Stocks Rebound

Stocks staged a vigorous, albeit light volume rally Thursday. As Dave Fry put it, “earnings and punchbowl beat poor data.” The SPX bolted out of the gate, leveled off through most of the day, and pulled back a bit in final hour before closing up better than 2% for the day. The index topped the 50 day SMA and broke above the downtrend line.

(click on chart to enlarge)

Joining the “risk on” parade, oil and the commodities group continued their modest summer rally but curiously, Treasury bonds did not sell off. Within the commodities, both Cam Hui and Dave Fry (and others, no doubt) have written about the importance of copper prices as an indicator of broader economic prospects. Copper, as Dave noted in yesterday’s chart study, has broken through resistance. That is a legitimate if tentative bullish signal.

Whenever we look at commodity prices, oil in particular, we also have to look at the US dollar, which is the other side of the transaction. The dollar has been falling as oil and commodities have been rallying. Yesterday the dollar’s correction paused, while the euro’s dead cat bounce and the Yen rally did likewise.

This is noteworthy as today we get reports on the European bank stress tests. I looked at the charts of several of the major eurozone banks to see if they were giving a signal, and didn’t find anything remarkable – but they do seem to be going along with the general direction of European large cap stocks, which is up.

The question is, do you buy the bull thesis here? I’m cautiously optimistic, but the bond market doesn’t appear to be buying it, and when in doubt, I go with the bond market signal. My long positions are lightly hedged and I’m still heavy in cash. It’s going to take more than a one day pop in stocks  for me to go to a normal allocation; we had a similar rally attempt in June that didn’t break the primary downtrend.

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