The Fed’s bold plan of injecting another trillion dollars into the banking system was met by investors yesterday with a solid vote of skepticism. Instead of putting more money into stocks, they reacted by driving commodities such as gold and oil higher causing the CRB Commodity Index to gain more than 5%.
Fear of impending inflation and even “stagflation” appeared to be the motive for the run after commodities and related stocks. But it wasn’t only stocks — the dollar was a victim of the selling. The greenback fell 1.7% and is off more than 4% in just two days.
Auto parts makers benefited from a $5-billion program for car parts suppliers and their shares jumped 8.6%. But profit-taking continued to haunt the financial stocks and they fell 8.0%.
By the close, the Dow Jones Industrial Average (DJI) was off 86 points at 7,401, the S&P 500 (SPX) fell 10 points to 784, and the Nasdaq (NASD) lost eight points and closed at 1,483.
On the New York Stock Exchange, breadth was even with 1.9 billion shares trading, and on the Nasdaq there were slightly more sellers than buyers and volume totaled 809 million shares.
The April crude oil contract rose $3.47 to $51.61 a barrel and the Amex Energy SPDR (XLE) finished the day at $44.98, up $1.06.
Gold for April delivery rose by almost 8% to $958.80, up $68.70, and the PHLX Gold/Silver Index (XAU) closed at $136.65, up $7.11.
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What the Markets Are Saying
On March 6, just 11 trading sessions ago, the S&P 500 (SPX) hit a low of 666.71. Since then, six of nine sessions have been up and the index has risen over 20%.
The SPX has penetrated the 20-day moving average and the first island of resistance at 742 to 780, and yesterday when hitting 803.24, it entered the first serious zone of overhead at 800 to 820.
But technically, and as a result of the huge percentage gain, virtually every internal indicator is now overbought. The short stochastic of the S&P 500 is at the highest level since 2008, just prior to the high of 1,440 made on May 19, which preceded the huge sell-off to 820. And the same is true of the other indicators like Moving Average Convergence/Divergence (MACD), the Relative Strength Index (RSI) and a host of others.
Except for volatility indices, the CBOE Volatility Index (VIX) and the CBOE Nasdaq Volatility Index (VXN), other sentiment indices like the America Association of Individual Investors (AAII) weekly survey are telling us to be very cautious since the public is becoming more bullish.
AAII bearish sentiment has declined for three weeks and on Wednesday reported that 38.27% were bearish versus 54.47% and 70.27% for each of the prior two weeks. But most alarming of all, the AAII members have become more bullish, with 45.06% bullish. This is the first time that they have been bullish on balance since Jan. 8.
But as the market is becoming more overbought and due for some serious selling, two major commodities — gold and oil — are establishing new bull markets. And the word stagflation is whispered more loudly as the dollar declines while other commodity and stocks and futures are attracting more buyers.
Today’s Trading Landscape
Earnings to be reported include: Kirkland’s (KIRK) and NeurogesX (NGSX).
There are no major economic reports scheduled.
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Sam Collins is a registered, fee-based portfolio manager who may be contacted at samailc@cox.net. You can also check out an archive of some of his most recent market outlooks by clicking here.
