Traders tried hard to stretch the positive streak to six gains in a row but came up a little short. We are nearly half way through September and markets are setting new highs. Bears are completely confused.

Market Statistics

The economic calendar for Friday was light with September Consumer Sentiment the only major report. The headline number rose nearly 5 points to 70.2 from 65.7 in August. Both internal components posted gains. The present conditions component rose to 71.8 from 66.6 and the expectations component rose to 69.2 from 65.0. This was a very strong improvement in consumer sentiment and suggests the fear that gripped consumers in July/Aug has passed.

Some analysts claim that fear was worries that the health care reform plan was going to strip consumers of their current insurance and reduce the amount of care available. That fear has subsided due to recent events on the political front. There was also fear the economy might dip again into a W recession and the accompanying additional loss of jobs. That fear has also passed as each economic report shows improvement and payroll reports are less dire. Of course the stock market is also a prime component to consumer sentiment. It is the ultimate indicator of economic health for the average consumer. In their mind if the Dow is up routinely then the economy must be getting better.

Continuing to weigh on sentiment are the low home prices, increasing foreclosure rates and the reductions in their available credit card debt. There is also the prospect of reduced raises and lower end of year bonuses. Consumers are forgiving or maybe I should say forgetting. As time passes and daily life continues they will eventually forget the prosperous times during the housing boom and will begin living in the present. Once the non-farm payroll reports go positive we should see a large jump in sentiment.

Consumer Sentiment Chart

Another Friday report was Import & Export prices, which came in at +2.0%, +0.4% if you exclude oil prices. This suggests deflation pressures are still in check. Wholesale Trade fell -1.4% for July after a -2.1% decline in June. Inventories continued to decline and that means the eventual replenishment cycle will be strong once it arrives.

The calendar for next week includes the PPI and CPI reports, which will give analysts a clue about current inflation pressures. Industrial production on Wednesday is expected to show another minor gain of +0.5%. The Philly Fed Survey on Thursday is the first of the monthly manufacturing reports for the September period. This is probably the most important report for the week. However, that assumes there is no sudden uptick in inflation pressures in the PPI/CPI.

Economic Calendar

Friday started with a lot of upgrades and improved guidance announcements. The biggest was FedEx (FDX), which reported earnings of 58-cents and well above the 30-45 cent range they predicted back in June. They also raised their guidance for the current quarter to 65-95 cents per share. FedEx said better than expected international priority volume, strict cost management and solid execution led to the unexpected gains. I suspect it was more of an "under promise, over deliver" event than a real uptick in volume. Back in the May/June timeframe there was still a lot of worry about the economy. We had not seen any real improvement and corporations were being overly cautious about their outlooks. FedEx said back then that the quarter was expected to be "extremely difficult" so they were definitely guiding lower. Their guidance upgrade on Friday suggests the global economy is picking up speed. This helped power gains in FDX of +4.68 and UPS +2.50.

FedEx Chart

Chip companies have been in rally mode with company after company upgrading guidance and saying orders were increasing. On Friday Jeffries upgraded ASM Lithography Systems (ASML) to a buy from hold on stronger orders. The good news continued with an upgrade to Intel (INTC) by Roth Capital to a buy from hold and an upgrade to buy on Marvell Technology (MRVL).

National Semi (NSM) beat the street with earnings of 13-cents vs estimates of 7-cents and issued stronger guidance and predicted sales would rise between 5% to 8% for the quarter and see gross margins back over 60%. This followed a similar boost in guidance by Texas Instruments (TXN) Wednesday night.

Despite all the good news the Semiconductor Index lost ground as traders took profits from a monster chip rally over the last week. The selling was muted with only a -4 point drop after a +30 point gain since the prior Thursday. This was not a sell off but just some light profit taking.

Goldman Sachs was on an upgrade binge as well and upgraded Progressive (PGR) to a buy from sell. At the same time they cut Allstate (ALL) to a sell from neutral. Goldman said Progressive was best leveraged to the changing consumer trends while Allstate was at continued risk of market share losses in auto insurance. Also in the insurance sector Prudential (PRU) was upgraded by Morgan Stanley (MS) with a price target of $58.

AIG continues to get the most downgrades with a Wells Fargo analyst cutting them to an underperform saying recent trading gains have been a mystery. Wells says AIG has "virtually no tangible book value" which basically means the shares are worthless.

Colgate (CL) was upgraded by Goldman to a buy with an $85 price target. Goldman said earnings estimates were not pricing in new marketing and rising gross margins. Meanwhile Clorox (CLX) was downgraded to neutral by Goldman saying rising costs could limit upside potential.

Schlumberger (SLB) was upgraded by Goldman to a buy saying the company would benefit from the eventual increase in energy spending.

Goldman was upgraded by Citigroup saying the company should benefit from the growing strength in the capital markets and the improving deal pipeline. Citi gave Goldman a buy rating and raised the price target from $175 to $215.

Steel Dynamics (STLD) got a buy rating from Citi and a price target of $22 on rising business metrics. US Steel (X) also got a boost from Morgan Stanley on higher profits.

With analysts strongly in upgrade mode you would have thought the markets could have shaken off that bout of minor profit taking but it was not meant to be. I do expect that the current upgrade cycle will continue to provide market support on any pullback.

Motorola (MOT), remember them? They had one of the most successful cell phone models of all time in the Razor. That phone was left in the dustbin of history when the current generation of smart phones prompted a wave of upgrades to iPhones and various versions of the CrackBerry. Motorola announced another new phone on Friday called the Cliq. The phones claim to fame is auto aggregation of data from all of your social networking sites like Facebook, Twitter, MySpace, etc. It sounds to me like it will be marketed to the Hannah Montana crowd but analysts seem to like the announcement and MOT saw a +9% jump on various analyst upgrades. I doubt I will be ordering one.

I may order one of these instead. The U.S. has been forbidden to sell the high technology F-22 Raptor stealth fighter since 1998 because it was too good to allow anyone else to own it. A law was passed in 1998 to keep the technology from being shared with our allies. The F-22 program was in danger because the U.S. decided at the current 187-plane inventory level it did not need any more and it had terminated existing plans for a total of 750 planes. The Senate appropriations committee passed a new defense spending bill on Friday in 15 minutes with no dissenting votes and no debate. Must have been a lot of pork in that bill. The bill also killed a new search and rescue helicopter, a presidential chopper and a new missile defense interceptor. The committee now wants to allow sales of the F-22 to other countries to save 2000 jobs in America. I think that is a good idea. We can spend billions of dollars creating technology that is light years ahead of everyone else in order to protect ourselves. Then we sell it to everyone else and bring them up to our level. Then we have to spend additional years and billions to come up with some newer technology to defeat the technology we sold everyone else. Am I the only one that sees the flaw in this logic? We are in a highly expensive never ending weapons race with ourselves.

F-22 Raptor

Gold prices rose again to close just over $1005 and the level that has been strong resistance for the last 18 months. Gold is rising due to higher demand, lower sales from central banks and because of the falling dollar. As a dollar denominated commodity it has a direct dependence on the value of the U.S. dollar.

The dollar index fell again on Friday to close at 76.60 and a new 52-week low. The worries over the growing U.S. deficit and the amount of debt created to bail out the financial system is reducing the value of the dollar at a rapid rate. If you have any doubts at all on the price of gold being linked to the value of the dollar then look at the line chart below. That compares both in the same chart. Since the dollar is not likely to get well soon this suggests gold could finally break over that $1005 barrier.

Chart of Gold

Chart of the Dollar Index

Comparison Chart Gold & Dollar

Oil and natural gas were extremely volatile last week. Gas prices traded as low as $2.41 on the 4th and a level not seen since 2001. This prompted a lot of technical trading and some buying in the futures. Since most companies can't produce it for less than $2.40 a sustained price at that level would cause production halts in thousands of wells where the production was not protected by hedges.

There was a rebound to $3 by Wednesday before another sell off began. Something hit the market early Thursday that caused a massive amount of short covering and a +16% rally in gas prices to just over $3.40. That is a +41% spike from low to high in one week. Nobody knows for sure what happened but the spike in the futures was dramatic. The drop again on Friday was almost as dramatic with the close at $2.96. The dramatic part of Friday's drop was the 198,021 contracts traded on a down day. That is nearly twice the daily average and nearly twice the volume of Thursday's spike.

I suspect this is all related to the CFTC's efforts to curb the position sizes of the energy ETFs. The natural gas ETF (UNG) ceased issuing new shares on August 12th because of pending changes in regulatory requirements. They have permission to issue as much as 1 billion new shares but fears over CFTC position limits kept them on the sidelines. The fund has been trading at a premium to its net asset value, sometimes as much as 20%, since the announcement. Short sellers have been pounding the nat gas futures in anticipation of a position limit requirement that would force the UNG to divest itself of a large number of contracts.

Rumors started surfacing this week that the CFTC was moving away from position limits in their discussions. This caused some short sellers to exit the trade and gas prices rose slightly early in the week. On Thursday it was rumored that the UNG was going to start issuing shares again. I believe the sharp spike in the gas futures was shorts running for cover since a new share issuance would mean the position limit scare was over. It appears the rumors were true because on Friday the UNG announced it was going to start issuing new shares again under "limited circumstances" on Sept 28th. It would appear the crisis was over EXCEPT that the statement said they may condition the sale of new shares of the funds ability to hedge its position in the futures markets and they put off the date to Sept 28th. That means the fund is still not clear of the position limit problem and they may be trying to put pressure on the CFTC to make a decision by Sept 28th. The fund said they would attempt to hedge their position with alternative instruments like swaps. Shorts immediately piled into the futures again thinking the position limit trade was back on again.

People email me on the energy ETFs nearly every day. What ETF should I buy? First, I can't answer that in an email because of SEC rules governing individual advice. Second, I would be skeptical of any energy ETFs until the CFTC issues a final determination. Third, I believe the leveraged ETFs are dead. Since it takes a $1.0 billion futures position to produce a 2x leverage for a $500 million ETF it no longer makes sense for fund managers to fight the CFTC for a product that has a higher risk. Lastly the leveraged ETFs have been proven to have a high beta on a 2-3 day positions but a very low beta over long term holds.

Every single leveraged commodity ETF performed worse overall than a 1x1 ETF over the last 12 months. The options, swaps and futures positions necessary to replicate a 2x or 3x multiplier of the underlying positions produces a drag on the ETF over time. Options expire, premium decays and markets don't move in a straight line. Today I am not recommending ANY energy ETF based on the actual commodity. I would try to get exposure to the price of oil/gas by investing in a sector ETF like the XLE, VDE, IYE, IGE, XES, XOP or IXC. If you check the charts of those 1:1 ETFs and compare them with a chart of DIG you will see that the double leveraged DIG has performed worse than any of the other ETFs.

A better way to play the specific price of oil and gas today is with the individual stocks. With nat gas so badly beaten up the shares of a gas stock like CHK or APA have far more upside when the tide does turn. I reported last week that the rig count was rising and mostly in gas rigs. Analysts claim there will be an 8% to 12% shortage of gas in 2012 so drilling activity needs to pickup fast to capture the coming rise in prices. Those prices will not likely rise any time soon since the gas in storage is going to break a record sometime in the next 8 weeks. The chart below shows the yearly storage cycles and the peaks are at the end of each October. We are nearly at the prior peak and 2007 record high and it is still early September. It is tough to justify a rise in gas prices until after the peak passes and we get into the winter consumption season.

Oil prices rallied throughout the week only to collapse on Friday for no specific reason. OPEC kept the production at current levels when they met this week but nobody expected them to make any changes. The IEA raised their estimates of global demand by 500,000 bpd for 2009 and 2010 but those numbers change monthly so that should not have been a factor. Hurricane Fred did weaken but it is so far away and the track so erratic that nobody is really trading on Fred yet. Nobody knows why oil prices dropped on Friday but I believe the long-term trend is still up. Support at $68 should hold but you never know what forces will show up on any trading day to push the price around. Resistance remains at $75.

Crude Oil Chart

Three more banks bit the dust on Friday. Regulators closed the Chicago based Corus Bank with $7 billion in assets. In Minnesota the Brickwell Community Bank was closed and the Venture Bank of Lacy Washington was closed. Venture had 18 branches. The FDIC said the three closings would cost the FDIC fund $2 billion. This brings the total to 92 banks closed in 2009.

You can't tell me the market makers don't have control over the market. On Sept 10th, 2001 the Dow closed at 9605.51. On Friday, the 8th anniversary of 9/11 the Dow closed at 9605.41. The Dow traded all over the map on Friday with an opening high of 9649 and afternoon low of 9571. The market makers had to drag it back from that low to close it at 9605. Volume was low and internals about dead even between advancers and decliners so it was probably an easier task than one might think. CNBC hyped that 9605 9/10/01 close all day and then acted surprised when the market makers matched it on 9/11/09.

The minor 22-point loss for the Dow on Friday was not material. Given the +165 point rebound for the week this was just a short breather for the markets. The Dow is the only major index that has not broken over current resistance. That level is 9625 on the Dow and dates back to last November. The Dow traded over that level intraday but profit taking brought it back neutral territory. I view this as bullish.

There is a real conflict in progress under the surface of this market. Every major analyst is still expecting a pullback or even a serious correction. TrimTabs said last week that insider selling was at the highest level since May 2008. For every insider buying there were 30.6 insiders selling their stock. This suggests that the economic rebound is going to fail if that many insiders are seeing problems in the future. At least that is the TrimTabs take on the data. There is another view. I believe those insiders need cash and those shares are the only asset they have left. Home values are underwater and credit lines are being cut off and bonuses slashed. Even if they knew the stocks were going to double over the next year many of those insiders would still have to sell to pay the bills.

This makes the continued rally last week even more important. The market is moving higher despite the constant caution by analysts that the market is going to correct. This forces those who have moved to cash to rethink their position and to come back into the market and push prices higher. Eventually we will get a correction but funds are aggressively buying the dips and brokerage analysts are upgrading expectations for any stock with a pulse. It is a classic denial rally.

If we do see a pullback the initial support on the Dow is 9500 followed by 9300. Once over resistance at 9625 the next material resistance is 10,318 with a pause at 10,000 for psychological reevaluation. I know that sure sounds like wishful thinking but that is what the charts are showing.

Dow Chart - Weekly

The S&P closed down a little over a point at 1042 and clearly in breakout mode. Resistance from last week at 1035 was broken and the last October high at 1044 is the last thread of resistance before the S&P is in blue-sky mode. The S&P may have finished negative on Friday but it held on to the +50 point gain since the prior week's lows. It was Friday after a big run. We could have easily given back 10-20 points but we didn't. This is bullish and a breakout here should draw some cash back into the market next week. Support is 1020-1030 followed way below at 995.

SPX Chart

The Nasdaq has been a reason for worry until last week. The Nasdaq has broken out over the 50% retracement level at 2063 and broken out of its month long trading range. The chip stocks led the charge higher but there was plenty of help from the other sectors. Support should be 2040 on any serious profit taking. Resistance at 2160 should be the next target.

Nasdaq Chart

The good news from FedEx helped power the Dow Transports well over current resistance and the next target should be 4220. A breakout by the transports is a confirmation to a Dow rally.

Dow Transport Chart

Russell Chart

Notable from last week was the flat line in the financial stocks. They have been the backbone of the market for weeks and they quit going higher on August 24th. The rebound out of last week's dip was lackluster compared to the rest of the market. This is a critical point suggesting the market support is broadening out and that is a bullish sign. Techs and industrials are taking the lead while financials are taking a breather. Eventually they will return once Meredith Whitney quits beating up on them in print.

BKX Chart

We need to watch out for a bull trap next week. That is defined as a spike to a new high in the morning and a collapse at the close to below the prior day's low.

I would continue to buy the dip until proven wrong. A market in breakout mode contrary to normal historical cycles could go a long way. This may really turn into a September to remember.

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Jim Brown