DJ30 cleared the 200 day SMA, its next resistance, but gave it up on the close. NASDAQ gapped to next resistance at 2500, and that was the high for the day. SP500 hit its longer term trendline and faded back as well. Great starts, mediocre finishes. Good breakouts Thursday, particularly on NASDAQ with its volume, then an unfulfilled promise at the close. They likely have a bit more upside to put in despite the Friday reversal before they rest again given the breakout was just on Thursday. Not a lot of upside, but a bit more.

LEADERSHIP: The Thursday leadership surged but then purged, though not a total reversal as stocks such as RIMM held their gains. Overall there was a definite industrial and commodities bias as the latter continued their bounce back from some harsh selling. Some were quite successful with their bounces and held their trends. Others look as if they are simply in a relief bounce after breaking their trends. Still looks as if tech is in good shape after maybe taking a breather here. Transports remain in excellent shape, and even retail continues to improve. The financials are still moving up; if they had volume they would be serious contenders for new leaders of the new year.

In sum, the market is still looking for power. NASDAQ is showing some strength though not clear power. NYSE is simply not showing power. Financials are the clear example: rising but no volume. If they get power then this rally will be a clearer indication of real market strength and thus a better indication of a rising economy not too far down the road. The light volume for NYSE and the financials makes the move suspect in the longer run, but for now the rally is working.


THE ECONOMY

Economic data shows nascent signs of bottoming. Good but don't light up just yet.

Jobs were better than expected though still negative. Factory orders for March were definitely much better than expectations at 1.4% versus the 0.2% expected and the -0.9% in February. That February number was revised higher from -1.3%; revisions are where the truth lies because it is like having more than just one good data point. Definite improvement there. The ISM as not as bad as expected either but it was still below 50.

Maybe all of this is telling us the economic dip is bottoming. If that is the case that is truly amazing given the housing bubble popping and the credit freeze from last summer. Yes the Fed has found what appears to be the magic potion and even strengthened the dosage on Friday. With a financial crisis restoring confidence is typically all it takes to get things greased and back to normal. If too much time passes, however, and damage is done as a result of the freeze up, then it can take more than just a Fed appearing in command of the situation. This recovery, or more accurately, attempted bottoming, is suggesting there was not a lot of structural damage.

Okay, maybe not. Maybe the Fed's actions were enough to sooth the savage beast of the financial markets AND soften the blow of housing burning down. What about gasoline heading to $4+/gallon this summer and food costs jumping, despite the President's protests otherwise, in large part because of added demand created by a social planning mandate courtesy of a philosophically confused administration (is it a free-market president or just a free-market until some emotional issues comes up president?), can any attempted economic bottom hold?

Food and energy (now referred to as Foodergy because their prices are now joined at the hip) are taking a larger and larger share of disposable income. It is thus no longer disposable income but monthly overhead: you have to eat and drive to work (remember, jobs are improving, right?) and it is taking more scratch to do it. Thus less for the other things in life that make our standard of living nice. We are not going to get wealthier as a nation spending our money on fuel and food, the former going to fund the anti-American activities of those selling us the fuel. This higher and higher cost of living is only going to drag the economy more just as some of the numbers are showing signs of bottoming.

The questions about the impact of surging fuel and food prices on an already weak economy remains. A look to the market shows an improvement and thus something of a confirmation of the attempts at bottoming in the economic numbers (actually it is the other way around: market bottoms, then the data improves, just as it is trying to do here).

So, bear market rally or a new bull market starting out of a very, very modest correction? As I said before, the correction sure seems too little to account for the mortgage and credit issues, and now you add surging energy and food costs on top. Robins on the yard indicating springtime for the economy and thus a new bull market? It is enough to leave you nervous and cautious about the prospects, but with growth stocks showing solid patterns and runs higher with tech gaining more strength you have to go with the market moves. You don't only play straight up bull market runs. You can play bear market rallies as well. You just have to keep alert and assume that, given the weak data and lack of NYSE volume on the rally, it is like a bear market rally. It could be very much the opposite, but if it is, it will just keep telling up to buy in and thus we miss out on nothing.

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at InvestmentHouse.com

Technorati tags: stock trading stock market investing Jon Johnson InvestmentHouse.com

Bulk of Earnings Season Behind Us

SUMMARY:
- MSFT hangover cools techs, but SP500 clears resistance.
- Oil blitzes back up toward 120 after what looked like a crack in the oil pan
- Bonds continue their breakout . . . along with the dollar.
- Historic Fed action: stock, bond, dollar market bottomed on one day of action.
- Bulk of earnings season behind us, but economic calendar is jam-packed.
- Will techs and the Big 3 return to lead the week.

Market has to deal with issues but perseveres.

Microsoft sandbagged its current quarter in a 'what is good enough for Apple that is beating us about the head and shoulders is good enough for us' move. Unlike Apple that rebounded nicely and posted an almost 4% gain after its 'disappointing' earnings, MSFT didn't rebound, unless you call finishing $0.23 off its session low during a 6.19% loss a rebound. Thus, unlike Thursday where NASDAQ bounced and broke out over its February high in a key breakout, NASDAQ had to drag MSFT around all session and it lagged rather than led.

It didn't help that RIMM reportedly is having problems with its 3-G BlackBerry for AT&T and it may be delayed. RIMM lost 3% on the session but it was down quite a bit more than that before a nice rebound. In addition, oil surged back up even as the dollar climbed, tapping at $119 once more (118.93, +2.87). Interest rates jumped again as they continued their second breakout in the past two weeks.

There was enough in the mix to sink stocks early in the session and on through midmorning, taking some of the nice glow off of NASDAQ's Thursday breakout. Even with that, the indices held at near support at the 10 day EMA and put in what is becoming a typical midmorning bottom. The indices rebounded after lunch in a straight upside shot that took the indices back up to the opening prices, and in the case of the NYSE indices, to session highs. Enough so that SP500 broke over the key early February high.

It was not a powerful session; we know powerful sessions and are willing to suck up to them at any time, but this was not one. It was, however, a solid session. Volume backed off and breadth was mushy, but the market overcame disappointing news, held near support at the 10 day EMA, and rebounded with leaders bouncing back, and as noted, a new breakout by SP500. The volume was great on the breakout, but it the breakouts are piling up, and that is an excellent development for the market.

TECHNICALLY the action remained, despite the tech losses, in a positive build. The indices were under some pressure on the tech side, but then all slid lower as the session moved from the opening bell. Once more, however, it overcame some disappointing news as it has over the past few weeks (GE, TXN, etc.) and bounced back to squelch the losses. Always like it when the market can look at the bigger picture down the road and overcome near term setbacks.

INTERNALS: Breadth was modest and volume was light. Good to see volume back off on the selling on NASDAQ, but it is always nice to see it jump back up on a rebound move. The lack shows no real buying as stocks rebounded and SP500 broke over the February highs, but it was a non-expiration Friday after a good upside week, and in that situation getting out with a flat to slightly higher session is fine, low volume or not.

CHARTS: SP500 joined NASDAQ and DJ30 in their breakouts over the early February peak making it an official uptrend now for all three of the large cap indices. In other words, they have all made new highs since bottoming on the selloff, surpassing the prior peaks in the 3.5 month base. That is an important technical move for the individual indices and the market overall. As noted above there was no big volume on the SP500's move and that was somewhat disappointing, but you take what you can get when you can get it when recovering form a serious correction.

LEADERSHIP: Well we were not expecting it this week after they broke lower to correct given the dollar's sudden popularity, but the Big 3 (energy, ag, and metals) came right back on Friday DESPITE a stronger peso . . . er. . . dollar. Bonus. That was all the more a positive given tech lagged thanks to the MSFT and RIMM issues. Even then, however, RIMM rebounded to hold near support and thus remains in great shape. Moreover, plenty of leaders continue to form up good bases and are set to breakout while others are testing or starting to bounce back up after testing near support following a breakout move. Very nice. Others simply moved higher, showing no sign of wear and tear (e.g. the transports whether trucking, rails, or shipping). Money continues to move into new areas and also old areas when the opportunity presents itself. Healthy action.


THE ECONOMY

Oil reinvigorated after a brief respite.

Oil tapped at $120/bbl just over a week ago, surging higher in what looked to be something of a near term climax run. It was, but it was very near term. After a quick dip to the 114 level it held and without much of a push it was back up to $119 Friday, jumping $2.87 on the session to $118.93. The dollar moved up during the week and so did oil, defying the 'weaker the dollar, the stronger the oil' relationship. Oil took on a bit more independence to end the week as it went it alone without the dollar falling.

Last week we discussed the tie between oil and food, or more accurately, how our government has made an artificial tie between the two with the anti-free enterprise anointing of ethanol as the solution to our energy problems. Besides the many arguments about how it cannot be the solution or even a small part of it, the fact that oil rose despite a stronger dollar to end the week is even more reason we need to disassociate food from oil by scrapping the ethanol mandate. Why? Because if a rising dollar is not going to break the pressure on food prices because oil is still rising in price regardless of the dollar, then we are going to be stuck with high food prices as long as the tie is there despite reversing one of the major drags on the economy, i.e. the weak dollar.

Food and fuel are two of the primary cost items for any household. It is bad enough that higher energy prices make feed grain and food prices rise simply by raising the price of operating the machinery to grow our food. When you link food costs directly to fuel, however, by making food an ingredient for fuel, you uncork the bottle and the unintended consequences spew out. Ask the ranchers slaughtering cattle right now before they are ready to sell because they cannot make enough money on them at the current prices given the cost of feed. Ask the poultry farmers doing the same. They have to slaughter because they won't make any money now but hope if the herd or flock is thinned prices will rise enough to make it worthwhile to buy the feed to fatten the herd. As one rancher friend put it, get ready for $8/lb ground meat.

Great. Not only is gasoline going to top $4/gallon this summer, but meat and chicken are going to go through the rough. The government tried to pick winners with its ethanol policy and as is always the case, when the market is manipulated by clamping down on one part, it squirts out in other places. This situation has to be rectified immediately to hopefully avert a real disaster ahead that will kill off any attempted economic recovery. The housing issues are bad enough and credit has done its damage. Now government policies are ready to finish off the consumer. We have to buy gas to get to work and we have to eat. Federal policies (or the lack thereof in the case of energy) are making both more expensive and if unchecked that is going to cause the deep recession that it looks like housing and credit could not bring about.


The days of the weak dollar may be over: bond yields rising, gold fall.

Without any help from the administration the dollar is staging its best move against the euro in months. Of course it is coming off the mat to do so given the long and deep slide, but at least it is making the effort. The dollar has not broken its downtrend, not by any stretch. It has not even broken its 50 day EMA having just reached that level Friday and failing to hold a move through it. That leaves it down in the cellar, but trying to find the stairs to climb out.

Bond yields are up sharply the past two weeks with the 2 year yield breaking out over 1.8% to over 2% as its first move. It stalled near 2.2%, and then toward the end of last week it broke out with another key move again, jumping to 2.44% on Friday. Even the 10 year broke higher up to 3.86% though its moves remain modest compared to the short end's surge.

Bonds are telling the same story of the stronger dollar, i.e. there is a recovery taking shape. Some say it is inflation. As discussed a week ago, rising interest rates are not inflation or caused by inflation. Inflation can be part of a rise, but bond yields move higher more for economic recovery reasons than inflation reasons.

Just look at gold. While oil is moving back up in a clear breakout and uptrend run, Gold has formed a head and shoulders top and is getting ready to really tank. It ran to 1000 last month and that was the top. It sold off sharply, rebounded, but made a lower high, rolling back over the pat week. It closed below $900 for the week in a rather amazing reversal from the highs just a month back. It is ready to crash much lower and that is not a sign of inflation. Thus the rising interest rates we see ARE NOT related to inflation, but instead an economic recovery to come.

Creative Fed action turned the tide and is a landmark in central bank history.

The dollar still has a long way to go, but the interest rates are showing it is going to continue higher unless the administration does something really stupid such as attempting to undermine it seeing its recent rise sustain itself.

The roots of the recovery go back, to the day, to the Fed's series of actions of opening the discount window to non-primary dealers, taking other forms of collateral as swaps, hugely jumping the amount of funds available to swap, and stepping in to quickly rectify the BSC run on the bank. This showed the markets this was not your Greenspan's Fed, i.e. one that would just cut rates again and again and again as the cure to any ailment. Indeed, it showed the Fed could fight the problem, successfully, without having to cut rates any further.

With that realization the bleeding stopped that day. It was not an immediate upside rocket shot, but the floor was built, and the dollar has spent the past 6 weeks setting up a bottom, breaking higher to end the week.

That makes the Bernanke Fed's action some of the most significant and important moves in Fed history. It affected liquidity without endless rate cuts. Sure it slashed rates, but that was part of the process of figuring out what worked. At first the swaps were ridiculed. We said at the time they did what was needed, i.e. get money where it was needed. On balding blow hard bloviated nightly that the government had to step in and buy all of the mortgages as the only way to stop the bleeding. No, that bailout blathering was wrong. There was simply not enough money and the window was too discriminatory in the first attempts so as to let those really hurting take advantage of it. Once that was fixed by opening the window, the fix was in. The Fed was seen as able to affect liquidity and solve serious problems without an indiscriminate flooding of liquidity across the world via rate cuts.

The results were immediate. The dollar stopped its slide. Bond yields firmed. The stock market bottomed on that day. Those who called Bernanke an amateur were half-right and half-wrong. Sure he did not get the politics, but the reason he was installed as Fed chairman, i.e. his brains and ability to think outside the box, became apparent when he did finally get the politics. Once he realized how the system works with the political overlays he crafted a policy that solved the problem. That makes this historic. It is one of the extremely rare occasions a government agency solved a problem without burning down the house in order to save it. Kudos to Chairman Bernanke.

We can lament the Fed did not do this quickly enough without gutting the dollar with those initial rate cuts, but it was in uncharted waters and it took a bit of time to figure out what the right fix was. When it decided and acted, however, the impact was immediate.

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at InvestmentHouse.com

Technorati tags: stock trading stock market investing Jon Johnson InvestmentHouse.com