Charts strong. Fundies weak. Again.

Charts: The S&P 500 closed at 1003, down .3%. XLF (financial index) was up 3.5%. CAF (Chinese stocks) was down 2.3%. The broad index showed tremendous technical strength by falling only a tiny bit in the face of bad fundamental news. Financials were buoyed by a short squeeze in AIG, so it might be fluky. We need to watch China carefully since it is the global horse that we all depend on.

Fundamentals: Earlier in the week the ISM manufacturing survey came in stronger than expected because it is levered to Asia. Today the ISM service sector survey came in weaker than expected because it reflects America’s weak domestic economy. Yesterday we saw that US household income and spending are still weak and for now totally dependent on government stimulus. The market would almost certainly be tanking right now if it weren’t for the strong housing data over the past couple months. The market disagrees with my theory that housing will collapse once the first time home buyer tax credit expires in 2 ½ months. Strong housing data is supporting the financial sector.

Geopolitics: In Israel, Hamas and Fatah are holding reconciliation meetings to bridge their differences and present a unified front in upcoming peace negotiations with Israel. The Palestinians are getting very serious about the peace process. The leader of Fatah, Abbas, is setting forth a program of civil disobedience rather than armed resistance. This is an obvious attempt to pacify Washington and a sign that there is indeed a sea-change underway.
In Afghanistan, Taliban rockets rained down on Kabul Tuesday, doing little damage but a sign that the bad guys are serious about disrupting the national elections in August. Other anti-election tactics from the Taliban have been more effective. 77 NATO troops were killed in July, a record. Politicians are unable to campaign in Taliban controlled territory. And the Taliban seems to be effectively framing the debate; if the elections go well America is winning, if they don’t the Taliban is winning. Of course framing the war in these terms gives the bad guys a huge advantage. It’s a lot easier to destroy the elections than to pull them off smoothly. Once again we see that the Afghani Taliban is tougher and smarter than Al Qaeda in Iraq.

Specific Stocks: Foster Wheeler (FWLT) reported solid numbers today. The chart looks okay, although the stock bounced 15% today, a bit much. FWLT is an engineering firm that essentially installs the kind of gear that Flowserve (FLS) builds. So I like this sector.