All we wanted to do this week was hold last week's gains.
So far, so good, as we finished yesterday right at last Friday's 12,850 close after firming up the 12,700 line as a possible base that we can build our next leg on. We got a little over-excited yesterday and the Dow ran up to 12,950, just about where we topped out last Friday. Still it's progress and we'll take it – anything above 12,750 will be a victory for the week and 12,850 will be downright bullish.
Of course the S&P needs to take that critical 1,400 mark to confirm a move so we're going to shift our attention there and next week we may grab some SPY calls (probably the $141s, now $1.39) if we can hold 1,400 as major resistance is way up at 1,436. David Fry draws his line slighly below the 50 dma but note the MACD is very encouraging in the longer view.
Note also, the similarity in this consolidation to the one we had in the spring of '06, that led to a massive summer break-out when the markets looked much LESS oversold than they do now. What caused the great summer rally of '06 was a 35% pullback in crude, from the July record high of $79.86 (couldn't make $80) to the Jan low at $51. Here we are 50% above that old high (can't make $120) and they are telling you this time it will be different. 35% of $120 is $42, a drop that would take us right back to that July high around $78. More importantly $42 a barrel means US citizens have 21M x $42 per day to spend on something besides fuel – that's almost a Billion dollars a day – double the stimulus package and THAT'S my bullish premise.
So the Fed can do MUCH more for the economy by NOT cutting rates next week and strengthening the dollar (which was at 85 during that rally, now 72.5 – down 15%) rather than toss out another pointless rate cut that will only help the lenders widen their crack spread on loans, which are STILL at 6%, despite 3% of Fed cutting. No wonder the XLF was the star of our show yesterday, with a huge move in anticipation of yet another rate cut next week (not to mention the $60Bn the Fed tossed at the financials in their special auction). At this point, I think we've helped the bankers enough, how about a little lovin' for the borrowers, whose cash is worth 40% less than it was when GW won his supreme court case and became President.
Without a strong dollar, we are very likely not going anywhere from here and, as Daniel Carroll points out, we may be heading into an epic market decline, like we did during the last period of stagflation in the 80s (down 37%). Back then, the commodity run peaked out at +350%, currently commodities are up 300% since 2002 and our dollar is down 40% vs the Euro since 2002 while we bottomed out at down 43% vs. the Deutch Mark in 1982 before the G5 intervention we discussed last week. I maintain my bullish stance but let's keep in mind that I still expect G7 intervention on the dollar to get there…
China intervened in their own markets as the Shanghai Composite plunged to 50% off its summer highs and the market gained 15% in 2 days. Don't forget that adding 15% to 50% is "just" 7.5% so they are still 42.5% off the highs now, not quite the recovery the media would have you believe and still below the better-than 20% retrace we would be looking for to say it may be time to go back to China. Today the Shanghai had a little (1%) pullback on weekend profit taking (that would be big boys cashing out on this rally, not the poor bastards who are still down 42.5%) and the Hang Seng gave back half a point but held a 900-point gain on the week (3.6%). The Nikkei had a huge turn, jumping 322 points and saving themselves from being Asia's only losing market this week. India jumped 404 points, up 2.4% for the day.
HMC put in a good report and that, coupled with the rising dollar, gave our TM holdings a 3.1% boost this morning but the big news in Asia is China setting up a meeting with the Dalai Lama, something that makes me think China really is trying be more responsive to global opinions. This comes as riot police had to accompany the Olympic torch as it went to Nagano: "Five tracksuit clad riot police will run alongside the torchbearers, who will also be followed by two Chinese officials. Phalanxes of 50 riot police will surround the torch on the right and left. About 3,000 police have been assigned to security."
"This is my simple religion. There is no need for temples; no need for complicated philosophy. Our own brain, our own heart is our temple; the philosophy is kindness. It is necessary to help others, not only in our prayers, but in our daily lives. If we find we cannot help others, the least we can do is to desist from harming them." – Dalai Lama
Europe is up about a point ahead of our open with ERIC giving the markets a lift on a much better than expected report, ERIC is up 18% pre-markets and their fellow Swedes at VOLVY (who we gave up on in the fall) also put in some very strong numbers as did truck maker Man, who saw a 16% sales increase. ECB Governor Noyer stepped up the G7 rhetoric saying: "I would simply say that I have managed a crisis encountered by a large and internationally active bank, and so have some of my colleagues. We know how to do this. Theoretical musings that a single market should lead to a more integrated crisis-management system are just that — an academic exercise conducted by people who are very far away from the real thing. We have procedures, we have tested them, we know they work."
A weak dollar and high oil prices are hurting EU business confidence, with the Ifo Business Climate index taking it's worst drop since September 2001 and the IMF has cut the EU's growth outlook from 2.6% to 1.4% but, as we predicted in yesterday's member chat, oil is up this morning as Nigerian Rent-A-Rebels have again shut down production along with a well-timed strike in which we are meant to believe XOM can't come to an arrangement with workers who make less than the US minimum wage to produce 800,000 barrels of oil per day ($92M). I don't know which is harder to believe, that XOM can't come to terms with "The Petroleum and Natural Gas Senior Staff Association of Nigeria," who had to suddenly call a strike the day after oil prices broke down at the NYMEX, or that they can't defend a multi-billion dollar oil platform from a motorboat full of teenagers.
Let's hope we can put in a good finish to the week. Next week we have a ton of economic data plus our stimulus checks are "in the mail" so, if we CAN'T get a rally off of this – we are probably in big trouble!
Have a good weekend,
– Phil
