It is very interesting to go away for 3 days and come back to find essentially nothing happened.
To say news is slow is a major understatement. On the other hand, it does give us a good chance to really feel out the market momentum as drift without news is the best indidcator of direction.
The Nikkei and Asian stocks are moving lightly down as exepected with the Nikkei getting a push down due to changes in trading rules aimed as stopping retail investors from getting killed in margin accounts (or, a skeptic would say, to stop them from making big money as they have been doing in this runaway market).
Oil continues to drift down on warm weather and no terror so far this week. Even China’s demand is dropping off a bit so expect to start hearing “demand destruction” bandied about again. Coal stocks should hold up as a lot of the drop in crude is from countries that don’t care about pollution switching to lower cost coal wherever possible.
While oil is still thinking about testing that critical $56 level, there are a lot of people desperate to keep it above that mark because a free fall may lie below it. When I say people I mean very powerful ones and when I say desperate I mean like arrange to blow up a pipeline kind of desperate so we need to keep a keen eye on this one.
On the higher end, both the 50 and 200 dma for crude are at $59 so any break above that will be a real cause for concern but I think the battle for this week will be waged at $57. The dollar should be gaining ground this week with rising consumer confidence, strong retail and low inflation which will help keep oil in line as well.
Gold got another nice boost from inflation actually hitting Japan for the first time in 7 years (nice, healthy inflation – not the bad kind). This should cause a little weakening in the Yen (good for TM and SNE) and continued appreciation in precious metals. I still like NEM and GG in that space for another 5% or so.
The DOW is looking more and more like a flag pattern with strong support (that needs to be tested) at 10,700 and a massive breakout at 11,000. The SPX looks very strong to move up to 1,300 but is also looking a little overbought at 1,268. Without a Nasdaq breakout above 2,280, I am concerned all of the indicies will engage in what will be considered a “healthy pullback” of 5% to start the year. This would look like a nightmare for most virtual portfolios!
So, that doom and gloom possibility aside, today looks like an excellent day (at least in the morning) with great momentum. If we have a reverse in the afternoon again, I will become very pesimistic indeed. If all of the stars line up correctly however, we could be right at the start of a 150 point run in the Nasdaq which would set us up for an amazing 2006.
Since both the up and downsides are so great at this inflection point, cash is still king – there will be plenty of time to get on board whichever way this goes.
