Wednesday July 5, 2006
The index markets continued to build upon the Bernanke led rally from last Thursday's FOMC statement during Monday's abbreviated trading session. Volume flows were very light with the 4th of July holiday keeping most players away from their screens. The ISM survey was the one key piece of economic news for the session. The headline rate came in on the low side of expectations at 53.8, however, the jump in new orders to 57.9 offset the potential weakness of the report. In the release, it is interesting to note the ISM chair's view of the report, "Manufacturing growth continued in June, and although the rate of growth slowed slightly, renewed strength in June's New Orders Index provides encouragement for the third quarter. The sector is benefiting from the weaker dollar and business investment...our members generally see their business in a continued growth mode."
The index markets now stand slightly above their respective 50% retracement levels from their 2006 highs to our June trading lows. This week will bring the employment report, while next week brings the beginning of earnings season and more economic releases. Considering the FOMC language is - in my opinion - a relatively worthless task for any trader. The key is understanding how the marketplace will respond to any subtle change in the language. After Thursday's release, many major participants produced notes saying the FED was done, however, the bond market never really bought into that theory and currently resides just a bit lower in yields than it was on Thursday before the FOMC announcement. Equities, the dollar and certain metals have had the sharpest directional moves since the release...the question is pretty simple, was Thursday's FOMC statement a trigger that leads to a sustained one way street in these markets? Or are we smack in the middle of a suckers rally that will get awfully painful once the buying subsides? This last statement reminds me of a quote that George Soros said once in regards to speculation - and I am paraphrasing here - "the trick to successful speculation is to ride the false trend and get off before everybody else."
I have included a chart depicting the MA extensions for 2006 in the SPX cash market for the 20 day and 200 day MA. We have bounced...now what?
