The Market Rally Train Is Leaving the Station

 |  Includes: BA, CF, CVX, DD, DIA, MRK, QQQ, SPY, XOM
by: Chris Damas

When the Stock Market goes UP on Lousy Economic News, it means the rally train is leaving the station.No one promises it won't be a bumpy ride, but if your asset allocation is normally pointed towards “equities”, then it would be best to buy some broad-based U.S. and Canadian equity funds, and you shouldn’t dally.

1) June U.S. New Home sales figures were mildly poorer than expected, in spite of the “24% increase” headline. The reported SAAR (seasonally adjusted annual rate) of 330,000 homes sold, was 20K better than expected but May was revised down 33K to 267,000. Therefore the June sales were net 13K less than expectations and May was a post-first-home-buyer-tax-credit disaster.

But the U.S. market bellwether rallied up 50 points as people are generally numb to more bad housing news (traders now need very bad housing and consumer numbers to sell stocks). September Lumber futures rallied up $4 to $213, indicating the CME lumber contract could also be oversold. The DJIA (at 10,474) is now above its recent July 13 high of 10,408 by 70 points and the S&P 500 at 1,109 is nearing its own 200 day M.A.

Talk about indices that just won’t quit trying to go higher! Imagine the short-covering if we blow through these levels for the third time since May.

2) The June Chicago Fed National Activity Index came in at -0.63 for June versus up 0.31 points for May. Three out of four broad components were lower (Production-related, Employment-Related, and Consumption and Housing-related). But the Industrial Production related component was slightly higher – that’s one theme in this rally – better U.S. domestic industrial production. Note this is a slightly dated indicator.

3) The July Texas Manufacturing Outlook Survey, a key indicator of state manufacturing conditions, rose from minus 2 to plus 5, suggesting slight expansion. Most of the components were mildly negative.

The DJIA was up Monday, in spite of these ostensibly worrisome indicators. Why is this discussion of apparent market irrationality important? It’s saying the market has already discounted the slow down in U.S. economic activity.

We’ve seen rallies in some of our favorite stocks – particularly in fertilizer and industrial nitrogen, with CF Industries hitting a new recent high of $80. This week we expect earnings from five DJIA components: Dupont (NYSE:DD), Boeing (NYSE:BA), ExxonMobil (NYSE:XOM), Chevron (NYSE:CVX) and Merck (NYSE:MRK). Dupont leads off Tuesday, and it should boost the market with a bullish guidance for the chemicals and agriculture sectors.

I’ve heard a lot lately about how the bull rally is not confirmed by (higher) volume and that volumes on the upside are anemic whereas downdrafts bring in more sellers. Normally a devout follower of price and volume (I'm a past student of Joe Granville's material), I would suggest that the Summer is cause to put this indicator on hold, as many participants are on holiday. (Speaking of which, we’ll be out of the office from August 15-22).

Disclosure: Long US and Canadian ETF's, REIT's, small-cap and commodity stocks