Yesterday's strong rally after a gap down move to support at 1040 (SPX) was impressive. It's unclear to me whether it was short covering or genuine buyers who perceived a rare buying opportunity. In reality, it was probably a little of both. At any rate, it was welcome relief for embattled bulls who have been bludgeoned unmercifully by the manic selling and high volatility over the past three weeks.

Futures continued to trudge higher overnight and opened positively this morning along with bourses around the globe. Sentiment was helped this morning at 8:30 AM when the U.S. Census Bureau reported that Durable Goods sales in April surged $5.6 billion (2.9%) to $193.9 billion, the fourth increase in the last five months. March was revised to no change. The surge was led by Transportation.

Later in the morning the Commerce Department reported that New Home Sales rose 14.8% in April to their highest level since May, 2008. New homes sales are up 47.8% compared with a year ago. This number needs to be taken with a grain of salt because much of the surge could be credited to the government's tax credit which has now expired. Toll Brothers shares jumped by 3% after reporting a narrower than expected loss and the company saying that new orders have increased by 41%.


Toll Brothers

All eyes will be focused on the Gulf of Mexico over the next two days as BP begins the so-called "Top Kill" procedure in an attempt to stop the flow of oil from the ruptured well. In a memo released to Congress BP admitted that there were a "series of underlying failures" and that there were "indications of very large anomalies". It is not clear who was responsible for failure to act on these warnings. Everybody is pointing their fingers at the other guy. The Obama Administration is catching an enormous amount of flak from both the left and the right. The White has vowed to keep "a boot on the neck of BP". Suffice it to say that BP shareholders are not enjoying this fiasco.


BP PLC

Mark Hulbert, who writes a newsletter that tracks the sentiment of market-timers (among other things), has noticed an interesting phenomenon. In the short span of 13 trading days the market-timers' that he tracks have gone from full-blown bullish to full-blown bearish. Prior to May 6th, most were recommending an 80% exposure to equities (the highest level since 2000). Now, they are recommending a MINUS 45% exposure to equities. In other words, they are recommending that their clients remain in short positions. What makes this so unusual is that in previous market tops most advisory services continued to remain stubbornly bullish well past the time that it was obvious that they were wrong. In a strange, contrarian sort of way, this could actually be interpreted as bullish since these guys are rarely right at the top or the bottom.

The European Union proposed today that member states should establish "bank resolution funds" which would be used to pay for the orderly wind down of any future failed banks. This would be paid for by a levy on the banks. The proposal was a little short on details i.e. how it was to be collected or how big the fund needed to be. This comes on the heels of the US Senate's recently-passed financial reform legislation which contains similar language. Its purpose, of course, is to avert the type of meltdown Lehman's bankruptcy caused.

While we are on the subject of the financial reform legislation, one of the provisions contained therein is a ban on so-called "proprietary trading" by banks. This, of course, refers to banks speculating and trading with their own funds as opposed to trading their client's funds. This is aimed at about five or six of our largest banks that are heavily involved in this practice. Probably the largest "offender" is Goldman Sachs.


GS

In a May 26, 2010 article in the Huffington Post staff writer Shahien Nasiripour reported the following: "Of the 63 trading days in the three-month period ending in March, Goldman Sachs generated revenue of at least $25 million on EVERY SINGLE DAY, according to its latest quarterly filing with the Securities and Exchange Commission. On three of every five days, Wall Street's most profitable firm, generated revenues exceeding $100 million trading stocks and bonds, and creating and entering into derivatives contracts". How about you? Did you do that well? When you combine Goldman's assets with those of the other behemoths, is it any wonder that they can control the market? Do you see why these guys drive Keene and me into a state of apoplexy?


Trading Revenue

Just because we have not had another crisis du jour out of Europe(that seems to roil the markets on a daily basis), does not necessarily mean that all is calm on our eastern flank. Reports out of Europe indicate that the French and the Brits are furious with Germany about the ban on "naked" short sales. First, they are annoyed that Germany took the action unilaterally without consulting them and, secondly, they don't believe the move will accomplish anything (and I agree). In fact, the Brits have let it be known that if anybody wants to short German bonds they are welcome to do it on the British Exchanges. This is not exactly what I would call Continental unity.

As I opined last week, the solution to Europe's sovereign debt problem is not to just keep moving debt from one balance sheet to another. As painful as it may be, debt destruction is the only answer and that may, indeed, involve a period of deflation. Todd Harrison (Minyanville) had this to say on the subject: "There are two alternative forward paths: On the one side, debt destruction, asset class deflation and an outside-in globalization once the dust settles. On the other, we continue to give the global drunk another drink with hopes that he does not sober up. The sad truth is that one day he will, and our children will be forced to pick up the bar tab if we do not change our ways soon". Of course, he includes the United States in this (as well he should).

Gold continues to climb today and it looks like it wants to retest its high on May 12th and May 14th at 1250. A strong dollar is not deterring its advance.


Gold

Let's have a look at the charts and see if they give us any clues about what lies ahead. First, let's examine the SPX chart. We got a big gap up opening that peaked at 1090.75 about 10:40 AM. It retreated from that level and traded sideways for most of the day. I would anticipate that SPX will encounter stronger resistance at 1104 (200 DMA) and again at 1107 (50% retracement). If the bulls can successfully breach those levels I would look for more resistance to appear at 1115 (January's opening print) and 1122 (62% retracement). And lastly, the 50 DMA is at 1165. It dropped below this average on the "Flash Crash" on May 6th. It tested it from underneath the following Monday and promptly fell away. If the bulls can overcome all these obstacles, it would clear the way for new highs. It is a pretty daunting task in my opinion.


SPX

The Russell 2000 (RUT) has been something of a curiosity to me. Fund managers keep buying these small caps in the face of these uncertain times. Usually one would expect the funds to be rotating into the more liquid large caps. Either they know something I don't know, or they are not very bright. Unlike the others, the RUT has not dropped below its 200 DMA (yet). Today it gapped up (with the rest) and hit a high of 657.95 when the markets peaked just before 11:00 AM. I would expect stronger resistance at 667 (50% retracement) and even stronger resistance at the 678-685 area. The one thing I'm fairly certain of is that if the rest of the markets take dump RUT will not be far behind.


Russell 2000

And finally, the granddaddy of them all - the DOW. It jumped up today and hit 10,178.88 before retreating. Above at 10,283 lies its 200 DMA. If it does not stub its toe there, it will surely encounter some strong head winds at 10,357 (50%). Above 10,500 the DOW must contend with the previously broken 20 DMA (10,591) and its 50 DMA (10,830). I'm not saying the bulls can't do it, but it's a steep hill to climb.


DOW

Yesterday's strong rally off the lows, and today's continuation of the rally did not surprise me. The markets have gone from obscenely overbought in late April to grossly oversold (now). An oversold bounce (aided by short covering) is to be expected. However, I think it would be unwise to heed the advice that the cheerleaders in news media offer so freely. I am of the opinion that we had a major trend change in early May. A more likely strategy for profits going forward will be shorting the rallies - not buying the dips. Having said that, I would also caution that bear markets (if that's what we have entered) are not easy to trade either. They are characterized by sharp (sometimes vicious) rallies so you must remain ever-vigilant. Unless you are Goldman Sachs you can't make money every day of your life. The only thing us mortals can do is try to win more than we lose.

Remember, the markets are closed on Monday in observance of Memorial Day. Have a good long weekend.