Summer Rally Lifts Stocks for Third Straight Session

Just a week ago, stocks appeared to have lost much of their appeal, as US economic data and problems in Europe prompted fears of a "double dip" (another recession) or slow growth for the United states and much of the developed world.

Apparently, not everybody got the memo, as this first week of the third quarter has traders snapping up stocks by the truckload. The major indices recorded their third straight day of gains, following seven sessions in negative territory. While concrete proof of better economic conditions have yet to be affirmed or even ascertained, traders have felt the need to dive headlong into stocks at a crucial juncture.

For chartists, one of many significant patterns developing right now is what's been termed the "death cross," wherein the 50-day moving average falls below the 200-day moving average. The last time this particular pattern occurred was at the very end of 2007, when (using the Dow Jones Industrials as a guide) the Dow failed to surpass the October, 2007 high of 14,164. Through the end of December, 2007, the Dow was trading in the low to mid-13,000s, but by the end of January the index had fallen to the low 12,000s range. Even though by June, the index had made its way back to 13,000, the 50-day MA remained below the 200-day, there was not enough commitment in the market to reverse the trend, and the subsequent crash in Autumn of 2008 finally dashed all of the bullish camp's hopes.

What is notable about the "death cross" is that it is not an insignificant event. As the market is normally an efficient discounting mechanism, the crossover of the two major moving averages correctly forecasts deteriorating economic conditions, though sharp rallies, bringing the averages back above the 50-day, and sometimes touching the 200-day, normally end in failure.

The key area of resistance at this juncture is two-fold, and that dichotomy bodes ill for the bulls. The first level is at the 200-day moving average, roughly at 10,300. A break above that level would be a boost for optimism, though the second level, at 11,200 - the height of the most recent rally and also the level at which the market broke down severely in 2008 - is more important. Failure to exceed the previous high can mean only one thing: stocks are overvalued and moving lower.

This entire panacea will likely take place over a lengthy time span of six to eight months before it is finally resolved, though there seems to be little doubt - from a technical point of view - that the bears will eventually feast upon overpriced securities, likely by November and almost surely by january 2011.

Not to put too much of a pessimistic tone on the delightful little three-day rally, but it's well-known that the averages never move in straight lines, sentiment can turn on a dime and there's no discernible difference between economic conditions today and those which prevailed for the prior eight weeks. Housing, unemployment and financial fears - not confined to just europen banks, but to US banks and the entire global financial system - will continue to pressure those on the long side of trades.

Chartists usually get it right, and while there are surely no guarantees, recent economic data suggests at least a slowdown in GDP growth from the first and second quarters of this year to the third and fourth. While individual names may report stellar earnings, the underlying data is signaling a tough time to grow profits and revenues.

Despite the glowing headline numbers, today's trade was a disaster in a number of ways. First, the galloping gain of the morning were nearly completely vaporized by noontime, and, second, most of the day's gains (80 points on the Dow) were achieved in the final hour. There's a good deal of buying going on, but there's surely no dearth of selling, either. The rub is that institutions may very well have been unloading stocks midday, forcing another bout of short-covering at the tail end of the session. It was a very sloppy-looking chart.

Dow 10,138.99, +120.71 (1.20%)
NASDAQ 2,175.40, +15.93 (0.74%)
S&P 500 1,070.25, +9.98 (0.94%)
NYSE Composite 6,755.81, +70.03 (1.05%)

Advancers dominated declining issues, 4658-1738 (nearly 3:1), and new highs surpassed new lows, 145-84, breaking a streak of seven straight days of wins for new lows. Volume was below par.

NASDAQ Volume 1,958,669,750
NYSE Volume 5,208,361,000

Oil gained again, now eraing most of the declines from the prior two weeks, higher by $1.37, to $75.44. It's doubtful that oil can or will break out of this $70-80 range any time soon, unless there's a serious disruption in production or demand falls off a cliff - unlikely during the busy summer months.

Metals were little changed, with gold dipping $2.80, to $1,195.80, and silver losing 13 cents, down to $17.85.

The most relevant stat for the day came prior to the open, when initial unemployment claims were estimated at 454,000, down from the previous week's total of 475,000. A good many analysts saw this as a positive, though the reality of the situation must be viewed in a larger, longer context. Using a simple round figure of 450,000 initial claims a week, that would extrapolate to over 23 million claims in a year, or a turnover of roughly 30 percent of the total workforce.

With jobs scarce, that kind of turnover is simply not supportable from available data, insinuating that the weekly claims numbers are very faulty and probably disguising an even-worse employment condition than many believe exists. The government's own non-farm payroll actually put unemployment at 9.5% in June, down from 9.8% in May, even though the number of jobs created was a negative. Clearly, the response was that the workforce had shrunk, as many longer-term unemployed entered the ranks of "discouraged," and thus, not counted.

It's a complete fallacy to believe that employment is in anything but a disastrous state of affairs and that the official numbers are masking the truth. The real unemployment rate, or U-6, which captures underemployed workers and those completely discouraged and without benefits, at 16.6%, another government statistic probably undervalued by 5-10%.

Of course, the employment condition is only part of the story, but a large part, as it also impacts retail sales and housing in major ways. Anyone who believes we're out of the woods just because the stock market rallies for a few days might just ask a few of their unemployed neighbors how they feel about things.