Explain This Rally!

The market gods are smiling this week. How do you explain it? We were teetering at 880-900; everyone (including your author) believed we would drop to 820-840 before a meaningful advance would occur.

Low summer volume could have kept a lid on a price recovery, forcing us into a slow and low channel for a couple of months. The danger then became, “What if the buyers throw up their hands and go home for the summer?” My fear was a lack of buyers and we could see a plunge to levels not seen in years.

Instead, earnings expectations are so low that most companies are beating the estimates. Excitement has infected even the most bearish investor. Some of the upward pressure is no doubt the result of short sellers having to cover positions. This is like rocket fuel to a rally. In two weeks, we are up 11% on the S&P 500.

One respected editor that I read Friday morning predicted 1200 on the S&P 500 in this rally. Two weeks ago, he was loading his portfolio with shorts and Ultra short ETFs. The market has a way of humbling anyone that tries to predict Mr. Market.

Traders must learn to change their perception and position quickly when presented with a ticker that is destroying their positions. Pride and the desire to prove past decisions correct can be your worst enemy. I think we are cleared to 1000 on the S&P.

The Energy Information Agency (EIA) tracks petroleum inventories in the U.S. We pay particular attention to the crude oil numbers, as I believe we will be paying more at the gas pump sooner rather than later.

This week’s EIA report showed another reduction in the crude oil inventory of 1.8 million barrels. This is the twelfth week of declining inventories, interrupted by one small up week in June. Crude has rebounded this week along with the general market.

When the market was looking lower on concerns that the economy was not recovering, this transferred to lowered expectations for energy needs, thus lower prices for energy. Optimism in the equities market has buoyed the hope that the economy may recover sooner and demand will increase.

Below is the chart showing present crude oil inventory in the U.S. plotted over last year’s levels. The lines are getting closer, when they cross the price of crude will never look back. September to November should reflect a different dynamic on crude oil pricing.

I have warned our subscribers we need to watch carefully for the crude oil that was bought on the spot market last spring and resold on the futures contracts. This could lead to a short-term glut that OPEC’s reduced exports will not control. I hear rumors that some of this oil may come on the market in August. I still maintain crude oil is the trade of the year, but there may be some hiccups along the way.

Disclosure: No positions

Comments

[Roger Knights:]

Maybe a dollar devaluation is suspected by market movers.

Jul 26 06:06 AM

[O-B-WON:]

Explain This Rally! ....??

Have you ever watched the wizzard of Oz..??

Ever wondered where all the TARP money went...???

Jul 26 10:51 AM

[Teutonic Kn...:]

To John Dalt - - -

To answer your call your an explanation I have two thoughts.

1) It is some sort of a miracle. As the distinguished American theologian Rev. Dr. Charles Swindoll said in one of his best-selling books "...in my 30-year ministry I have only witnessed three such unexplained instances (miracles)..." Sometimes miracles do happen. The present rally is unexplainable, and so it might be attributable to a miracle, in my humble opinion.

2) It is a set-up by the insiders and those "in the know". In the pioneering days, the Indians set up traps to ambush the incoming marching calvary.

Other than these two, I couldn't think of others.

Thanks for a good article.
TK

Jul 26 11:44 AM

[untrusting ...:]

Exactly. If one wonders why the market contines to rise from the March lows with virtually no corrections, then read a few of Tyler Durnen's articles about high frequency trading and program trading.
Estimates place Goldman Sachs and about 2% of HFT traders controlling about 50-70% of total market volumes. We have observed on many occassions since March the so-called "stick saves", usually late in the trading day whereby the market was trending down (sometimes dramatically), and then like magic late day massive trades appeared and caused almost "parabolic" shifts from a downtrend to an uptrend. It should be obvious that if a handful of computer generated large algo traders can dictate hugh trading volumes, that such traders can move the market wherever they choose to move it. And they have... virtually straight up. This is in contrast to many many fundamental and historical metrics which indicate that the market is probably significantly overvalued at this point, and thus should be correcting downward....but it is not. Thus one can only conclude that the market will continue to be pushed upward for as long as GS and the HFT choose to "manipulate it" in that direction. Who knows, it might go to S&P 1,000, 1,200, 1,500, 2,000 or whatever... that seems to be dependent on what makes GS and the HFT's the most amount of profit. But the collarary is ... at some point it will become much more profitable for GS and the HFT to have dumped all their stocks at significantly higher prices. At that point, one would expect them to take hugh short postions and use control of trading volumes to generate significant downward moves in the market as well. Who knows when that may happen .... but it will happen when the profit incentive for GS and the HFT indicates that is the most profitable direction for them to move the market.



On Jul 26 10:51 AM O-B-WON wrote:

> Explain This Rally! ....??
>
> Have you ever watched the wizzard of Oz..??
>
> Ever wondered where all the TARP money went...???

Jul 26 02:19 PM

[SeekingTruth:]

Basically agree with "untrusting" comments above.
Too much market power in the hands of a few has made the markets more dangerous than milking rattlesnakes.

Jul 26 04:51 PM

[jerrydd:]

Speculators!!

Why would refiners buy crude when the have too much product already with no demand?

Jul 26 05:47 PM

[Market Holiday:]

Goldman is a primary dealer. There are $250 billion in Treasuries to be sold this week. Guess who is the buyer of last resort? The primary dealers. Where will they get the money? Will they need to liquidate their equity positions to buy Treasuries? Is this why they ramped the markets so high? Time will tell.

Jul 26 06:46 PM

[Kimball Corson:]

The classic dictum that the market tends to look six months ahead is about right here and in line with Roubini's and other's forecasts that the recession will have run its course by then and we will start to turn the corner, subject, of course, to several caveats.

Jul 26 08:32 PM

[OilFinder:]

Must read:
www.theoildrum.com/nod...

Jul 26 10:41 PM

[OilFinder:]

BTW, before crowing about the impending return of crude oil stocks to the upper bound of their 5-year averages, you need to also look at the impending overshoot of gasoline and distillate (diesel and heating oil) stocks *over* their 5-year averages. After all, the purpose of crude oil is not to have crude oil in and of itself - the purpose of crude oil is to have it so you can refine it into gasoline, diesel, heating oil and other things.

Gasoline stocks:
tonto.eia.doe.gov/oog/...

Distillate stocks:
tonto.eia.doe.gov/oog/...

It wouldn't matter much if crude oil stocks were at some bare minimum level as long as gasoline and diesel stocks were overflowing: With gasoline and diesel stocks overflowing, you wouldn't *need* large crude oil stocks to keep supplies to consumers adequate. End users consume gasoline and diesel, they don't consume crude oil.

Jul 26 10:48 PM

[sickofthehype:]

Harry Schultz says the US government has instructed our embassies around the globe to convert their US dollars for local currencies and to keep enough on hand for a year's worth of expenses.

Dollar devaluation? Um. Yep. Big time...

Jul 27 12:07 AM

[johnbee:]

Its all very simple. Are consumers still spending money and if so at what rate are they spending it compared to a year ago or six months ago? If they are spending a lot less the more this boom is a farce. Don't rely on Government figures.

Just ask around in your local stores. It's possible that people are spending ahead of what they believe will be rampant inflation and so to make best use of any money to buy consumer products before prices move against them. Does this apply to shares? Maybe - if fund managers feel they may miss the boat they will jump on the bandwagon too, but the figures show peoples' savings are up massively so where is the monet coming from? One day someone will need pay for the excesses of the past and it will be in higher taxes or inflation and most likely both.

Jul 27 07:32 AM

[TradingHelp...:]

The rally, and current prices, needs to be put in perspective:

1. March's lows were over sold.
2. The fiscal and monetary stimulus has been enormous. A lot of liquidity is washing around and needs a home.
3. There is a back-log of retail money that has been sitting on the sidelines for the last 9 months. The economic recovery was by no means certain back in March, April and a lot of cautious investors sat that rally out.
4. Earnings are beating expectations.
5. Global growth is out-pacing the US, so whilst a lot of US consumers are still depressed, US firms with global exposure are already benefiting.

I am sure you guys can add more reasons. Anyway, it's happening. Let's see where we go.

Jul 27 10:13 AM