And An Up Day...Like Playing Jojo

Stocks opened strong on the back of the Durable Goods number released before the opening. However, the market turned south and tested the downside almost immediately. Stocks were down almost 1 % before a recovery rally lifted prices back into positive territory. At the end of the day all of the major averages closed solidly in the green...partially erasing yesterdays losses.

The Dow ended the session + 103.78 points or 1.25 %. The broader based S&P ended the day +13.77 points or 1.54 %.

I have been mentioning it a couple of times...but for good measure I am going to talk about it again today.


Longer term interest rates have been going up now for more than 4 weeks. This is despite the FED buying the debt the Treasury Department is issuing. (which is happening for the 1st time ever in the history of the FED). One of the corner stones of the anticipated recovery are low interest rates and, by extension, low mortgage rates.


The continued rise in rates makes this a very difficult preposition to achieve. The consequences of higher interest rates have the potential to derail (or at least postpone) any economic recovery.


It is to early to see that happening but once again...if rates continue to rise at the current pace we will have to face this issue by mid/late summer...and this would be a major problem for the FED.


Government debt is projected to increase by about 2.5 Trillion US-$ over the next 2 years. (which equals about 17 - 18 % of the total US GDP !).


If buyers of our debt start to require a premium to buy that much debt from us...then we are in a boatload of trouble. The recent increase in long term rates might be a first indicator that this is starting to happen.


I hope that I am wrong with this assessment...but as always, time will tell.


The perhaps most important economic development today was the release of the Durable Goods number for the month of April. The April number increased by 1.9 %, much better than expected and making it the biggest advance of the last 16 months.


Undoubtedly this was welcome news. Durable Goods are longer lasting, higher priced and typical industrial items. (i.e. planes, ships, metal presses and so on).


The fact that we are seeing an uptick in the sale of those items is a good indicator that we are, at least temporarily, seeing a bottom in the demand for industrial products. Of course...the level we from where we are seeing the uptick is also much lower then where we were just 1 year ago.


I like the number but also would like to issue a word of caution. My belief is that an improvement in any type of consumption related number is already priced in at the current levels.


Remember...stocks are now about 35 % above their lows from early March. I am not suggesting that stocks will not move higher from here (at least longer term...see my opinion below) but there should be more and more headwind until the dust settles.


Stocks are currently fighting a tug of wars and are trading almost like a Jojo. We are going up one day and erasing gains the next day only to make the lost gains back the following day.


Intraday volatility has been picking up steadily over the last 10 days and even though the market has not made a big move on a closing basis...intraday activity has been anything but calm.


This type of market action is consistent with a bigger move happening soon. The big question is of course...which direction ?


Readers know that I have been market neutral and short term negative for 3 weeks now. Even though I have to admit that the market has not been going down at all (rather is has been going sideways over the last 2 weeks) I still feel good about my current outlook.


Simply put...after a 35 % increase in stock prices it seems to me that there is some significant potential for a pullback and the upside, I believe is rather limited.


So...I remain neutral stocks with a short term negative bias. However...a close in the Dow above 8620 would change my outlook and force me to reconsider. Until that happens I would suggest to hold on to your puts.


See you tomorrow,



Steve Benger