A Happy Day...

Driven by geopolitical news (the nuclear test conducted by North Korea yesterday) stocks opened under pressure. However...within minutes stocks found their footing and reversed to the upside. The advance gained momentum once the Consumer Confidence Index was released (more below) and higher highs were made throughout most of the day. The market drifted off the highs during the final hour but still managed to close with very healthy gains.

At the end the Dow closed + 197,21 points or + 2.38 % and the broader based S&P closed + 23.24 points or + 2.62 %. Perhaps even more staggering...the Nasdaq closed + 3.45 % and the Russel 2000 index (US Small caps) closed + 4.77 % !

It was despite the geopolitical news (North Korea and their nuclear test) that the news item of the day was the report on consumer confidence. Released once a month the Conference Board releases an index which measures the level of Consumer Confidence. Needless to say...the readings have been pretty dismal for more than a year.Until today that was.

The index for May came in at 54.9 for the month, an advance of more than 14 points over the April number. (April was 40.8).

To put the number in perspective...the last time we saw an advance of this magnitude was in April 2003.

Today's advance which represents the greatest rate of more than 6 years suggests a couple of things.2/3rds of our economy is consumer driven and for the economy to enter a sustainable growth path the consumer has to spend. Today's number makes clear that for a majority of consumers it is now much more likely that they will open their pocket books to buy big ticket items (i.e...TV's, house appliances and cars).

The increased likelihood of a notable increase in consumer spending is what drove stocks higher in a big way today. The market likes the idea that consumers are more likely to spend...hence stocks went up.

Now...an interesting question is whether consumer confidence is up because stocks managed to rally more than 30 % since March. In my mind the obvious answer is, of course,...yes.

With stocks erasing all of the year to date losses we all feel much better about out portfolios....hence the huge increase in consumer confidence.The real test of consumer confidence is not the number released today. The real test will come once the stock market goes sideways (or even down). Only when consumers feels secure about their income and long term job prospects one can argue that the boost in the consumer confidence index serves as a viable indicator of future consumer spending.

As it stands today...I would be rather cautious to get overly optimistic because of one, admittedly extremely good, consumer confidence number.

Furthermore...not to spoil the day but just take note of the following:The National S&P/Case Schiller Home Price Index was released today. The number measures the value of (almost) all homes sold in the US during the 1st quarter of 2009 versus the 1st quarter of 2008.

The index came in at a loss of 19.1 %. This is a bad number...it means, quite simply, that every home in this country declined on average by 20 % during the last 12 months.There is nothing good about this number. Analysts had expected a better number.

Also...to offer a different perspective...the number means that nationwide we are now 32.2 % below the real estate peak recorded in July 2006.

As usually...I am the first one to admit that I am surprised about today's move. I expect prices to decline and the velocity of the upward move makes me question my current market call.

Be it as it is...I am still neutral stocks with a short term negative bias. I expects prices to decline towards the 8000 number. A close above 8620 would change my position.

Hold on to your puts for the time being.

See you tomorrow,

Steve Benger