Big Sucker Rally on Oil Price Drop, Wells Fargo Earnings

Well, since Fannie Mae and Freddie Mac didn't fall over and die - though they will need much help from the Federal Reserve and the US Treasury to stay afloat - and the price of oil dropped for the second straight day, US equity investors got the relief rally many of us were looking for last week.

Also contributing to the general euphoria was second quarter earnings from Wells Fargo bank, which actually beat estimates and was rewarded with a 32% gain. The rest of the financial sector followed the lead and the market followed and piled on the gains.

Naturally, while stocks were soaring from legitimate investment purchases, there had to be more than a fair share of short covering which boosted stocks even more. Sentiment, which has been decidedly negative in recent days and weeks, does not change overnight.

There are still many unanswered questions and hurdles for the US economy to clear.

The horrific credit conditions in the USA have not simply vanished because the Fed and Treasury averted a collapse of two major institutions. In case anyone cares, interest rates - especially those covering residential mortgages - have been rising and banks are still loathe to lend to anyone but the most stable, less risky companies and buyers.

Meanwhile, home prices are still falling, and, as the CPI figures released prior to the market's opening this morning showed, inflation is still raging right along. CPI for June jumped 1.1%, with core CPI up 0.3%. Those are hardly encouraging figures, though they mask the real problem, which is, oddly enough, deflation.

If the US economy continues to sputter and stall and credit conditions do not improve, very simply, there is going to be less spending, and according to the most rudimentary economics rules, less money chasing the same amount of goods equals lower prices.

Now, the rest of the world may not be in the same dire straits as the USA, but they certainly are feeling a bit pinched in most parts of the planet. Since lower prices usually result in companies' turning lower profits, this scenario is not at all good for stocks.

That's the next position we'll be in. First, housing falls, then stocks fall (where we are now), then, as the fundamental security of and confidence in the currency and the financial institutions begins to erode (also current), consumers pull back. What's prevented this from happening were those billions of dollars in checks sent to millions of Americans. They've been sent, and spent, and now comes the real test, as the US economy tries to muddle through without artificial stimulus.

I'm betting that conditions will worsen before they improve, regardless of what will likely be a follow-through rally the remainder of this week on any positive earnings news.

Dow 11,239.28 +276.74; NASDAQ 2,284.85 +69.14; S&P 500 1,245.36 +30.45; NYSE Composite 8,332.82 +175.02

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Don't get me wrong. It's nice to see plus signs in front of numbers for a change. I just don't think we're anywhere close to being out of the woods. We are getting closer to a bottom, however, and while I may not paint the rosiest of pictures, mine is at least realistic and based upon some experience from the past 30+ years.

I do believe that the final capitulative move to the bottom will occur this year, and that the US will be in recovery while other nations will be just beginning their downturns.

On the day, internals were a far cry from the dismal figures of the past month. Advancing issues outperformed decliners handily, 4877-1529, though new lows were still well ahead of new highs, 615-73. It's important to note that there were about 1000 fewer new lows today than yesterday. Bottom fishing, anyone?

Oil played a pivotal role in the market's one-day success, pricing lower by $4.05, closing at $135.32. As expected, the metals confirmed, with gold losing $16.00, to $962.70, and silver falling 21 cents to $18.81.

The good news is that everything, stocks, gold, gas, food, clothes, video games, rents and homes is going to be less expensive. The bad news is that it will be that way because there are so many people unemployed with no money to buy anything.

The fallout from the recession we're in (and we are in a recession, despite all the "official" measurements out there) haven't been fully manifested throughout the economy. Those include lowered corporate earnings and layoffs, which are certain to follow.

So, the lesson for today is simple: Chew before you swallow.

NYSE Volume 1,731,048,000
NASDAQ Volume 2,466,144,000