Morning Briefing: Testing the Highs

One of the themes I touched upon several times yesterday was the resilience of the stock market in the face of themes that would normally be bearish for equities: falling commodities and the drop in share prices in China. When markets fail to do what they normally do, that is often an excellent sentiment tell. Underlying demand for stocks has been sufficiently high that even normally bearish developments could not push us below the overnight lows yesterday.

That has emboldened the bulls, and this morning before the open we're looking at a healthy rally. Those intermarket themes are once again in gear, with stocks higher overseas, U.S. dollar weakness vs. euro, and rises in commodities and Treasury rates. As we can see from the chart above, we're now testing the bull highs, having traversed the multiday range overnight.

Whenever we see an early strong rise following several days of consolidation, we have to be alert to the possibility of a breakout and an upside trend day. I will be tracking the market via blog and Twitter updates (follow here) to see if such a scenario materializes. Should we prove unable to sustain such a breakout move, we could develop an interesting move back into the multiday range. Either way, there should be some trading opportunity here.

Comments

[Dr. O]

I noticed it too this week: overbought, rising dollar, falling oil, sharp pullback in China, yet, US and European stocks holding their ground. Yesterdays bond auction was a dog, too. Maybe money flows from bonds to stocks?

2009 Jul 30 09:05 AM

[Mad Hedge Fund Trader]

Go ahead and drink the Kool-Aid. I thought PIMCO co-CEO Mohamed El-Erian hit the nail on the head when he said that the July stock market rally was nothing more than a sugar high. Skyrocketing unemployment does not create new demand. We are going nowhere without a real housing recovery which is impossible with gun shy lenders. What little improvement we are seeing in the economy stems from unsustainable government spending. If you think the last stimulus package was tough to get through congress, wait until the next one. With three quarters of Q2 earnings out now, it is clear that company managements panicked and shed staff like a fur coat in a New York summer. This produced a string of top line disappointments and bottom line surprises. Companies can’t continue this, unless they want to shrink themselves out of existence. They are gaining weight by eating their seed corn. I think that if you want to go long here you are risking 10-15% to make 2-4%. It doesn’t look like a good risk/reward ratio to me. I prefer the inverse. There’s no law that says you have to trade every day of the year, despite what the brokers say. Better to keep your powder dry and watch the long players inevitably crash and burn.

2009 Jul 30 12:42 PM

[Benito Camela]

The market is surprisingly drifting slightly lower which opens the posibility of a key reversal day. The conditions are set for such price actions given still deteriorating fundamentals and overbought conditions.

Stay tuned and flat waiting to short this madness.

2009 Jul 30 02:55 PM

[Larry House]

I don't think today will qualify as a "break out." The slide late in the session is not positive. It is late summer; spring is not bustin' out all over. We are due a significant correction. Don't venture into the markets withou it.

2009 Jul 30 05:06 PM

[Roger Knights]

Yesterday SPY closed at its opening level, which was also the low for the day, forming a “gravestone doji” candlestick preceded by a gap. (Toppish.)

2009 Jul 31 09:13 AM