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March 3, 2010

Bullish Proverb

Both stocks and precious metals seem to playing the ages-old game of climbing a proverb known as the wall of worry. Despite a 7% rally out of the February low for stocks and a nearly 9% rally for gold (and almost 18% for silver), markets are still taking baby steps higher. The last two sessions even witnessed late-day sell-offs, as if traders were concerned about overnight exposure. I'm not sure where the tipping point of this rally will be, but I'm confident that at some point, bears and tepid bulls will start chasing price higher.

s7p 500 daily chart

When this cyclical bull terminates, I expect it will go out with a frenzy of volume... volume representing retail traders chasing a move in the fear of missing more. If we are, indeed, in bullish mode, corrections should be shallow and should hold the 65DMA on a closing basis, so downside appears limited at this point. The dollar tends to agree:

dollar index

Apart from a possible back-test of the failed pivot at 80.5, the U.S. Dollar Index should now make for the 78.5 pivot or the 200-day moving average just below. Such action would be very bullish for both stocks and commodities. As a side note, I am reticent to use the word "bullish" with regard to rising commodity prices since they are rising for monetary reasons rather than economic ones. This type of inflation will do nothing but further weaken our country. So please interpret my use of "bullish" solely to mean higher prices sans any postive connotations. Honestly, I would rather be making money by holding productive companies in a healthy economy, but given the conditions we face, one must be defensive and take the inflation play.

Back to the markets... here are a few other observations:

bank stock index chart

I suspect a break above this pivot will be one of the factors getting the public to chase the market higher as it enters the terminal phase of this cyclical bull.

Nasdaq chart

Russell 2000 chart

gasoline price chart

How long do you think the weakest economy since the 1930s can withstand $4 gas at the pump?

All indications point toward higher commodity prices this spring, and stocks will likely participate. The action would be precious for our portfolios (I'm full of puns these days). It is the reaction from Congress I fear.


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