–> Once again, the market is lead higher by Energy and material stocks (bad), but accompanied by financials (good). Financials have so far shown to have interest among investors, however we need to see a more robust rise in this sector as it still has yet to break it’s 200 day moving average and it’s early May high (almost a month now since it’s made new highs). The fact that it hasn’t followed the market higher is a negative sign.
–> Notably a laggard in today’s rally? Consumer Discretionary (bet of increased spending by consumers) as “chain store sales” show a larger than expected decrease. Doesn’t the consumer make up about 70% of the economy? On the bullish side, we have experienced the much heralded “Golden Cross” (50 day mv avg. crossing over the 200 day mv avg.) and is a historical powerful bullish indicator that could signal continued upside for consumer discretionary stocks.
I have two “what-seem-to-be-trivial-to-the-market” problems with the current rally (call me a headstrong individual, see if I care). Two key cogs for a sustained recovery revolve around housing and increased spending (ie. mortgage rates and gasoline prices). Over the last 2 weeks, mortgage rates have spiked (triggering reduced refinances and depressing demand for homes) and gas prices are now up more than 20% this month– of interest obviously is what will be the fed’s response to these new problems be (higher QE?). I still am in the camp that this rally has been way overdone; however one cannot argue w/ the tape and as long as we have higher highs and lower lows, the rally continues.
My fear is that inflation expectations have substantially percolated into the market (as seen by higher oil and commodity prices leading to higher Energy and Basic Material sectors) and once this threat is not seen as immediate (see “Investment Letter” why), commodities, and oil will come crashing down, taking the stock market down with it.
Needless to say though, I have been humbled by the strength of this rally.