Every day that passes with the market at new highs the frustration for the bears continues to mount. Another dip was bought and another level of resistance slipped quietly behind us.

Market Statistics

You know there are a lot of bears thinking every day "why didn't I go long" at some point in this three-month rally. We have to be kind to them because their short covering is providing momentum for the current move. Let them know you feel their pain but enjoying every minute of it.

Obviously I am poking fun at those on stock TV who have been predicting a top in the market for months now. Eventually they will be right but right now the bad news bulls just keep devouring every bit of bad data and using it to build new steps over their wall of worry.

Lately the number of commentators has been weighted towards the bullish side with S&P 1550 as the most common target in 2011. However, the bears are starting to change their tune with comments like "I think we are going higher in the short term BUT it is only going to make the crash more severe." Once the majority of the bears turn bullish and decide to join the party it will be time to start worrying about market direction.

The rally today continued to lack conviction but traders still bought the dip after the weekly Jobless Claims spiked unexpectedly by +25,000. Claims rose to 410,000 from the revised level of 385,000 in the prior week. Analysts are now claiming the dip in the prior week was probably weather related. Layoffs in the private sector are continuing to slow but the government sector has slipped into reduction mode and that is supporting a steady stream of jobless claims.

Also causing some morning angst was the strong spike in the Consumer Price Index. The index rose +0.4% in January following a +0.5% spike in December. Core CPI rose +0.2% and the fastest rate since June. The core CPI had been stuck at 0% back in Sept/Oct and .1% in Nov/Dec. The rise in the core rate is the first sign for the Fed the inflation monster is awakening. We are still a long way from any meaningful inflation and still under 1% for the last year but you can bet the Fed is watching carefully. The energy component of the CPI rose by 2.1% in January and food +0.5%.

Consumer Price Index

The blowout report for the day was the Philly Fed Manufacturing Survey. The headline number for February surged to 35.9 from 19.2 in January. This was significantly higher than the 21.0 consensus estimate. That is the highest level since January 2004.

The internal components were also bullish and suggest we will continue to see an increase in business conditions. Backorders rose to 14.9 from 8.7 and the employment component rose to 23.7 from 17.6. The average workweek jumped to 12.8 from 10.6 meaning workers are getting more hours and companies will have to hire additional workers to increase production. Inventories fell to 2.1 from 6.8 and suggesting consumption is rising faster than products can be produced.

This was a VERY strong report but it does not mean the rest of the country suddenly spiked as well. If the national ISM shows this kind of gain in early March the Fed will be backing off the QE2 program before June.

Philly Fed Survey

The Mortgage Bankers Association (MBA) reported the overall mortgage delinquency rate fell to 8.22% in Q4 from 9.1% in Q3. This is a major decline although the rate is still high. The problem is the lingering foreclosure problem and higher credit standards that prevent them from selling their homes and the high unemployment that prevents them from making payments on time. It is encouraging the delinquency rates are declining so sharply. Once employment begins to rise the delinquencies should decline even further. Some of this decline is also related to the servicers working through their backlog of foreclosures.

Reports due out tomorrow are the Risk of Recession for January, ECRI Weekly Leading Index and the Household Credit Report. None are really watched by the street.

The Business Council released the results of a survey conducted along with the Confidence Board. More than 70.4% of 124 CEOs surveyed expect business conditions in their industry to rise over the next six months. That was a major change from the prior survey in October when that number was 34.2%. A total of 98% expressed some level of confidence that growth will continue throughout 2011. Responders believed sales, prices, profits and investment expectations would all improve. However, 35% expect prices to rise but they believe the better economy will support these price hikes. More than 40% also expected higher wages for workers. This entire report was very bullish and shows how much sentiment has improved in the last three months.

It was a pretty tame day in the equity markets with minimal stock news. Starbucks created a negative event for Green Mountain Coffee Roasters (GMCR) when Howard Schultz sent a memo to employees that suggested SBUX would NOT be partnering with GMCR in the single serve coffee sector. There had been rumors Starbucks would partner with GMCR and the stock of Green Mountain had been moving up over the last two weeks. In the memo today Schultz commented on GMCR's expiring patents in 18 months and that successful businesses build on the goodwill of their faithful customers. He then said Starbucks would move into the single serve market in a "sea-change of innovation." That sounds like they are going head to head with GMCR and produce their own single serve product to debut once the GMCR patent expires in 18 months. Shares of GMCR dropped sharply losing -8%.

GMCR Chart

Apple was in the news again after the National Enquirer posted a picture of a frail Steve Jobs heading into a cancer treatment center. This is the same center that treated Patrick Swayze before his death. Obviously the source of the article is highly questionable but the picture appeared to be accurate. However, the Enquirer went one step further and asked two doctors to make comments on the pictures. Based on their analysis the doctors said the loss of muscle mass and posture suggested the cancer had returned and he only had a few weeks to live. The Enquirer went too far (if that is possible for them) to post a diagnosis of death from doctors looking at a picture of a man they have never met. Apple shares declined $5 on the news.

Rebutting this story could be an appearance by Steve at a tech event with President Obama on Thursday night. He is expected to attend along with John Chambers, CEO of Cisco, Eric Schmidt CEO of Google, Larry Ellison or Oracle and Facebook founder Mark Zuckerberg. If Jobs shows up looking hearty and healthy all those rumors will be put to rest. After all if he had only weeks to live and in such poor health why would he show up in front of his peers and advertise that fact? It will be interesting to see if he makes an appearance.

Apple Chart

The big news weighing on the markets today was the rising tensions in the Middle East. Protests escalated in Libya and 16 demonstrators were killed by police attempting to breakup the protests. Yemen also saw and increased level of protests demanding the president step down now instead of 2013 when his term expires. There were also protests in Iran but details were sketchy because of a press blackout.

The biggest event geopolitically was in Bahrain where the military was called in to remove demonstrators. Six demonstrators died. Bahrain is a postage stamp sized country consisting of 33 islands. The entire country is less than four times the size of Washington DC and has a population of only 738,000. The fate of Bahrain is of extreme importance to the U.S. because this is the home of the U.S. Navy's Fifth Fleet. Protection of the Straits of Hormuz is somewhat dependent on that base staying open. Bahrain has a Sunni ruler and Sunnis represent 20% of the population. The rest of the population is Shiite. It is the Shiite population that it protesting and that is the key. Saudi Arabia has the same split in population and a successful revolution in Bahrain could translate into problems in Saudi Arabia.

The uncertainty in the Middle East is weighing on markets but keeping crude prices high. The actual countries affected, Egypt, Tunisia, Yemen and Bahrain have very little oil production compared to countries like Saudi, Kuwait, Iran and Iraq. Oil prices are higher because of worries that this contagion could spread to those countries and eventually impact oil supplies.

U.S. WTI crude prices rebounded +1.50 to $86.50 on the geopolitical problems. The Brent contract declined slightly to $102.58 from yesterday's pause over $104. Next time you pull up to the gas pump be sure to thank the Middle East for your $3.15 gasoline.

U.S. WTI Crude Chart

Brent Crude Chart

The early morning economics and the news from overseas prompted another opening drop but the trend remains in place and investors bought the dip. It was the same story we have seen for weeks where bad news is ignored and the indexes push higher by days end.

The S&P closed at 1340 and well over the 100% rebound point from the March 2009 lows at 1333.59. That was supposed to be serious resistance but it came and went with little fanfare. The S&P has broken out to another new high and over long-term resistance. There is no magic pivot point for quite a ways until we reach 1375. Support is now that 100% rebound point at 1333. Amazing how these numbers are critical one day and insignificant a few hours later. That is the power of a bull market.

However, the gains still lack conviction. Volume was only 6.7 billion shares and every new high seems to be made on even lower volume. Declining volume was only 2.2 billion shares. Despite that low volume the number of new 52-week highs in equities continues to grow and came in at 864 today. The bullish sentiment may be getting stronger but the conviction by traders is still weak. This reluctant meltup is teasing the bears on a daily basis and teasing the bulls as well. The bears hope that every dip is the start of a big decline. Ironically the bulls are wishing the same thing but only so they can get a better entry point for longs. Both are being frustrated as each minor intraday dip is bought and neither can do anything about it but chase prices higher.

S&P Chart

The Dow easily moves over 12300 and broke out to another new high. There appears to be nothing to stop the big caps from continuing to forge new highs as long as there are no sudden news events that change the economic or geopolitical outlook.

Dow Chart

The Nasdaq is only 27 points away from closing at a ten year high. The next higher close was Jan 24th 2001 at 2859. This is a major accomplishment for the Nasdaq and also decent resistance. It is not that there is a significant technical challenge to 2859 but there a psychological one with that "ten year" label.

Current support is 2815 and I think back to last week when we could not bust through 2800. This is not the beginning of a bear market. If Apple had not been down $5 today the damage to the upside would have been stronger.

Nasdaq Chart

The Russell 2000 is only 21 points away from a new HISTORIC high. Not a two-year or a ten-year but a new historic high with a close over 855. If you need any confirmation we are in a bull market you need to look no further than the Russell.

However, that 855 level should be decent resistance. A break over that level could start a mad dash as reluctant bulls and bears throw caution to the wind and throw money at stocks.

Russell Chart - Monthly (825 close shown is monthly)

In summary the game plan should remain the same. Continue to buy the dips until something changes. Economics are starting to accelerate and with the crackdown on demonstrations in the Middle East there is not likely to be any additional regime changes.

Don't fight the Fed; buy the dips instead for a few more weeks. Once the market begins to worry about the disappearance of QE2 we will be selling the spikes but until then don't miss out on the party.

Jim Brown

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