Strength begets strength

Charts: The S&P 500 closed at 976, up a blistering 2.3%. The index smashed through several resistance levels. The Nasdaq is notching a sequential winning streak that has beat anything in nearly 20-years. While the recent bearish head and shoulder pattern was forming short interest increased and we are certainly seeing short covering now; however, strength begets strength in technical analysis so we have very positive charts right now. The only real weakness is that throughout the rally that started in early March volume has been very low, lower than the start of any other bull market.

Fundamentals: Existing home sales came in better than expected today. This was the cause for the monster rally. Buyers snapped up regular houses more so than foreclosures; investors took this as a sign that normalcy is finally returning to the housing sector. The National Association of Realtors warned that today’s good numbers are deceptive because many of these reported sales won’t close due to tight credit and bad appraisals.
The percentage of companies reporting earning beats is widening as the season progresses, obviously bullish. The earnings beats are still almost entirely due to cost cutting as revenue continues to come in soft. In Asia the data looks very good. Spot prices for iron ore are zooming up as demand is spreading from China out to the other tigers. And this is the big story. It is possible that Asia will pull the global economy out of recession. And it is also possible that stupid governmental mistakes in America will drag the global economy back down again, creating the classic W-shaped recovery. This is what happened in the mid-30s when our government jacked up taxes just as a recovery was taking hold, plunging us back into a “recession within a depression” as economists would later say. This is why the healthcare bill needs to go down in flames; the new taxes that it will bring along with the expiration of the Bush tax cuts will be bearish.

Geopolitics: July has been the deadliest month ever for NATO forces in Afghanistan, with 63 good guys killed. However, July has also brought about a positive change in the war, the Afghan Army and police forces are vastly stepping up their efforts. Tuesday saw the Afghan Army killing 13 bad guys. On Wednesday Afghan forces made scores of arrests. When Taliban fighters give up, rather than fight to the death it is a good sign because guerilla wars are won when insurgents surrender. As noted yesterday, America doesn’t have the manpower to occupy Afghanistan, but our new strategy is to build native forces that can get the job done and this seems to be working.
This week the invincible Pakistani Army has killed so many bad guys from so many different parts of the country that the body count is difficult to tally, perhaps 150 Taliban fighters have been eliminated. Long term DMU readers are familiar with my thesis that America winning wars trumps any fundamental economic data as far as influence on global stock markets. The obviousness of the USSR’s eventual Cold War defeat in 1982 triggered the greatest bull market in history. So we have to ask ourselves if this is a 1982 moment.