Watching for Bullish Action From Housing, Lumber
Cover any shorts in housing stocks for the time being.
- The Dow finished modestly higher while the S&P, NASDAQ, and Russell 2000 were flat.
- Market internals were mixed as volume was light to average, net new highs were healthy, and breadth was decidedly negative for the NYSE, NASDAQ, and Russell 2000 (see below charts).
- The benchmark 10-year Treasury fell and the yield moved up three basis points. There's been plenty of economic data and Fed talk for bond traders this week. At 3.67%, though, the 10-year is simply in the middle of its trading range for 2010. The reading on its RSI is also in the middle -- almost exactly at 50 -- indicating that this investment vehicle has just flattened out as it temporarily found its supply/demand equilibrium.
- The dollar showed strength and the DXY closed higher by nearly 0.75%. The dollar index closed at 80.28 after flirting the past two days with its 50-day moving average, which comes in at 79.41. The key levels are still 78.25 and 80.82 -- movement in between is just noise. And there has been a lot of that since early February, as the DXY has fluctuated mainly between 79.50 and 80.75 -- a narrow 1.5% range.
- Commodities were mixed on Thursday, with the energy complex lower -- led down by natural gas -- and precious metals eking out gains (despite dollar strength). PowerShares DB Commodity Index Tracking (DBC) finished slightly lower at 23.71 (down 0.20%). Like the 10-year Treasury and the dollar index, DBC has fallen into a very narrow trading range since mid-February.
- It's worth pausing here -- just as Treasuries, the dollar and commodities have -- to reflect on this. Three asset classes, all heavily linked to inflation expectations, have essentially stalled here. It's as if the forces of supply and demand are perfectly balanced at current levels. Right now, the markets are suggesting that inflation isn't a concern, and this has been a boon to equity markets, allowing all major indices to move to new 52-week highs. Whether you agree with this or not is immaterial. Of importance now is that you recognize markets are pricing in low inflation (and improved earnings on an economic recovery). In other words, markets are dismissing inflation as a serious risk. By understanding this, you'll know to expect the markets to be unnerved if signs emerge suggesting inflation is a threat. An edge can be gained by knowing those things for which the markets are not prepared.
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- Optimism for continued economic improvement can be found in equities and nowhere else right now.
- The various markets are suggesting that inflation is in check or will be contained by Bernanke & Co. Investors, who are taking a shine to equities as they expect companies to perform better and the economic recovery to hold. Will it be clear sailing for the bulls? Or, will calm markets become unsettled by unexpected news?
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Market Internals: NASDAQ
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Market Internals: Russell 2000
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