Monday, June 1, 2009

A Great Day, But Keep Your Focus And Don't Become Overconfident

The crazy action in the last few minutes on Friday had a lot of people thinking that it was manipulated action that would be quickly reversed. Maybe it was a manipulation, but it sure wasn't reversed today. In fact, it probably helped create the big move today as those who were caught by surprise scrambled for long exposure when we didn't have a quick reversal this morning.

Technically speaking, the action doesn't get much better than this. Breadth was stellar at better than 3 to 1 positive and volume picked up substantially, particularly on the Nasdaq. Gold, silver and pharmaceuticals -- all defensive -- were weak but the biggest negatives were underperforming financials and bonds that fall sharply once again after a brief bounce on Friday.

After the close, JPM confirmed that it is looking to raise equity to repay TARP. Potential equity offerings helped keep the lid on that group.

Many stocks now present the classic dilemma of having very strong momentum but also being extended. It isn't easy at all to pay up when you have a stock with two or three big bars, but the fear of being left behind is driving many stocks straight up.

The most important thing is to stay disciplined and not let all the blather about how great the market is keep you from taking some gains and staying vigilant. Obsessing over how stupid the bears are and how wonderful the market is acting is a good way to get in trouble. Overconfidence has killed more traders than double super-special pizza pies.

Going into more detail, stocks spiked today in broad-based buying. Thanks to a concerted, broad-based buying effort amid pleasing economic data, the S&P 500 climbed to fresh highs for 2009 and managed to close above its 200-day moving average for the first time since December 2007... There wasn't any individual catalyst for the upward push, just pleasing economic data in the U.S. and abroad... Personal spending for April declined a moderate 0.1%, which was better than expected and an improvement from the previous month, while personal income for April showed a surprise 0.5% increase in the face of loose labor conditions... Construction spending for April also registered an unexpected increase by climbing 0.8% month-over-month... The ISM Manufacturing Index for May came in at 42.8, which was largely in-line with expectations, but up from the prior month. Though the reading indicates manufacturing activity continues to contract, the pace of contraction is decelerating... Meanwhile, upbeat PMI data in both China and Europe supported foreign indices, and even looped back to the U.S. to help extend the surge that U.S. stocks saw in the final hour of trading last week... Given the impressive gains in the U.S. and abroad, the Dow Jones World Index climbed 2.6% Monday... Retailers in the S&P 500 saw some of the best gains. They spiked 6.1%, which helped the consumer discretionary sector climb 4.6%. The sector was also helped by a 6.4% advance by automakers, even as GM confirmed all previous suspicion by announcing that it will enter bankruptcy with the help of the U.S. government, which is investing $30 billion for a 60% stake in the company... As a result of the filing, GM will lose its long-held position in the Dow. CSCO will replace GM in the index on June 8, which is also when TRV will replace C... Strength in blue-chips helped the Dow cut into its year-to-date loss, which now stands at less than 1%... Industrial stocks climbed 4.7%, more than any other major sector. Tech tacked on 3.3%, helping the Nasdaq Composite outperform the other headline indices and close above its 200-day moving average for the fifth consecutive session... The broad-based buying effort helped nine of the 10 major sectors in the S&P 500 finish higher. Telecom (-0.4%) was the only sector to finish lower, but financial stocks (+0.5%) and health care stocks (+0.5%) also lagged the broader market... Commodities also logged an impressive session as the CRB Commodity Index spiked 3.1% to log its best single-session advance by percent in two months. It was helped along by rising crude oil prices, which logged another 2009 closing high by finishing pit trading 3.2% higher at $68.40 per barrel... Treasuries were knocked around again. The benchmark 10-year Note shed 58 ticks, which pushed its yield up to 3.68%. The 10-year Note had been down more than two full points during the session.

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