Markets Shoot Higher in Spite of Rate Rise

[Excerpted from Bill Cara's Daily Report]

Quite a rocket ship higher Monday, as the late rally Friday caught shorts off guard, and performance anxiety shoved sidelined money into the fray, a little birdie whispering to under-invested fund managers; “the surest way to get fired is to miss a big upside move.”

Throwing caution to the wind Monday, buyers lifted offers, ignoring the dramatic rise in US interest rates. In our view, 'green shoots' are going to turn into brown outs if ten-year yields breach +4%, where debt-strapped consumers burdened by the escalating cost of living expenses have less disposable income to purchase discretionary items.

Bonds experienced another selling squall (TLT –3.26%), oil strengthened (USO +2.28%), and natural gas exploded upward (UNG +8.56%). Tighter, more expensive credit and increased heating and transportation costs will suppress any economic recovery. Hope does not pay the bills, money does; implicit and explicit tax increases dampen spending, not an elixir for a floundering economy.

Equities were bid from the opening bell (S&P +2.58%) with retailers (XRT +5.86%) and semiconductors (SMH +5.02%) pacing the advance, normally the sectors Bulls want leading the charge. Cornered Bears are feeling the heat, licking their wounds after the persistent 3-month rally, a steady progression of higher highs and lows off the March bottom.

Chasing performance, however, is not an effective long-term trading strategy. The end result is predictable after periods of reacting to market action resulting in higher entry costs, increased commission costs, ultimately decreasing returns over time.

Clearly we wish we had been more aggressive initiating long positions after the S&P broke out over resistance at 875; however, hindsight is always 20/20. Sometimes our opponent draws to an inside straight, while odds are heavily stacked against the occurrence.

Our objective is maximizing risk adjusted rate of return (meaning upside relative performance may lag), conservatively compounding capital over time. The mathematics are heavily stacked against anyone trying to rebound from a sizable loss, a fact many of us are too painfully aware of after last year’s 40% drubbing.

The S&P tagged and closed above its 200-day moving average for the first time since December 2007, and also exceeded the January 2009 high for the first time. The .382 retracement from the 1576 high to the 666 low is approximately 1013, slightly above the November 2008 high of 1007. Those levels should be formable barriers of resistance, slightly above Monday’s close of 942.87.

As the world shuns US bonds and the US dollar, and geopolitical tensions are sharply rising, we prefer to wait for lower prices before committing risk capital. The temptation to party hardy is unavoidable as stocks gallop higher. Avoid the urge to splurge, declining the last drink, or at least limiting losses by having a designated driver.

Last call?

Comments

[chirs$wallst:]

may the dow go to 20k and we not lose our souls in the process..

good read thank you..

Jun 02 10:57 AM

[Mistrofan:]

I still think we will retest the lows goind to al least 8000 on the Dow.

Jun 02 04:46 PM