Daily Commentary : Climbing The Wall Of Worry

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Daily Commentary
Climbing The Wall Of Worry
David Goldring
Friday, June 06, 2008

Despite a surge in oil prices and Standard and Poor’s lowered rating on some prominent bond insurers, the major indices exploded to the upside yesterday. In the process the Nasdaq (2549.94) recaptured its 200 day average in convincing fashion and the broader market now appears poised to resume the rally that started March 17th. The jobs report was just released and it showed a decline of 49,000 and a puzzling sharp increase in the unemployment rate to 5.5%. We confess, given the recent good economic data, we were holding out for the possibility of a modest increase in jobs, which could have served as a powerful catalyst to get the second phase of our rally going in earnest. Yesterday’s strong action encouraged us to add back long side exposure with increased conviction and despite this mornings disappointing news, we continue to feel that we will soon break out of this consolidation period and embark on a sustained upturn back to the December highs. It is important to note that the decline of 49,000 jobs is still nowhere near the 200,000 declines seen in the 1990 and 2001 recessions; so the bottom line is that while economic growth is moderating, it is not falling off the proverbial cliff and the most undervalued market in thirty years has already priced in this worst case scenario. In the past Wall Street has somewhat perversely celebrated weak employment numbers as the bond market would rally and p/e multiples would expand, and so perhaps we will recover from early weakness this morning. Critical near term support on the S&P 500 (1404.05) is the 1383/1388 area, and so long as we hold above the 50 day average on a closing basis, we continue to believe that yesterday’s spike higher was the blast off move to the second phase of our rally. We were looking for a move to the 200 day at 1424, a modest pullback, and then a successful recapture and challenge of our 1440 high. Down the road, any break above 1440 would have the bear market rally crowd throwing in the towel, and we certainly expect to see this play out in June. The Nasdaq (2549.49) closed at its highest level since January 3rd and Tech is certainly showing signs of relative strength. National Semi (NSM – 22.66) blew the cover off the ball in yesterday’s earnings release and provided evidence that the analog revolution is only just now getting going, which augurs very well for Texas Instruments (TXN – 32.03). Look for early support on the Nasdaq at 2528 and pay special attention to the 200 day at 2514. Its 45-30 as we move around the 200 day average, and we don’t want to see deuce and another move below the 200 day. Recent strong action has encouraged us that we will not see a 50 day test near term, and that a run to the December highs will play out first, but a give up of 2514 would encourage some near term defense. The price of oil is on a tear this morning as the president of the European Central Bank rattles on about increasing rates! We don’t think treating cost-push inflation in the same manner as demand-pull is wise, but the hawks are center stage at the ECB. Again, the oil price and commodity bubble in general needs to pop, before p/e multiple expansion and the shackles holding back the broader market are free to set us on our way to new highs. Oil is up to $134 this morning and the recent high is at $135; and any move above $135 would bring a potential spike above $140 into play, which in turn will weigh on the broader indices and bring our original S&P 500 Up trend and Nasdaq 50 day test back into play. We are getting whipsawed a little here, but a resolution is close at hand, and we are confident it will be to the upside.