- Buyers strike back, keeping the rubber match on but also the uptrend in place.
- The theme changes again: Little good news to drive stocks on Thursday, but turns in the dollar and commodities bounces equities back up.
- China still trying to slow its economy even as its stock market struggles.  How Greenspan.
- PPI clearly on the rise as retail sales show the impact of gasoline prices.
- Bernanke warns of using debt ceiling as a ‘bargaining chip.’  Isn’t that what he is doing along with his pal the Treasury Secretary?
- The rebound Thursday demonstrates one clear point: the buyers and sellers are fighting at these highs.

MARKET SUMMARY

The fight at the rally highs continues as the buyers return.

Stocks were poised to continue the selling that they suffered Wednesday. Futures were down and the same theme was in place. That theme was a stronger dollar, weaker commodities, and weaker stocks that emerged last Thursday and again on Wednesday.

There was not a lot of good news to change that theme, and stocks were weaker ahead of the open as a result. The initial claims put in a fifth week above 400K, coming in at 434K when only 423K were expected. The prior week was revised slightly higher as well. While the PPI month-over-month did not look bad, overall there was an 0.8% gain versus a 0.5% expected. The core rose 0.3% versus 0.2%. Looking at the year-over-year, the overall was up a whopping 6.6%. Of course that includes food and energy. The core itself came in at 2.1%.

Gasoline rose 2.7%. Pretty big sales. They made up a good chunk of the retail sales, which gained only 0.5% versus the 0.6% expected and the 0.9% gain in March. That was more than double what was originally reported. That is a positive, but you have to break it down. Note again that gasoline sales were up 2.7% while more discretionary items, such as electronics, were down 2.2%. Sporting goods fell 1.9%. Discretionary funds are being used to buy gasoline. At the same time, although gasoline sales with running higher, retail sales are running lower. That is a clear indication that money is being utilized to pay for higher gasoline prices, and it has to be taken from other areas. Those discretionary spending areas are suffering.

It is not worth going into the retail sales ex-auto. It is not a factor anymore. We need to look at retail sales and focus on the energy component and its play with respect to the other discretionary areas. You can see the impact. More money is being diverted to pay for gasoline, and that means less money going to other sectors and discretionary goods. Weekly jobless claims continue to rise. In other words, people are losing jobs every week at a faster pace than we are creating jobs every month. Incomes are going down in the aggregate because jobs are still being lost, and we have less money in the scheme of things to spend on retail purchases.

Not great news for a market that was already under pressure from the Wednesday reversal. China raised its bank reserve ratio another 50BP. That also hampered stocks because people are worried that China is raising rates in the teeth of what may be an economic slowdown. This is very much like Greenspan. Greenspan was famous for continuing rate hikes or ratcheting too hard when it became clear that the economy was going slow. The stock market started to run out of gas, then it would buck and kick, showing that it was rolling over. Nonetheless, Greenspan would continue raising rates, even after the best leading indicator was already turned over.

The Chinese stock market continues to struggle. Even so, the regulators continue to raise reserve requirements and interest rates. That is very Greenspan-esque, and that was one reason why the commodities markets and overseas markets are worried. They think China may go too far and really send its economy into a tailspin. That would crimp demand across the board. Thursday morning saw that continuation of the Wednesday trade with commodities heading lower and the dollar heading higher. At the same time, oil sold off, gold sold off, and even bonds sold back. Stocks followed into the open, but then everything changed. Was there any specific catalyst? Not really.

Bernanke was speaking on the Hill. The main piece of information coming out of that was that our leadership should not use raising the debt ceiling as a “bargaining chip” in getting what they want concerning how to attack the deficit. Of course he would say that; it really means nothing. A lot of his policies are based on the Treasury being able to print money at will in order to fund Quantitative Easing. That is whether he has an official Quantitative Easing plan, like he does now, or after it expires in June and he implements an informal Quantitative Easing program. Bernanke, just as Giethner, needs that higher debt ceiling in order to have all the pieces fit where he can keep manipulating the currency along with the Treasury. Then they can achieve their goal of trying to inflate our way out of this by devaluing our currency.

Whatever the reasons, stocks reversed and surged back to the upside. With that, SP500 recaptured the peak that it gave up on Wednesday. NASDAQ held it on Wednesday and added to its bounce above that level. Not bad action at all. It is basically a flip of the Wednesday trade. You can take some comfort that the uptrend has sustained itself. We still have higher lows in place, and the indices are holding their uptrend and ready to resume it. On the other hand, and other theme remains of the buyers and sellers slugging it out. As soon as the market broke out, it rallied to a new high. It reversed and sold, and then we had that really wild Thursday where oil collapsed and gold fell off the table along with silver. Stocks fell as well, but they bounced right back up. Back and forth, like an ongoing tennis match.

The volume has picked up again, and that shows that a fight is going on at these old highs. The buyers are fighting and winning one day, and then the sellers are coming back the next day and winning. There is a rough and tumble right at an old peak, and that keeps the rubber match going. Until we get a definitive winner, it will be a guessing game   but a guessing game with educated guesses. We still have a nice uptrend. We still have plenty of stocks that look very good and able to move higher. That is what they were doing again on Thursday.

As long as we have good leadership, as the market is showing now, then the uptrend remains the stronger of the two. The ball is in the sellers’ court to be able to break the uptrend and send it down. Until they can do that, the trend remains intact and good stocks are still moving higher from good positions.

FRIDAY

There is very important economic data coming out before the market opens on Friday. That is the April CPI. We saw the PPI jump up with the core year-over-year moving to 2.1%. We do not expect the core CPI to do that; it has not shown those kinds of gains, and only 0.1% is expected. 0.1% or 0.2% is what it has been showing over the past several months. We still know prices are rising. We need to look beyond the core and look at food prices. Some very smart people keep saying that inflation is higher. I am not going to argue with them because they have basically been right.

Michigan Sentiment is almost out, and that is another important number. We have seen problems in retail sales with gasoline prices. $4.00 once again appeared to be the choke point for consumers, and they started cutting back on their discretionary spending as well as cutting back on using extra gas. I think twice about going to several stores to find what I need. I want to track it down first. Driving my truck around will suck down more gas than I care to spend. It really jacks up the price of those items I am trying to save money on. I am just one person. If you multiply that millions upon millions of times all across the country, you get the picture as how demand will go down. You could say that is good or that it is bad. Whatever it means, we are spending less money overall on gasoline, goods, and services. That is not necessarily good for the economy.

We will see what the economic data holds and how it influences the market tomorrow. We also have to look at the Big M: The Market overall. It is still trending to the upside. Thursday the buyers came back in, struck back, and did so on very credible volume. The uptrend is in place, and we still have to go with it. At the same time, note that the buyers and sellers are really fighting at the point. It is not an easy cruise higher, which has what you want to see. A nice cruise to the upside after a breakout shows that the buyers are in control and everything is okay. That is not the case here. The sellers are announcing their presence with authority. The buyers announced their return with some authority on Thursday as well.

We are not done yet. Not by any stretch. Looks like the dollar wants to sell back. If it does, that is going to embolden commodities once more. That will help all of the stocks that trade better when the commodities trade to the upside. They are also tied to the overseas industrial trade. We will see how the dollar reacts and see what theme takes hold on Friday. It has been flip-flopping each day the past few sessions. I would like to get a definitive answer on our rubber match, but it does not look like that will happen. It will take more than one day to give us a true answer.

If the indices are able to rally again on Friday on good volume, that will be a very good indication that the upside has the advantage in the match and that it will run with that advantage. We really have to see how it plays out tomorrow and what happens early next week. We waited too long in the week to get a definitive answer.

In the interim, we still see good stocks moving to the upside. As we see stocks in good position and they make the moves we want, we will pick up some positions. We have been doing that all along. It is not the type of situation at this point where we want to load up with double our normal positions. We just want to be prudent. Take partials when we have a chance, see how they test, and then pick up some more on a good test that starts to break back to the upside. Play the game smart and manage your money. Do not put too much money into any one trade because you can get burned.

Today the SPY rallied into the open from lows and then rolled over. It looked like it was done, so we took some positions on it, but then it reversed and rallied back to the upside. It threw it right back in our face. We did not load the boat on it, however. It was just a hedge. It was a play we were going to make some money on if the market turned down. The play is not dead yet. Even though the overall theme remains in place, the trend is there. The buyers and sellers are still fighting. Ever since the big selloff on Thursday, they have been fighting back and forth and no side has gotten the upper hand yet.

We will get an answer soon enough. As long as we see good plays that are in position to make the moves we want, we will pick up positions both upside and downside.