Stocks Continue to Pop on Production; Gold Soars

There was no slowing down the upside freight train as the major indices posted their 8th gain in the past 9 sessions and third straight winner at mid-week.

All sectors were positive, led by conglomerates, financials, basic materials and capital goods. Economic news included improved industrial production, up 0.8% in August, with capacity utilization gaining to 69.6% from a revised July figure of 69.0. CPI was benign, up 0.4%, with the core number up 0.1. Continuing a string of positive economic data, investors clambered back into the markets for more of the financial feast currently unfolding.

That this rally has not only legs, but now, euphemistically, wings, and is soaring, is remarkable considering where we were just a year ago, on the brink of global financial collapse. Through whatever means, the Fed and Treasury, working alongside central banks from countries around the globe, managed to avert severity and bring markets back to functional, realistic levels. How much further economic recovery can bring the market at this juncture is still a bit problematic and stressing, though the general consensus has now shifted to extreme positivism.

At some point, the market will balk and give back some share of profits, but timing that event is a foolhardy endeavor. Those who blanch at the first signs of weakness are likely to leave money on the table as any downturn will probably be short-lived and small. While some are calling this a stock-pickers market it appears to be anything but, as shares of just about anything have participated in this rally. Companies with clean balance sheets, strong management and stable product or service lines have fared the best. Companies are once again executing on their business plans with the worst fears behind them. Any money that has not participated as of yet has missed some of the most substantial gains though there are surely more to come.

The absence of any competition for stocks is also fueling the rally. So long as the Fed keeps rates at zero, this kind of activity in markets is to be expected. Money must go somewhere and the best returns are currently in equities.

Dow 9,791.71, +108.30 (1.12%)
NASDAQ 2,133.15, +30.51 (1.45%)
S&P 500 1,068.76, +16.13 (1.53%)
NYSE Composite 7,038.14, +121.07 (1.75%)

Simple indicators confirmed the headline numbers from the averages. Gainers beat losers by the widest margin in weeks, 5009-1499, while new highs ramped up dramatically, to another multi-year daily high of 586. There were 97 new lows. Those high-low numbers should begin to become even more dramatic, as stocks retrace the collapse of last year. This trend has completely reversed, signifying a new, healthy, bull market. Volume on the day was also at elevated levels. Stocks are close to overheating, though nobody will sound an alarm when they do. The risk of another tumultuous collapse has been all but washed out. Confidence is returning in a very big way.

NYSE Volume 1,581,164,000
NASDAQ Volume 2,738,888,000

Commodities also joined in the fun. Oil kicked up another $1.58 at $72.51, but the metals were the real story, with gold gaining $13.90, to $1,020.20, and silver up another 43 cents, to $17.43. Gold is once again being viewed as a solid hedge against the declining US currency and all the government deficits and guarantees of financial institutions that have fueled the comeback. Gold could easily top $1200 in coming months as there is still a good deal of work to be done on the overall global economy. Even eventual dollar stability should not be able to stop the run in gold and silver through the next 12-18 months.

This rally train left the station long ago, and it's running at nearly full speed. Options players have also enjoyed a heyday, with expiration on Friday. With that in mind, a slight pullback for profit-taking would not be surprising, though, honestly, in this environment, it may only last a manner of minutes.

Double Top Breakout for Stocks; Silver Tops $17

The markets continued to tack on gains Monday and Tuesday, confirming a double top breakout on the latter, promising more gains straight ahead. Tuesday's trade was touch-and-go early on, as the market digested solid August retail sales figures (up 2.7%, +1.1 ex-autos) and an uptick in the Producer's Price Index (PPI), which was up a solid 1.7% (+0.2% core). What gave investor's caution was Best Buy's (BBY) quarterly report, in which the nation's largest electronics retailer missed earnings estimates - 0.37 actual vs. 0.42 estimate - but raised guidance for the year.

Expecting much more from the retailer, especially since Best Buy was poised to benefit greatly from the demise of Circuit City, which went bankrupt and closed all its stores earlier this year, the stock sold off, losing 2.09, to $38.32, a dip of more than 5%. The overall market viewed this as another sign that the consumer is not yet ready to open the wallet for discretionary purchases such as LCD TVs, game consoles and other electronic and high-ticket items.

Shortly after 10:00 am, during a question-and-answer period, Fed Chairman Ben Bernanke let it slip that the recession was "probably over" which gave everyone a small boost of confidence. Markets really didn't begin to take off until after President Barack Obama's first speech of the day, which ended about 11:30 am. It was as though traders were waiting to see if eithre Bernanke or Obama would drop a verbal bomb. When they didn't, it was off to the races in a broad-based strong rally.

Dow 9,683.41, +56.61 (0.59%)
NASDAQ 2,102.64, +10.86 (0.52%)
S&P 500 1,052.63, +3.29 (0.31%)
NYSE Composite 6,917.07, +37.08 (0.54%)

Advancing issues outpaced decliners by a solid margin, 4183-2254, while new highs registered their highest one-day total since October 2007, at 412. There were 87 new lows, with only 8 of them appearing on the NASDAQ. Volume was once again above normal, as investors rushed to get into equities. The rally continued almost through the end of the session, with stocks closing near their highs. Longer term, the current bull run is more than six months old, though the performance for September, thus far, has been exceptional and in strong opposition to many who were calling for a pull-back.

NYSE Volume 1,496,974,000
NASDAQ Volume 2,400,533,000

Commodities got in on the action as well. Crude oil for October delivery gained $2.07, to $70.93. Gold rebounded, up $5.20, to $1,006.30, but silver was the star of the day, picking up 38 cents per ounce, to $17.00, and higher after the close in New York.

In general terms, this six-month-old rally is getting a little bit winded, as daily gains are measured and not overly large, though by and large the bull market seems to be intact and booming, though a blow-off top could occur at any stage, now that the double top has been confirmed over 9650 on the Dow.

Investors have been taking some money off the table, though much seems to be going right back in to the market, either in sector rotation or buying the same shares on dips, even though there hasn't been much of a break in the upside action.

All the data and speeches by the Fed Chair and the President have set a very positive tone heading into fall and the upcoming earnings season. The downside is that any disappointments will likely be dealt with in rather harsh manners. Companies which fail to meet expectations in the coming weeks could see their share prices slashed without mercy. On the other hand, data continues to point towards recovery. The issue is whether companies can extract profits as a normal function of business, since the past two quarters' profits have come largely from cost-cutting.

Housing and employment continue to underpin the markets, keeping a lid loosely over stocks, for now.

Remembering 9/11; No Break for Bears; Gold Tops $1000

The trading day began with moments of silence... remembering the victims of the awful attacks on the World Trade Center 8 years earlier. At the close, strangely enough, the Dow Jones Industrials stood 0.10 lower than the close on September 10, 2001. It was a sombre session, within a tight trading range, the mood almost preoccupied with previous events.

While many market participants recalled 9/11, others were focused on more current disasters, namely the fall of Lehman Brothers, which occurred just one year prior. The US economy and the markets have been through a metaphorical wringer since last September, witnessing the near-collapse of the entire financial system, followed, thankfully, by a subsequent recovery.

Though all of the major indices closed lower on the day, ending a five-day winning streak for the bulls, the losses were barely noticeable. For the week, the Dow finished ahead by 164 points, the NASDAQ improved by 62, and the S&P added 26 points, all reinforcing the recovery wind that has swept over the financial landscape.

Dow 9,605.41. -22.07 (0.23%)
NASDAQ 2,080.90, -3.12 (0.15%)
S&P 500 1,042.73, -1.41 (0.14%)
NYSE Composite 6,843.82, -6.99 (0.10%)

Market internals ended on a mixed note, with decliners gaining a small, late advantage over advancing issues, 3223-3205. New highs continued to dominate new lows, however, 349-88, giving every indication that the rally will not wilt soon. Volume returned to its sluggish ways, with trading activity close to the lowest level of the week, though the NASDAQ still seems to be the place to which money is flowing.

NYSE Volume 1,388,797,000
NASDAQ Volume 2,347,513,000

Economic reports offered some vague insights. Consumer sentiment shot up to 70.2 for September, after a showing of 65.7 in August. Wholesale inventories dropped 1.4%, the 11th consecutive monthly decline. This shows that goods are still moving at a very sluggish pace and wholesalers are playing close to the vest, though eventually manufacturers will be called upon to replenish inventories. When that begins to happen, a strong reaction by the markets is almost assured.

Another positive sign came at 2:00, when the US Treasury announced a budget deficit for August of $111.4B, when analysts were expecting much worse, though the markets barely noticed.

Commodities finished in very mixed fashion. Oil was hammered down $2.65, to $69.29, on oversupply concerns, but gold finally topped the $1000 mark, ending with a gain of $9.60, at $1,006.40. Silver lagged, up only 3 cents, to $16.70.

From a chartist's perspective, the trading day was positive for bulls, as stocks advanced in the early going, fell to the lows of the day shortly after noon and then recovered into the close. With the slightly lower finish, it has set the classic bear trap for the opening session next week.

The Next Great Bull Run

This is it.

The Bull market has been so firmly established by market fundamentals, charts and Dow Theory (see yesterday's post) that there can be no denying the US stocks are in the midst of a major bull run.

After the banking meltdown of last September through November, the ultimate third wave crash ending on March 9, 2009 and the resulting snapback, 6-month rally, bulls are once more in complete control over the stock markets.

Thursday's trade was the fifth consecutive winner on Wall Street and further confirmation of a secondary trend wave. The closing price on the Dow today was 9,627.48, which is two points better than the interim top on November 4 of 9625.28. Charts do not lie. This is a further confirmation of the bullish trend. For more convincing, see the double top in the point and figure chart formation here.

The Dow Jones Industrials closed at a 10-month high, the NASDAQ at another 11-month high and the S&P 500 at an 11-month high (October 6, 2008).

Stocks were led by the transportation and basic materials, though all twelve sectors were positive. The laggards were financial, healthcare and utilities.

Dow 9,627.48, +80.26 (0.84%)
NASDAQ 2,084.02, +23.63 (1.15%)
S&P 500 1,044.14, +10.77 (1.04%)
NYSE Composite 6,850.81, +78.41 (1.16%)

Simple indicators were screaming buy to anyone who would listen. Advancers beat decliners, 4663-1765. New lows were trampled by new highs, 351-80. Volume continued yesterday's trend with the NASDAQ showing very strong trading activity (nearly 80% up) with the NYSE lagging still, though most of the volume was on the sell side, as were the vast majority of new lows (74-6).

NYSE Volume 1,580,281,000
NASDAQ Volume 2,483,736,000

Commodities were mixed, with oil gaining 64 cents, to $71.94; gold off 30 cents, at $996.80, and silver up 20 cents to $16.67.

Markets were buoyed by improving unemployment claims. Both initial and continuing claims were lower in the most recent data week.

Bulls are in control, with price targets for the S&P ranging from 1100 to 1250, and 10,500 to 10,900 on the Dow.

Fed Slows Rally; Re-Examining Dow Theory

Those of us over 30 years of age remember the stock market before the advent of internet trading. If you're over 40, you can recall what the stock market was like prior to CNBC. If you're over 50, like me (disclosure: I turn 56 in December, God willing), you can recall much of what the market was like in the 1960s and 1970s, when investing was done mostly by a well-heeled, upper crusty wealthy class of people.

First there were mutual funds, which brought the average Jane and Joe into the stock trading mix, followed about a decade later by IRAs and 401k retirement plans which got more people into the game, circa 1974. Now, as they like to say in poker rooms, we're "all in" the stock market, thus the 24-hour coverage, unlimited internet access to trading, insight, chat rooms, etc., and the requisite madness that ensues when large funds jump in or out of positions.

With everyone (well, 60-70% of the adult population) now focused daily on what the stock market does, the indices have become less predictive and more reactionary. Witness today's release at 2:00 pm of the Fed's Beige Book, which outlines the economic landscape in the twelve districts of the Federal Reserve Bank. All the indices were sporting healthy gains (the Dow was up more than 60 points) when the data was released, but by 2:20 most of those had evaporated into thin air. After 3:00, however, investors saw more optimism than at first blush and moved the averages higher for the 4th straight session with the 9500 level on the Dow serving as support.

The Fed governors were not very enthusiastic in their assessment of the economic situation as of the end of August, but it was a rather measured account, with many of the regions showing increased activity in manufacturing and some stabilizing of prices in residential real estate. Consumer sales, however, were slow, and commercial real estate continues to slump. Overall, it was a pretty bland, mixed report, with little news and investors took it in stride.

Today's actions gets us back to our core argument: that the markets have become more reactionary rather than predictive. Little jolts of news bites over CNBC rattle traders in one direction or the other, with little to do with fundamentals. It's almost as though a third-grade mentality has permeated the caverns of commerce.

Nonetheless, the markets droned on today, stopping short of the Dow 2009 high (9580), which brings into play another burning question: are we in a new bull market or is this a bear market rally?

A few weeks back, I looked over the data from the past two years and determined that stocks may have to move higher - especially the Dow Jones Transports - to declare a new bull, but after closer inspection, I am going to make the call that we are already in a new bull market. Now, if I am wrong, recall that Richard Russell, the publisher of the "Dow Theory Letters" and a man for whom I have tremendous respect and admiration, actually made a bad call in 2007, declaring that we were not entering a bear market. It took a year, but the evidence was more than convincing that Russell was wrong. So, should my call prove to be off, be reminded that even the most astute and brightest people sometimes err.

To save everyone from the boring details of my analysis, here are the facts:

9034.69 was the recovery high for the Down Jones Industrials on January 2, 2009. 3717.26 was the January 2nd, 2009 recovery high for the Dow Jones Transports. Both of these numbers came after the second wave of the bear market, the most tumultuous part, from September to November, 2008. The initial phase was from October 2008 to September 2009, and the final leg was from November, 2008 to March, 2009. Anyone still thinking a double-dip downturn is in our immediate future better pay more attention to details. The third leg of the bear ended March 9. Today is the 6-month anniversary of that turning point. The Dow Jones Industrials entered bull market territory on July 23, when it closed at 9069.29. The Transportation Average confirmed when it finished business at 3749.58 on August 7. So, we've been in a confirmed bull market for more than a month already. My apologies for getting it right so late, but at least I now have it on the money.

Dow 9,547.22, +49.88 (0.53%)
Nasdaq 2,060.39, +22.62 (1.11%)
S&P 500 1,033.37, +7.98 (0.78%)
NYSE Composite 6,772.40, +46.33 (0.69%)

Our simple indicators are now screaming BUY. Advancers beat back decliners, 4556-1863, and new highs bested new lows, 316-62, the largest margin in two years. Volume turned up strongly after the Beige Book release, though most of it was on the NASDAQ. Much of that sell-off was likely repositioning, and traders got right back in later in the session, albeit in different stocks, shifting mostly from energy and consumer discretionary into materials, industrials and financials, though all twelve sectors showed gains.

NYSE Volume 1,329,853,000
Nasdaq Volume 2,524,738,000

Commodities took the worst of it as crude oil gave back larger gains to finish at $71.31, up a mere 21 cents. The level between $68 and $75 has maintained for weeks now, and that may be regarded as a benchmark pricing point. There is still simply too much slack demand for any further price appreciation in oil. Natural gas is also stuck below $3.00 and should remain there for at least another 6 months. There's nothing better than cheap fuel to hasten a recovery and prices should remain muted. So too with gold, which lost $2.70, to finish at $997.10, and silver, off 4 cents, to $16.47.

Those new high-new low figures are simply stunning. One should expect a major breakout any day with a quick run to Dow 10,000 by no later than October 10. All of the elements are lining up for a solid recovery. Dow Theory has confirmed, simple indicators have confirmed. What else need I say?