Commodities Prices Surge

SUMMARY:

- Commodities prices surge back up with nature’s assist, but stocks don’t care as the indices solidify their breakouts.
- Gasoline surges, recovers its losses, as Mississippi River floods threaten refineries, closes the river to barge traffic.
- Import prices continue their rise as the dollar continues its weakness.
- Rubber match is advantage buyers as more stocks look ready to move higher. If technology would move . . .

MARKET SUMMARY

Stock buyers don’t care about the world problems.

The rubber match week continued, and on Tuesday the advantage went to the bulls. There were nice gains on SP500, NASDAQ, and the SP600, solidifying the breaks above the February peak. Volume was a bit better. It was still somewhat pathetic on the SP500, but it managed to bounce up to average on NASDAQ. I suppose I can live with that. As long as it was a gain, I will not complain about it.

Looking at the intraday chart, futures were up from the early morning hours. They extended their gains into the early part of the session, a mid-afternoon flat line, and then a nice rally into the close. It gave back some, but we had a good move to the upside. NASDAQ, +1%; SP500, +0.8%; Dow, +0.6%; SP600, +1.75%; SOX, +0.5%; NASDAQ 100, +0.85%.

There was not a lot of great news. It was not all bad, but there was not a lot of news to move the market. Export and import prices came in less than expected. You would think that is not too bad, but you have to look beyond that. You cannot just look at the headline numbers that the government wants you to see. The government always wants to ex out oil. If we do not, they rose 2.2% versus the 1.8% expected. That was less than the 2.6% in March but still quite solid. Year-over-year, they have risen 11% versus the 10% expected. They drop significantly when you take out the oil, but consider that oil increased 7.2% on this reading and is 37% higher than it was this time last year.

Fortunately we make a lot of cotton, corn, and other agricultural items, but they are rallying in price as well. That is particularly true now that the Mississippi River is flooding. That has become a serious problem. On Thursday wholesale gasoline prices fell 32%. In the interim, they have rebounded completely. Oil has not rebounded to recapture all of its gains, but gasoline certainly has. The Mississippi River is rising and is almost at a record flood stage. It is threatening some the major refineries for US gasoline production. One of the refineries puts out 15% of all gasoline manufactured per day in the US. Thus gasoline prices are surging on fears that these refineries may be forced to close.

There is more. The Mississippi River barge traffic is now closed. Not only is the gasoline supply threatened, but the movement of the many goods on the Mississippi is being closed. It is very cheap transportation. Companies now have to route around the Mississippi, finding trucks and trains to move their products. That is more expensive. Prices that we have already seen rally to the upside are rallying even further. Cotton is going up, corn is going up   everything shipped is going up due to the Mississippi closing and transportation costs rising. Moreover, some of the major cotton fields in Mississippi are under water or being threatened by rising water.

This underscores something I have talked about many times before. It happens over and over, but we never learn from history. It seems we cannot catch a break. That is true, but things often happen that way. The Fed and Federal government are tinkering and trying to fine-tune the economy to get it the way it wants, but that is not done in a vacuum. Invariably something unexpected happens that upsets the best-laid plans of mice and men. I’ll let you guess who the mice are and who the men are.

Allen Greenspan found out how difficult it is to plan for the unexpected. He would embark upon a tinkering program and then we would have an unexpected disaster. 2010 and 2011 have been chock full of the unexpected. Their devaluation answers to the economic crisis   money printing, massive debts, etc.   are causing extraordinary problems on top of the disasters that have hit us the past couple of years. Tinkering is never good. All I can say is fill up your gas tanks, and we will see if we can ride through this and get production back up and running. It may come right back down because they do not flood. That would be great. Maybe then we really would catch a break, and we definitely need it.

In other news, MSFT is buying Skype in a bolt-on addition. It is trying to add another feature to a company that is basically a one-trick pony. It desperately wants to keep the cash coming in   not to grow but to buy what it can to sustain itself.

Interestingly, Consumer Reports said consumer sentiment was “substantially down” from the prior month in March. Consumers are spending less and planned purchases are down for May. There is a bright side, however. They are planning a few more new car buys and actually some home buying. It is hard to complain about that.

DF beat its earnings estimates nicely despite increases in food costs. Apparently it has been successful in boosting its pricing and passing it onto consumers. That is not necessarily good for the consumers, but it is good for DF. Others will probably follow suit; it is a necessity at this point.

Getting back to the action, it seems that the market did not care one way or the other about higher prices. There many reasons for it to be concerned, but it rallied nonetheless. The reason goes back to the same thing that has driven the entire market. There is some modest economic improvement, but nowhere near the level to drive this kind of gain in the stock market. It goes back to the Fed providing liquidity that is being pushed into the stock market and other financial markets. That continues to drive the action. As long as it is there, the market will apparently use dips as a buy point to rally further to the upside. That was evident on Tuesday.

WEDNESDAY

There are positives for the market, although the positives for the economy keep looking daunting. Nonetheless, stocks continue to move higher, as do other financial markets and commodities markets. The latter are driven by the dollar decline and worries about inflation as much as the liquidity being pumped into the market. It is not only a stock gain that is pushing commodities higher. Commodities just have more jet fuel on them because of other issues driving them higher   namely, the weaker dollar.

Tomorrow there is more housing news with the mortgage index. It will likely be gloomy. The news has not been good in terms of pricing, and it really turns on price. Once the market turns up enough, price will firm and start to move higher. There is a little trade balance, some crude inventory, and then the Treasury budget. They are nice leading into the jobless claims on Thursday along with the PPI and retail sales. On Friday comes the core CPI. It is the core we are worried about, right?

There is not too much news tomorrow. There will be a few more earnings continuing to come out. The market has now made a pullback and is trying to make its rally to the upside. It has tested and has been successful from the looks of it. I will not declare the rubber match over, but I will say that the advantage goes to the upside. We are continuing to let positions run. We have been buying positions along the way in the pullback on this bounce to the upside. We are happily with several new stocks and happily with several old stocks and options that we are letting run.

Some of them are May options, and we have a couple of Fridays left on those. As long as the market is moving higher, we will squeeze them for all we can before cashing in the final gains on those. They should be pretty nice. I have been looking at the pricing on them, and we will be able to bank some nice gains.

The point is to let them run at this point. We will also let the stock positions probably run after that. As long as they are moving higher, we do not worry about expiration on the stock prices. If they are making good moves, if they are pulling back normally and rallying, that is what we want to see. We can make money as long as they continue higher. We have plays back from 2009 still on the report that we are just letting move higher. Some that we have May options on (HUM and others) we will have to take that eventually. We do not want them to expire on us, but there is no reason to cut short the stock run. It looks outstanding.

Those are our continuing positions, but what about new positions? We will continue looking at those. We were buying on Monday and Tuesday. We were buying some last week even as the market was struggling because it continues to look solid overall. There is no doubt that the stock market has done what it needed to do: testing the breakout and starting back to the upside.

We will still look for more buys because not all of them have bounced to where they are no longer in risk/reward position. That is the key. I harp on this a lot, but getting the right risk/reward is what you want. We want to pick up stocks as they come off of a support level. Grab them while we have a very good support point that will act as a stop loss.

PII fills that bill with this gap to the upside. Now all it has to do is show us that upside break and we can move in. Many stocks are like this. We still have great buys we can make on several stocks. If this rally will continue, as it looks like it wants to, we will be able to make money on those as they break higher as well. The market rallies in waves, and we can pick waves as they take off.

You need to figure out what stocks you want to buy and what option plays you want to make. Have a basket of them, and as they make the breaks you make them. No one can trade all of them, but you need to have enough irons in the fire because some will work and some will not. Play them and keep your money managed properly. Do not put too much risk in any one trade. We can buy several positions on one stock, but we view them as separate trades because we are buying in at different times. We have different goals in each one of those trades. Making money is our main goal, but the targets will have to be different, of course.

If you treat them all differently and do not risk too much on any one trade, you will make money when these things move (as they have been.) Now we will see what Wednesday brings us.

Jon Johnson
Stock Splits & IH Alerts, Editor
InvestmentHouse.com