What an incredible week! The Dow gained over +480 points and shorts were still running for cover at the close. After pulling back intraday on Friday as traders took profits from the strong gains, the starters gun fired somewhere at 3:PM and the Dow soared again for a +53 point closing romp. The Nasdaq shook off warnings by three high profile techs and fought for every point as it closed in on 2200 ending only one point away at the close. The only negative factors overshadowing the markets was the unexplained rally in gold, up +$13 in only two hours before Friday's close. Gold is up over $32 in the last month, an incredible move on no news.
Nothing short of amazing if you are a bull. The Dow tacked on +480 points, most of it in only two days, and it is moving against normal market cycles. The normal reaction to the fifth largest one day gain in history would be a substantial pull back for profit taking. Instead the Dow continued to move upward and appears poised to breakout from resistance dating back two years and retest old highs. This is even more encouraging because this is typically a time when the markets go to sleep for the summer. Another week like last week would put the Dow into record territory. The all time record high was 11722 on Jan-14th 2000. This very broad based rally came on the heals of continued tech problems.
PALM continued to sweat investor heat on Friday losing -$2 to $5.02. Agilent recovered some of its after hours losses to close down only -2.72 at $36. Even a billion dollar shortfall evidently could not sour investor sentiment. Dell even started to rally by the end of the day after warning that earnings would slow, again. Lucent may be French kissing Alacatel in their corporate boardrooms this week. It appears that rumors are true that the two companies may combine in a "merger of equals" soon. At least that is what Lucent is calling it. In reality Alacatel will be paying about $40 billion in stock for LU which represents a no premium takeover. The fact that the LU board would consider a "no premium" deal means that they are not likely to pull out of their own profit problems any time soon and are looking at ALA as their savior.
Speaking of saviors Broadcom found theirs in the form of Lehman Brothers analyst Arnab Chanda who upgraded BRCM from market perform to buy. He also upgraded MRVL and ISIL. These companies make chips for "customer premise equipment" (CPE). These chips go into things like set-top boxes, cable modems and LAN equipment. He said this market should work through the inventory glut quicker than other chip sectors. CSCO for instance wrote off equipment for communication carriers not corporations. The growth in the carrier sector has come to almost a complete stop but the retail and corporate sectors are showing signs of life. Intel is also looking to break out of the PC chip market and into more consumer products. They announced a new mobile phone chip this week that performs the functions on one chip that took as many as seven before. This will make their chip much more desirable than the combination of multiple vendors to accomplish the same task. They think the market for this chip is close to $24 billion. Now that is a chunk of change!
While I applaud the gains on the Dow I am still cautious on the Nasdaq until 2250. Heck, even 2200 is proving to be a challenge. However, remembering the Dow jump over the "lead ceiling" at 11000 this week anything is possible. What is concerning me this weekend is not technical or fundamental. It is other factors which have jumped into the forefront almost overnight. Gold, the inflation hedge, has spiked to levels not seen since September and there is no real reason. June gold is up from a low of $256 in April it closed up +13 at almost $288 on Friday. Oil is also spiking and fears of summer shortages were jolted by news that Israeli warplanes struck the West Bank and Gaza Strip for the first time since 1967. If the current conflict in Israel spreads to the surrounding oil producing countries then supplies could be disrupted. July crude closed over $30 a barrel. Just what we need, another problem for the markets to worry about.
While the markets were breaking through resistance commodities have been soaring. Breakouts included energy, metals, meats, cocoa and lumber in addition to oil and gold. What is wrong with this picture? It is the yield curve stupid! Six months ago the curve was inverted and it was screaming to the Fed that rates were too tight. Now, even Lawrence Kudlow is saying whoa! Did they go too far with five 50 point cuts? According to the "other" markets it appears that the Fed will be playing indian giver real soon! When was the last time Alan was ahead of the curve instead of behind it? Contrary to the recent CPI/PPI reports it appears the seeds of inflation have been sown and are beginning to take root. The core price of every product is the commodity it takes to produce it and those prices are soaring.
I have come to the conclusion that Fed policy analysts are on drugs. Last Sunday there was only a 42% chance of a 50 point cut according to Fed fund futures. Analysts were worried that they might not even cut at all. Now, after another rate cut there are several noted analysts saying the Fed could cut another -100 points. Give me a break! We squeaked by the last meeting and the Dow could be at a new high by next weekend. (A deep cyclical bubble anyone?) The extreme mood swings of these analysts prove they are either on drugs, need drugs or have no clue what they are analyzing.
Regardless of the reason for the current market rally we will take it and run with it until it dies. It appears to be very broad based with not only the major indexes gaining but also the Russell-2000 and the Dow transports. Those Dow theory guys have got to love that. Transports gaining at the same time oil is rising. Go figure! Asset bubbles come and go, but irrational exuberance is human nature.
Advances are beating decliners, not seriously but still beating! The volume has yet to confirm anything with only 1.1 billion on the NYSE and a wimpy 1.7 billion on the Nasdaq. Yes it was Friday after a big week but it was also a double witching option expiration Friday. Where's the volume? Despite the meager +5 point gain on the Nasdaq it was the fourth positive day in a row. Check out the chart below. Does this look like normal?
Not hardly. Floor traders have said that hedge funds have been closing large short positions the last three days. It looks like there was a real rush to go into the weekend flat.
Some analysts are pointing to the lack of catalysts in our immediate future as problems for the fledging rally. There are literally no chances for market moving economic reports until Thursday when we get Jobless Claims and New Home Sales but these are not normally market movers. Friday has Durable Goods, GDP and Michigan Sentiment. Those could cause trouble if anybody is still listening.
Whether you are bullish or bearish both the Dow, Nasdaq and S&P are poised to break through real resistance and establish new uptrends. I am very excited about the possibility but I still have the nagging feeling in the back of my mind that we are about to get blindsided again. I keep remembering that earnings warning season does not start officially for two weeks and it is already a record quarter for warnings. Will it get worse and scuttle the rally or have most of the companies already warned and the worst is over? We will not know for several weeks.
Our job as traders next week is to trade the trend. For the current trend to continue the Nasdaq must break 2250 with strong volume. If the Dow can sustain a break over 11300 then it could drag everything else with it including the Nasdaq. That will be a feat considering the Nasdaq big caps were stuck in the twilight zone on Friday. INTC +.16, MSFT -.07, ORCL +.16, Dell -1.09, CSCO +.34, WCOM +.06. Makes you just want to rush out and buy them right? SUNW was the only respectable performer at a whopping +1.16. CSCO and SUNW are the only ones with anything resembling a chance at an uptrend and both are dead on resistance. CSCO and SUNW cannot carry the Nasdaq on their own and without help from their friends it is going to be a battle.
Just saying trade the trend does not cut it so I will put it in plain English. Buy the Dow over 11300 ONLY and sell if it falls back below it. Buy the Nasdaq over 2250 ONLY and sell if it falls back below it. It is black and white, or read and green for the candle stick readers. If the Dow is going to rally from here it has to move over 11300. If you are bullish then why would you want to own it under that? Same with the Nasdaq. 2200-2250 has been resistance since early March. Wait for a breakout to go long. Gosh, is investing really this easy? It is if you don't let emotion take control. Emotion says, "the market is running away, buy something quick." Logic says, "I will buy it IF the conditions are right to make a profit." There is a difference. A huge difference!
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Trade smart, enter passively, exit aggressively!