March Rally Hitting the Wall - Commodities Getting Killed

This morning, stock markets are down in Asia and Europe. And Futures show a likely decline in the U.S.

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What’s happening? I think we are seeing the March rally hitting the wall as the technical recovery everyone is anticipating looks to come later and to be less robust. As a result, commodities are selling off horribly. Crude has traded under $65 and is down over 3%.

For me, Alcoa’s (AA) Wednesday report will give a good sign of how robust the economy is as basic material stocks should do well in an upturn. In a post in late May Consumers ‘do believe in the green shoot story’, I indicated that June and early July would be key for this overbought market.

Let’s remember that confidence does not translate into consumption, especially as most of the uptick here was in consumer expectations. Nevertheless, this has grabbed the market’s attention and U.S. stocks are up well over 2% as I write this. If you were wondering whether the powerful market rally from March has legs, this should come as proof that it does. The S&P 500 is now above its 20-day average trendline again.

I should caution that an uptick in expectations of this magnitude has a dark side. If the economic data disappoint in June, we could see a sharp selloff. That makes the June data and the early July earnings reports very crucial data points.

And I still believe this is true. The June economic data was not really as good as market experts expected and the market has sold off as a result. The employment data last week was truly dreadful. If we get poor earnings here in July, this bear market rally is going to get cut down to size.

Key sectors to watch are financials and basic materials.

Comments

[Larry House:]

Last week's employment data revealed that things have not stopped getting worse. This raises the whole issue of what is next. Prophets of doom (who may be right) have a more receptive audience once again. This is a good time to step aside and let things develop. I see no conviction on short or long at the moment.

Jul 06 10:48 AM

[tobi:]

Wonderul market to do day to day plays. After the green closing in the US there likely will be a rebound in the Dax tomorrow for which I placed some bets this afternoon. But if I were to keep that position into wednesday I could not sleep a second, the market flips in seconds. The fact that we closed lightly green today (except nsdq) shows to me that the market is still responding to the headline sentiment of news, the "beat expectations", while the number itself is still awful. There is yet no panic that sells anything which could be seen in that after diving after the data the index slowly climbed up into the close.

Jul 06 06:59 PM