Revival and Contraction

Contractions and revival . . . were our basic expectations for Wednesday, as we'd expected some early selling (actually a follow-on to the Monday afternoon pullback), followed by renewed upside, toward completing the outlined minimum upside goals, elucidated over the past few days in the wake of the breakdown (a buy signal of sort into weakness, as the mini-capitulation took place amidst some fund selling too, that effected especially those mutuals needing to hide some of their inventory prior to the half-yearly reports, as a couple of you emphatically pointed out too), of 1080-1090 in the June S&P, now achieved (with further near-term market struggles likely riskier).

Wed. morning's economic numbers weren't really factors, though providing excuses for those looking backward, and not realizing the angst even geopolitics provides that modifies the rate of any possible recovery; hence helpign the early morning washout. In fact, the domestic variations on 'real politick' probably are bullish longer-term, as it tends to keep investors nervous, certainly not euphoric, and constantly critical of any and all attempts to rally the markets. Not to mention keeping interest rates relatively low (actually dipping a bit); something we've also expected would be the case. Sure, a sector will try to compare this situation to that of Japan, but the differences exceed the similarities; not to mention a society of spenders versus one of primarily savers.

And then there's Gold, which is starting to behave inversely to that of intraday stock market behavior (Wed. was a good example of that), which might forewarn too much retail interest is increasing in the metal; a potential sign of short-term topping possibly developing; although there is no sell 'signal' on a weekly or monthly basis yet; though of course such things are so mechanical they always occur after-the-fact. Keeping in mind that our optimism on Gold has been limited to noting a contratrend move as the Dollar swooned temporarily (now that everyone is talking about it, for reasons that we explored previously last evening, most of the short-term downside is likely completed) in recent weeks, we wouldn't be surprised to see a choppy metal short-term top, with a Dollar interim low point, over the near-term basis, or within a month at maximum.

Of course that presumes our ideas about the certain geopolitical changes previously noted, are on-the-mark, or close, and that does not reflect upon foreign currencies or heavily debased currencies, which almost always result in contratrend Gold rallies, regardless of what is going on in the U.S., or major bourses around the globe. We just wouldn't be very surprised that all those only now figuring out these shifts are late to the party just here. At the same time, such speculation don't take into account the risk of catastrophe, either here or abroad, which can undo the good works underway.

Similarly, though the world is a brutal place to make money these days; there is little doubt that productivity is being dramatically enhanced; that disinflationary influences continue; with high valuations we've warned about for months in multinationals at this point have been adjusted slightly, even if full risk-premiums aren't totally eliminated . That is one reason for the increased volatility (either way) of the Dow Industrials as contrasted to the NASDAQ (for instance), and why the S&P 400 or 600 (for instance) or other mid-cap and small-cap indexes have done so much better than the big-caps.

Hanging on the GM sales news as a rationale for the turnaround is a lame basis for Wed.'s rally; and though everyone tries to find 'reasons', maybe they should just look at basic economics, where costs are typically below prices, where margins are up as sales hold together generally, and where profits could really spike when sales rise in either the wake of 'peace in our times' (as unlikely as that may seem) or adjustments in life that account for the 'new normalcy', which Europeans are used to live with, and Israelis have for years (occasionally both their markets soared regardless of threats, though the matrix was less involved than more recently experienced). And then there is the discussion of European politics and fractionalization, which we won't expound on tonight again; though there has been nothing unfolding to deny our views on that, including the May Day discord reflecting incredibly splintered politics on the continent.

In any event, the Tuesday turnaround behavior at month-end, was the call Monday, delivered on Tuesday, and expected to resume after some contraction Wednesday in the early going. (Balance of commentary reserved for ingerletter.com DB readers.)

Daily action . . . must note that the NASDAQ and Nasdaq 100 (NDX) didn't really participate. Well, in a real turnaround, you need money focused on Senior Averages as we know; but there's a need for these to kick-in within a reasonable time. Also, the naysayers primarily say that all we had was short-covering. I'm not so sure, because if that's all it was, well, then why didn't shorts get run-in within the technology sector?

(Balance of section, plus Thursday forecast beyond basics, reserved for readers).

As a result, and distinct from a few hundred points potentially garnered during earlier action, the noon hotline (900.933.GENE or direct-dial access), was able to suggest a simple long-side entry at the 1068-69 area of the June S&P at the time, with a fixed mental stop of 1064 (which was never touched, so further guidelines weren't needed to be implemented). The result: a huge double-homerun gain all the way to the close, around 1088 or a tad higher; for a theoretical gain of around 2000 for that single shot.

If we instead falter immediately, and plunge late this week the pattern will vary from a successful effort to extend (provided alternative recognition criteria reserved).

In summary . . economic news actually contributed to setting-up the backdrop for the market's upside breakout, and not even because the numbers were superficially very 'bullish', but because many traders were again on the wrong side of this, setting-up at least a forecast afternoon comeback that Tuesday night's ingerletter.com DB called for, similarly to the expectations Monday for a turnaround Tuesday semi-spectacular.

As to McClellan Oscillator readings: improved to around +11 for the NYSE, but with no equivalent improvement for NASDAQ; stuck at -15. Surely a 'complex' April ended with solid declines overall (no surprise), and the final day's turnaround as well as the resumption today, suggests more volatility as the market likely resumes working on fully-completing an incredible tough-love market. As this is likely to be increasingly understood by institutional managers, we are just a little tentative about expecting lots more immediate upside after the projected rebound of the last two days, as we've noted. Stay tuned; remembering that small and mid-cap sectors are doing far better of course, than superficial major Senior Averages; and have for many months now.

Our prayers and thoughts remain with our troops fighting anywhere in the world, and as ongoing events continue to remind us of various risks Allied fighting forces face, or may face, as we try to keep in mind that the unexpected remains a risk as civilization cheers human progress, but worries about those trying to reverse hundreds of years of modernity. This week delivered our 'reflex relief rally', but it may be jumping-the-gun to expect it to represent the total final washout and reversal; though we wouldn't complain if it were to occur that way. As of mid-evening, we've got the S&P futures up around 150 or so on this Wednesday, with about a 194 premium over the Cash.