Wednesday, July 7, 2010

Markets have their best day in 2 months

Encouraging data on US retail sales & increased hopes for Europe to solve debt problems brought out buyers in droves. Markets rose throughout the day, closing at the highs. Dow shot up 274 taking it back over 10K, advancers ahead of decliners 5-1 & NAZ jumped 65. Banks & energy led the way. Bulls for bank stocks will point to the Financial Index "holding" at its 185 lows (shown in the chart below).


Value191.24One-Year Chart for S&P 500 FINANCIALS INDEX (S5FINL:IND)
Change8.12 (4.4%)

The Alerian MLP Index had a great day (up more than 5), gaining 7 to almost 315 & approaching its 319 highs before the market collapsed in May. Charts for the last 2 months are shown to give a better idea of how these groups have performed during a rough time for the markets. The Dow Jones REIT Index shot up an amazing 9 to the 189s. Junk bond funds generally had only minimal gains. The VIX dropped 2½ to 27, a sign of easing market fears. Treasuries sold off, but not that badly. The yield on the 10-year Treasury bond rose 5 basis points to 2.98%, remaining in a low region.

Alerian MLP Index -- 2 months

Dow Jones REIT Index -- 2 months

VIX -- 2 months

10-Year Treasury Yld Index -- 2 months

Oil had another good day (following the stock markets) but is still in its 70-75 trading zone. Gold finally found a few buyers but needs more strength to get back over the important 1200 level. Gold has been struggling on reports that China would stop buying gold & that central banks swapped gold for cash. Traders have been selling gold in favor of stocks.

CLQ10.NYM..Crude Oil Aug 10..74.18 ..Up 2.20
GCN10.CMX..Gold Jul 10..1,198.60 ..Up 3.80

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Stress tests on European banks may need to mark down the value of Greek gov debt by 16% to pass stress tests. Regulators are working out how much detail to reveal about the health checks. The Committee of European Banking Supervisors (CEBS) was expected to outline its methodology for a stress test that simulates the impact of a severe economic shock, but that could be delayed until around Jul 23. Whether to apply a "haircut" on the value of debt in countries like Greece, Portugal & Spain is one of the sticking points facing regulators. Optimism about these tests has brought more confidence about Europe solving its debt problems & has seen the € rise to $1.26½ (off its lows under $1.20).

It's difficult to point to significant news driving today's rally other than the markets were greatly oversold & gold sellers have been putting their money in stocks. But difficulties dribble on. The fate of tax cuts, due to expire in 5 months, is uncertain & becoming an important overhang for stocks. Congress is trying to deal with millions whose extended unemployment benefits are ending. The biggest problem with extending benefits again is it adds to an already massive gov deficit. After today's big rally, Dow is still lumbering around its lows for the last 8 months even though it's back above 10K again. Optimism is running high on Q2 earnings, the first are due next week.

Dow Jones Industrials -- 2 months

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