7/20/09

Charts: The S&P 500 closed at 951, up 1.14%. The broad index pushed through resistance of 946 (the June closing high) and faces next resistance at 956 (June intraday high and the top of the trading channel). 946 is now a support level, under that next support is 935. All the major indexes are above their 200-day moving averages for a week now, a positive long term indicator. Tech and other cyclicals are leading, not financials, which is good, a sign of quality leadership. Ultimate leadership is still emerging markets; everything depends on them technically and fundamentally. With today’s action and the 7% gain from last week the market is getting extended and it still needs consolidation for long lasting gains.

Fundamentals: 71% of S&P 500 companies that have reported earnings have beaten so far. Even in a bull market usually only about 60% beat, so this is encouraging. They are beating this quarter the same way they beat last quarter: by greater than expected cost reductions, not revenue increases. This means earnings are of lesser quality. Eventually revenue has to increase for the recovery and the rally to have legs. However, the incredible and successful efforts at cost cutting mean that these companies are now so lean and mean that when and if revenue does start increasing profits will be robust.
It looks like the private sector will bailout CIT Group with minimal government help. I was hoping the CIT rescue could be 100% private, but it is still a watershed moment. Goldman Sachs raised its yearend forecast for the S&P 500 by 13%. Goldman is the king, so we need to take it seriously. Today’s uptick was a combination relief rally on the CIT rescue, investors listening to Goldman, and the Conference Board’s leading economic indicators popping up for the third time in a row.

Geopolitics: For the first time in two years Paki police have mounted a successful attack against the Taliban in the Swat Valley, killing 1 bad guy and destroying 7 Taliban houses. Up until now the Taliban has batted local police forces around like a cat with a mouse. The Paki Army arrested 54 bad guys over the weekend and killed 12. No good guy deaths were reported.
The Afghan Army killed 35 bad guys in recent fighting. 2 good guys were killed. For the first time the Afghan government has gotten armed villagers to successfully attack the Taliban. If this trend continues it would be incredibly good news. The success in Pakistan against the bad guys is largely based on the general population turning against them. Afghanis carrying on the fight with America and NATO helping (not acting alone) is essential. And this weekend at least saw that kind of action (bullish).