- Just a hint of better news trips the oversold spring as the indices surge upside
- Impressive price moves but volume is lighter as SP500 bumps the bottom of its range and fades back.
- Lackluster Retail Sales, not too offensive PPI provide enough tender to spark up an upside rush.
- Bernanke wants fiscal policy ‘adjustments,’ but says debt ceiling wrangling is the ‘wrong tool.’
- A budget deal to give the Fed cover for QE3?
- Strong initial surge begs for some follow through this go round, but SP500 has to cross 1294 first.

MARKET SUMMARY

Didn’t take much to trigger an impressive upside rush.

When the market is oversold or overbought, it is sometimes surprising how slight a trigger is needed to send the market in the other direction. On Monday I said that even though the market did not have the flush-out to the downside, it would be ready to move higher because it had a “good enough” pullback. That is exactly what happened. The market rubber band was stretched tight enough. When the economic data was not as atrocious as expected it was not good the market triggered to the upside with some impressively sharp moves.

Looking at the intraday chart, futures were up early. Retail Sales were down for the first time in 11 months, but they were not down as much as anticipated. That had investors feeling a bit better. “In a storm any shelter will do.” The PPI was a bit hotter than expected, but it was in line on the Core. That also added to the upside impetus. Futures were up, the market gapped higher, and it rallied higher into the late afternoon session. It finally started to give back some late in the day, but it was inconsequential. The indices posted excellent moves.

NASDAQ, +1.5%; SP500, 1.25%; Dow, +1%; SP600, +2%; SOX, nearly +2%. Very solid, very powerful moves price wise. The volume was not there. It was lower on the NYSE and the NASDAQ as it bounced as well indeed, below average. Big, sharp price moves to the upside. A massive oversold condition and lighter volume on the move back up. Those are all the indicia of a relief bounce. Do I want to pooh-pooh the move because of that? If you are looking for a breakout back into the range and eventually a new breakout, that did not cut it. If you are pragmatic, you were expecting nothing more than a relief bounce. We are in the “show me state” right now. It has to show me if it will be a meaningful bounce. Then you are not disappointed and expecting more. We expect a rebound and a tradeable rally, and it looks like it got underway on Tuesday. It still has to prove itself even after the session.

SP500 bumped up against the bottom of the trading range marked by the February intraday low and the April intraday low. Last time it bumped into those, it had an impressive downside day. That was just last Friday. We are bumping it again, and it backed off from that level. Will it do the same thing this time, or is this one that can bring it back to the upside? Some of the other indices are making that move, and thus you might anticipate SP500 would be inclined to follow them to the upside.

There was other news that helped trigger the upside break. Japan reported increased production in April. That is nice to see after the tragedy there. Although the Gulf Oil CEO was talking late after the session on Tuesday; he said they were still seeing a tremendous drop in oil imports from Japan. Any increase is nominal. China announced that it was raising its bank reserve requirements an additional 50BP to the upside. It also announced that Consumer Prices rose 5.5% in May. Think they have inflation problem over there? As Sarah Palin would say, you betcha! There is no doubt they are having issues, but the market is performing better after getting gutted for two and a half months.

An interesting feature of the day was, of course, the strong move to the upside. At about at 2:30 eastern time, however, Mr. Bernanke was speaking and the market bucked and fell off its highs. He was talking about the budget deficit and how to handle the debt ceiling. Bernanke laid some good points out on the table. He did say there were “necessary and difficult fiscal policy adjustments” that had to be made. Using the debt ceiling in order to get there through Brinkmanship or draconian measures was simply the “wrong tool.” I wish he would tell us about the right tool; they desperately need that in Washington DC. Thus far nothing has worked.

Past Congresses a have set debt ceilings and have had agreements of what they would and would not spend. But those are not binding beyond the current Congress that passed them or the next President. They mean nothing. The only real tool is not even a balanced budget amendment. We need something that limits the growth in spending and limits spending to a low, low percent of Gross Domestic Product. That way you have a constitutional governor on what those career politicians in Washington, DC spend.

As an aside, at the time the Constitution was written, it was said that the drafters expected a 50% turnover each election. The people were supposed to go home and go back to work. There were not going to be career politicians. That is a problem. Maybe there needs to be an adjustment there as well. We have career politicians gaming the system and just looking to get reelected versus making tough decisions. That is one of the roots of our problems. Career politicians want to get elected, term after term, and ensure their power versus doing what is right for the country.

Bernanke, just like any politician, sounds great when he is making statements about the wrong tool and the tough decisions that need to be made. Fine, but how do we get there? If we cannot do it in the system that we have without playing Brinkmanship and without putting the system under stress, what are your suggestions? It does no good to make grandiose statements. Let’s see have some real, hard answers. He cannot give any real answers because there is no other way to do it given the reality of career politicians trying to get reelected.

Therefore, Mr. Bernanke, the wrong tool is probably the only tool we have outside of a Constitutional amendment to get this done. And we know a Constitutional amendment will not happen anytime soon. It has to be drafted and approved by two-thirds of the states, but we can get amendments passed very quickly when the will of the nation is behind it. We have done it in the past. If these politicians would get together and really push for a balanced budget amendment and put their money where their mouth is, then it could happen quite quickly. But it will not. Of course, I have digressed.

WEDNESDAY

More economic data hits on Wednesday. The important CPI comes out following the PPI that was fairly hot. The PPI was 7.3% year-over-year, up from 6.8% in April. The Core remained at 2.1% year-over-year. Of course the question is always whether it will pass through to the consumer prices. That is all the Fed is concerned about plus it is really only concerned about the Core. It is expected to drop 0.1% to 0.1% from the 0.2% shown in April. There is also the New York PMI, and that is a very important read. It will be out before the market opens. It is expected to decline to 10. Remember that manufacturing was the initial sector to lead us out of the recession. It is also the initial sector to show there were problems with the recovery this year. We have been in a steady decline ever since some sharper than others.

Industrial Production and Capacity Utilization is very important, and they are out just before the bell opens. We will get crude inventories an hour into the session. Those will be important because on Tuesday it took damn little economic news to move the market. It was so oversold, anything that looked halfway decent would get the nod for the move upside. We saw that with relatively lackluster Retail Sales and a PPI that was a bit hot. Stocks still moved to the upside, so more positive economic data or data that is not as bad as anticipated would help the market continue to the upside.

That is going to be important because SP500 is bumping its head again at the bottom of its trading range at 1294. It failed at that level last Thursday, and that led to the Friday selling. It fell to that level the prior Tuesday, and that led to Wednesday’s selling and ultimately the downside on that week. This is a very important move. We already have the DJ30 back up through its trading range (although marginally). The SP600 is moving back up into its trading range as well. The SP500 could very well follow those through to the upside. If it does, that is great. We have that tradable relief rally we have been looking for, and we want to continue to play that. If it does, we will probably end up having to close out our remaining SPYder downside plays and our QID. Although, looking at NASDAQ, it is not nearly at the level where it is ready to make any break back up into its range. We will have to see how the market performs.

If SP500 can make the break through 1294-1295 and hold, odds are it will continue higher in its range. It may not make it up to that February peak, but it might give it a decent run. That is what I would expect. But if it does continue to the upside, we would be looking for some more upside positions. With these trading ranges, you cannot get too late in the move or you end up getting stung. There is a possibility we could take some SPY at 1294. Then you have a move all the way up to the February peak at 1343, roughly 50-points, and you can make some money to the upside on that with an SPY or an SSO play at that point. Those are easy ones to make along with other big names that can rally.

One of the things that bothered me today was that some of the big names could not make the move. You would expect GOOG, CRM, etc to move higher, but they struggled. A lot of the move was relegated to some of the smaller issues. No problem with that. On these shorter moves, I prefer to see the big names move because you get more liquidity for the stock as well as the options. You can get in and out quickly when you need to make a trade. In a trading range, that is what it comes down to at times the ability to get in or out relatively quickly.

We have this break to the upside. We will see if it can continue the move. Maybe some of the economic date in the morning will assist SP500 in making the break. We got what we expected; it was just a matter of when it would occur with more of a flush-out or not. Turns out it got enough selling and it got a report on the economy that was less negative than anticipated. That triggered the upside move. Now we look for step two on Wednesday to see if it can continue the rally to the upside. I will see you in the morning, and we will find out how hot (or not) those Consumer Prices are.