Market Hangs Tough

Charts: The S&P 500 closed at 1006, up .3%. Charts remain bullish, although Chinese stocks took a small hit. First support for the broad index is at 996. After that support is at 982, the breakout point of the second rally within the nascent bull market. Resistance is at 1010, the October high.

Fundamentals: Pending home sales popped up more than expected. Housing numbers have been good for three months now, with the exception of homes over $750,000, which have been terrible. High end homes do not receive government subsidies. Low end homes get an $8000 tax credit plus FHA, Fannie and Freddie are essentially making subprime loans to support this segment of the housing market. The $8000 tax credit ends in November. Almost certainly we are seeing a rush of buyers coming into the market to beat this deadline. Unless you believe that the housing market is going to do fine once the government takes off these subsidies economic fundamentals within America’s domestic economy remain weak. On a similar note, German retail sales came in very weak. Exports from Germany and America to emerging markets are offsetting this internal weakness. So we are back to the question we’ve been asking for months now, can China and Asia save the world?
The US government’s revisions to the last few years worth of GDP data show that the recession was caused by oil spiking to 147 a barrel just as much as Lehman’s collapse. That spike is what really slammed GDP. More to the point, high oil prices hurt Asian consumers. The global recovery probably can’t take oil over $80 a barrel. We need to see oil production ramp up to be truly bullish. Oil was well behaved today (bullish).
The 10-year note’s yield popped again (bearish), treasury prices were hurt by the good news on housing and this once again shows the built-in dampening effect that might limit the stock market's upside.

Geopolitics: In Nigeria, Boko Haram is best translated as “Non-Islamic education is sinful.” The word Taliban is best translated as, “Students of Islamic education.” So Boko Haram means essentially the same thing as Taliban. And after they just got crushed by the Nigerian Army, Boko Haram fighters are acting like their Taliban counterparts in Pakistan’s Swat Valley, shaving their beards, blending in with the local population, regrouping, and getting ready to fight again. Nigeria is going to need help from the CIA and it will have to cut a deal with MEND (the very powerful non-Islamic rebels) to fully destroy Boko Haram. As oil prices go up Nigeria is going to become more important. It produces the highest grade crude in the world (easy to refine) and could double production if stability were to emerge.

Specific Stocks: Flowserve (FLS) makes ultra-high performance pumps, valves, seals, and automation gear for nuclear reactors, offshore oil rigs, and caustic chemical plants. It is mostly levered to energy. The gear it makes is technically challenging and emerging market countries can’t make this stuff, but need it. Brush Engineered Materials (BW) has a virtual monopoly on beryllium alloy products. These are used in nuclear reactors, nuclear weapons, high power transformers and smaller electronic gizmos like bar code scanners. Again, this is stuff that emerging markets need but can’t make for themselves. BW reported blowout numbers a couple days ago and the stock is on a tear, making it hard to find an entry point, so be careful.