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Stocks End Mix as Commodities Move Lower

|Includes: DIA, FAS, FAZ, IWM, PowerShares QQQ Trust ETF (QQQ), SPY

Volume dried up after Friday’s disastrous close, but the market was unable to hold its early morning gains. The market did not get a dose of economic data to sway the market in either direction. Pundits appeared to be more worried about what Greece’s potential, inevitable default would mean for the market. Bill Gross even weighed in telling the market the United States was worse off than Greece. Stocks did sell off during the midday but were able to bounce back, but another lackluster close did not offer any hope for a potential upcoming rally. Volume ran much lower throughout the day, it did pick up when selling began to accelerate, but failed to continue to accelerate when the market came off its lows. Just another sign the market is unhealthy, but on the bright side the S&P 500 did begin day one of an attempted rally.

There is potential for a rally to occur, the market has closed lower for 6 straight weeks and is well into oversold territory. It would not come as a surprise to us we wake up one morning with a big short-squeeze. However, we do expect any rally will ultimately fail and not turn into a new bull run like we saw on September 1st 2010. Seasonality wise, we are entering into the summer months where it can get quite tough for stocks. It is possible we do see the market have a rally lasting from 2-4 weeks and we’ll certainly get on board, but we aren’t looking for any sustain rally. A sustained rally will need to have the market correction significantly over a period last longer than 3 months. Do not believe this bottom we put in today is the absolute bottom.

We have plenty to worry about in the United States: Big banks running the country, unwise regulation, and government trying to “fix” issues. While some call for more regulation or not any at all are missing the point. The economy needs guard rails to operate. Big banks were levered more than 30 to 1 on their balance sheet for much of the last decade. We see where that got us, but unfortunately rather than solving leverage in the system government decides to regulate other areas. The problem was overuse of leverage in the financial system. Folks leveraging themselves 100 to 1! We need to fix the use of leverage and our problems, while not totally solved will solve the vast majority of issues. Despite what we may fear, a subtle shift from policy makers may pave the road for a new bull market. Until then, the market is front running headlines of a weakening economy.

Commodities took a dip today as crude oil printed a $96 handle at its lows. Perhaps the end of QE2 has traders worried, but the reasoning does not matter. Price action is indicating prices are headed lower for the basket of commodities (measured by the CRB index). More importantly, the public will certainly like to see crude oil continue to fall further.