Jordan Kahn's  Instablog

The chart above shows the strong breakout in gold. This is actually the gold etf (GLD), but it tracks gold prices very closely. You can see the strong volume spike yesterday as gold broke out convincingly above recent resistance.

Gold has been strong in conjunction with the weak dollar, one of the primary factors in the recently rally. There is a lot of chatter about the weak dollar, and central banks around the globe trying to diversify their dollar holdings and boost gold reserves.  So should you be chasing gold prices higher?

Central banks are notoriously poor market timers, and I would caution against falling in love with gold just as it is breaking out to new record highs. We are long gold in our portfolios currently, but I will look to take some profits if prices continue to rise short-term. A strong bounce in the dollar could easily shake out a lot of the newly minted gold bulls, and spark a sharp pullback.

Outside of gold, the markets were lower in premarket trading, but have since climbed back into positive territory. The first few earnings reports from the likes of YUM, COST, and MON all came in ahead of estimates - a good sign. Earnings season kicks into high gear next week, and will likely become the new catalyst for stocks at the margin, taking the wheel from the dollar, which has been the primary focus lately.

Asian markets were higher overnight; the 10-year yield is slightly lower at 3.20%; and the VIX is -1.5% lower to 25.30.

long GLD

Economists missed the jobs estimates by a wide margin this morning. The nonfarm payrolls report showed the economy shed -263,000 jobs in September, far more than the consensus of -175k jobs.

This is a disappointing number for investors. We need to see the number of job losses continuing to decline. That plays into stronger consumer confidence, and strong personal spending, which is the biggest component in the GDP calculations (consumer spending accounts for nearly 70% of GDP).

On the flip side, I have said in the past that this recovery is not going to be smooth sailing. Rather, the economic data coming in will be lumpy at best. At times, it will look like the path to recovery is at our doorstep, while at other times it will appear we have taken a step back. I think today's jobs report falls into the latter category.

The news pushed the S&P 500 lower this morning, all the way down to its 50-day average near the 1020 level. It is the first test of the 50-day average since July. It also marks more than a -5% correction from its highs last week, and I am not in the camp who says we have to have a 10% correction here. So while there may be some additional downside, my guess is we have seen the worst of this decline already.

Bearish sentiment is already on the rise, quickly, as the put/call ratios have been very elevated the last few days. I would expect to see similar dislocations in the investor surveys. So my thesis is that the "stair-step" market is still alive, and I will look to use this pullback as another buying opportunity.

The dollar is moving lower now, pushing oil back to $70 and gold back above the $1000 level; the 10-year yield is hovering near 3.20% after a dip this morning all the way down to 3.10%; and the VIX is now down a touch after briefly topping the 29.50 level, an elevated level for this index.

Trading comment: Yesterday I added to a few stocks, including BIDU and GS. I aslo think STEC is very attractive at these levels, even thought the technicals are broken. In etf land, I've added a little to financials (XLF) and tech (XLK).

long BIDU, GS, STEC, XLF, XLK, VXX

The market was weak in early trading, although it is bouncing back toward positive territory as I write this. This morning's ADP Employment Report showed more job losses than expected (-298k vs. -250k consensus), but second quarter productivity was revised higher while unit labor costs were revised lower. The positive inflation implications didn't have much impact on trading.

I have taken a lot of flack for supporting the notion that housing has bottomed. To clarify, I don't think it is the type of bottom like you get in the stock market, where home price appreciation is right around the corner. Rather I think that the pace of declines in the housing market has peaked, that while prices are still soft, but that sales have certainly picked up and overall I think the worst is over.  This is more indicative of a bottom, not neccessarily a recovery - a slight but important distinction.

I first started talking about this after the NAR Metro Home Sales report. Recently, we got more good news in the form of the much stronger than expected existing home sales report. And today, we get a third supporting datapoint in the July new homes sales report.

New home sales rose +9.6% in July, vastly higher than the consensus of +1.6%. This equates to an annual rate of 433,000 units. Inventories of new homes fell -11.8% to 7.5 months. I'm sure the housing bears will never declare a bottom has been reached, but I think that is exactly how we'll look back at this period.

There was also a positive durable goods report this morning, which showed July orders rose +4.9% (vs. +3.0% consensus), which is the best reading in two years. June figures were revised upwards also.

That durable goods report wasn't enough to keep the market from selling off near the open. The strong new home sales report pulled stocks back into positive territory, but they have since weakened again and all of the major indexes are now back in the red.

My colleague Doug Kass at TheStreet.com did a great job of nailing the market bottom in March. Now he is back trying to make another bold call that the market has topped for the year. While anything is possible, I think the market will be higher than today's levels by year-end. But I wanted to pass this along nonetheless.

Asian markets were higher overnight, led by China; the dollar is higher, pressuring commodities; the 10-year yield is lower to 3.44%; and the VIX is only 0.6% higher to 25.08. I would think the VIX would be higher if this selloff is to have any teeth.

Trading comment: I have added a short S&P hedge (SDS) with a tight stop, as I do think the market is due for a pullback after this multi-day run. Yesterday I took some additional profits on our insurance etf (KIE) and added RIMM to our portfolios as well.

Lately, every time I have been looking for a pullback it has only lasted a few days. So we'll have to see if it's any different this time around. I still have considerable cash on the sidelines, so I am willing to wade back into getting more fully invested on the dips.

long KIE, RIMM, SDS

There isn't much in the way of market moving news this morning. Our markets are lower, mostly taking their cue from overseas markets, which sold off again overnight. Shanghai fell -4.3%, with Hong Kong and Japan lower as well.

We got some solid earnings reports from Hewlett-Packard and Deere, but they aren't having much effect on the market. That said, so far this pullback has again been rather mild. I'm not saying its over, but given how overbought the market had become, I'm sure the bears were expecting a sharper correction.

From my perch, I think it all comes down to sentiment. The market had a fairly significant correction in July, with the S&P 500 retreating 9% from its highs to lows. But sentiment became highly bearish in short order, and the market rebounded and experienced a strong relief rally.

Could the same thing happen again? I doubt it will occur in the same fashion, but first we need to see how the sentiment indicators shape up. Many of them have moved too far in the complacent camp, and if that complacency persists, then any correction could last longer.

Here is a look at a few of the indicators I monitor:

• Investor's Intelligence survey: The spread between the bulls and bears hit +28% recently. This is the highest level since January 2008. Note that in July the spread moved back to +0%, so this indicator bears watching.
• AAII: this survey of individual investors bounced around more, but it recently hit +18%, its highest reading since May 2008. In July, it was deep in negative territory (more bears than bulls) at -27%.
• Rydex Nova/Ursa: this ratio measures assets flowing into the bullish Rydex market timing funds vs. the bearish funds. It recently fell to .56 after rising to .95 in July (a higher reading means more assets flowing into the bearish funds)
• 10-day put/call ratio: this is an options indicator of bearish put buying vs. bullish call buying. It currently stands at .81, which shows a little complacency. In July, it rose to .97, which showed far more skepticism.

As the market pulls back more, I will be watching to see if these indicators show rising levels of pessimism among investors. If that happens, then I would expect the pullback to be of the shallow variety again. Many pundits are warning about the fact that September and October are historically the worst months for the stock market. But if the market pulls back ahead of those months, and everyone is already hunkered down in their fallout shelters, the expected result might not come to fruition.

This is why I say sentiment holds the key. As we move closer to Q4, I expect some of the economic data to begin to improve at the margin. Also, as we move closer to 2010, when the economic recovery is expected to really show up, the stock market should begin to reflect stronger growth and work higher. This is why I would view any potential pullback in the market as another good opportunity to add to stocks that I think will be well higher a year from now.

The National Association of Realtors (NAR) released its quarterly metropolitan home sales report this morning, and I found some bullish undertones in it.

While most people are focusing on the continued large year/year price drops, I have not heard anyone focusing on the fact that most cities showed sequential (qtr/qtr) price gains for the first time in roughly 2 years!

For the country as a whole, median sales prices rose +4% in Q2 vs. Q1 of this year. The median home price in the U.S. rose to $174,100 (which is still -15.6% below year-ago levels). Here are some of the largest quarterly increases for some notable cities:

• San Francisco (+18%), Boston (+16%), Washington D.C. (+14%), Dallas (+11%), and Chicago (+10%).
• Additionally, some of the cities that have been most cited for outsized speculation in recent years have also shown renewed stabilization: San Diego (+5%), Los Angeles (+3%), New York (+2%), Phoenix (+1%) and Miami (+1%).

We know that one datapoint does not make a trend, but I also know that these quarterly sales prices have been dropping every quarter since mid-2007. So this bounce is notable, and from here we'll just have to see if the trend is sustainable.

Hopefully home prices have now fallen sufficiently from their prior highs, up to 50% in many cities, that buyers feel better about stepping up. The low mortgage rates and first-time buyer tax credits should continue to bolster demand as well.

Here is a look at some of the year/year price declines in some of those notable cities I mentioned:

• Boston: -8.3%
• Chicago: -20.7%
• Dallas: -0.2%
• Los Angeles: -25.7%
• New York: -16.3%
• Phoenix: -36.1%
• San Diego: -20.2%
• San Francisco: -33.8%
• Washington D.C.: -14.0%

Two other notable cities that are still seeing declines are Ft. Myers (-52.8%) and Las Vegas (-39.7%).

Overall, home prices have fallen by record amounts in nearly all cities. For the first time in roughly two years, we are seeing a sequential uptick in home prices. With the home affordability index near multi-decade highs, the odds are increasing that this single datapoint of rising home prices could further cement the notion that housing has bottomed, and that would have positive implications for home prices, consumer confidence, personal spending, as well as the overall economy and stock market.