Tuesday, April 24, 2007

Dow Resumes Rally After One Day Hiatus

US equities mostly returned to the plus side after taking a day off on Monday. The Dow nearly erased yesterday's decline and closed within 47 points of 13,000, though the NYSE Composite and S&P 500 experienced marginal declines.

Dow 12,953.94 +34.54; NASDAQ 2,524.54 +0.87; S&P 500 1,480.41 -0.52; NYSE Composite 9,648.50 -12.06

The fuel for the rally (pun intended) was a dip in the price of crude, which slipped $1.31 to close at $64.58. While the relief was welcome, it was hardly enough to move gas prices or the pessimism felt by most drivers in the US who are paying close to - and in some cases, such as on the West coast, more than - $3.00 per gallon for regular unleaded.

In a related story, British Petroleum (BP) reported first quarter profits 17% lower than in the same period a year ago. The British concern saw 1Q profits of $4.66 billion, or 1.35 per share. BP made $5.62 billion or 1.54 per share in the first quarter of 2006. There was nary a tear shed for the still-exceedingly profitable company.

Other commodities were effected as well, with gold and silver taking tumbles. Gold lost $6.50 while silver declined 27 cents. The metals have stymied investors with more than a year of rangebound trading. Both recently closed near benchmarks but failed to sustain the momentum and have pulled back considerably.

Declining issues once again surpassed advancers by a 5-4 margin, and there was a slight shift in the new high - new low ratio. A total of 373 issues recorded new highs while 97 (the most in more than a week) companies set new low marks. While the high-low mantra may be more tail wagging the dog than vice versa, the indicator could be signaling that the recent run-up in stocks has lost momentum and another correction mechanism is about to be put into play.

Stocks are, as it is, near record levels and the sustainability of high share prices is still in doubt in some circles. While the indices may not immediately react, especially in the middle of a pretty good earnings season, but within weeks (and possibly coinciding with the Fed meeting of May 9) there could be a pullback of some consequence.

Most of the movement will be a function of sentiment rather than fundamentals, however, as the market has shown great resiliency in the face of some troubling trends, most notably in the housing sector, which continues to suffer.

According to CNN.com, Sales of existing homes fell 8.4% to an annual rate of 6.12 million in March from February's 6.68 million rate, the National Association of Realtors said. It was the biggest one-month drop since January 1989.

Lower prices for homes may be a problem for sellers, but it has to be good news for buyers, though there aren't many out there. With banks tightening their qualifications, fewer Americans can afford to buy a home today than last year. The other side of the equation is that of forced selling at a price lower than one paid in the previous six boom years.

The entirety of the housing and finance sector may be somewhat of a conundrum for the Fed, alternatively weighing higher energy and food prices (inflation) with lower base housing costs (deflation). There may still be some pressure for the Fed to ease rates in order to spur the housing industry, though that kind of thinking is more wishful than practical.

Bernanke and friends will probably take the easy route of holding the course and keeping rates unchanged at the next meeting as hiking rates could send stocks into a tailspin. Of course, there are many who contend that the Fed is in denial over inflationary pressure and that a short series of rate hikes would be the best medicine.

In the meantime, corporate profits continue to pour in mostly on the positive side providing plenty of rationale for continuation of the rally.

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