Sam Collins

Stay Tuned, But Stay Focused

by Sam Collins   05/30/08

For the third consecutive day, the major indices posted gains that were driven by lower oil prices. But several important economic factors helped, too.

The Commerce Department revised its Q1 GDP number up to 0.9% from 0.6%, and the Labor Department said that unemployment claims rose 4,000 to 372,000, which was slightly higher than forecasted, but still within the range of expectations.

The U.S. dollar continued strong as commodities fell, and financial stocks led the sector gains on the S&P (SPX), climbing 1.8%. Bear Stearns (BSC) led the list of financials, as it gained 1.8% resulting from the approval by shareholders of the takeover by JPMorgan Chase (JPM).

MasterCard (MA) rose to a new high, up $22.11, after it forecasted long-term net income growth of between 20% and 30%. And Countrywide Financial (CFC) rose 8.2% after it scheduled June 25 as the date for shareholders to approve its takeover by Bank of America Corp. (BAC).

At the close, the Dow Jones Industrial Average (DJI) gained 52 points to close at 12,646, the S&P 500 (SPX) was up seven points at 1,398, and the Nasdaq (NASD) rose 22 points and closed at 2,508.

On the New York Stock Exchange, 1.3 billion shares traded and breadth there was a positive 2-to-1. The Nasdaq (NASD) traded 846 million shares, with advancers ahead by 8-to-5.

Crude oil closed at the lowest price in two weeks, with the July contract falling $4.41 to $126.62 a barrel. The Amex Energy SPDR (XLE) fell $2.39 closing at $85.12.

The August gold contract was hit by sellers again, falling $23.30 to $881.70 -- the lowest close in more than two weeks. The PHLX Gold/Silver Index (XAU) fell $7.51 and closed at $177.51. Support for the XAU is first at the 200-day moving average at $175 and then the bullish support line at just under $170.

What the Markets Are Saying

No doubt about it -- since January, this has been a tough stock market to figure out. And the closer we get to summer, it may become even more perplexing as intense crosscurrents will probably make analysis less predictable.

For the past six weeks, analysts opined that the problem with the markets was that there was a "hidden from the public inflation factor" and the catalyst for that inflation was, of course, black gold. The reasoning said that when oil tops out, there is bound to be an immediate move higher in stocks since the major cause of inflation will have been removed.

But, in the same breath they said, "Oil is going to $200 a barrel and nothing can stop it." In response, others surmised that the energy markets are in the final throws of a bubble-top and that the evidence for that was the appearance of the oil bull on every major financial publication at sometime during the month of May.

Perhaps the crude oil bears are correct: Maybe we've seen a top -- despite the overwhelming demand that increases monthly and our efforts to refine more crude with the same number of refineries as 30 years ago -- but I doubt it. And maybe the markets will behave more rationally than they did this week when, on Tuesday, crude executed a daily reversal and closed higher by more than $2 a barrel, accompanied by a Dow (DJI) gain of 46 points.

That's just too much for my little, ole mind to work with, so back to what has worked -- straight, heads-up technical analysis.

For example, consider sentiment: An indicator that has stood the test of time is the public sentiment report from the American Association of Individual Investors (AAII). I suggested last week that the public's bullish stance of five weeks (with the average of 49% bullish versus 28% bearish) was about to be broken. When it happens, that's a pretty good sign that we are close to a bottom.

Well, last night the AAII reported that the numbers have flipped with 31.36% of the public bullish versus 45.76% bearish. True, this is just one report for just one week, but other sentiment numbers (like inside buying, CBOE volatility indices, etc.) support the opinion that stocks have reached a correction low.

Stay tuned, but stay focused. For now, forget the relationship between stock prices and oil -- it's a slippery, black and dangerous slope.

Today's Trading Landscape

Earnings to be reported today include: Graham (GHM), Kirkland's (KIRK), Lions Gate Entertainment (LGF), Medical Action Industries (MDCI) and Tiffany & Co (TIF).

Several economic reports are also due including: April Personal Income (the consensus expects 0.2%) and Spending (0.2%), the PCE Deflator (the consensus expects 3.1% year-over-year with a core 2.1%) and the Chicago Purchasing Managers Index.

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