The sideways asset action from the last week of February kept the pressure on sellers that may have overstayed their welcome — once again trying to pick that elusive market top. They may not find it. That’s because the market’s setting up for a "Square Root Recovery" — here’s everything you need to know to understand what’s going on…
What the "Square Root Recovery" Means for Commodities
The dip in prices in late February was once again met with buying that now have positioned oil, gold and stocks for a run to recent highs. This setup is impressive now that the S&P has reclaimed the 1100 level and now attacking resistance at 1110/1120 which was the triple top from November/December. This has all been accomplished without the aid of Dollar weakness that can accelerate the bull trend on a turn down below 79.5.
Stocks were nearly unchanged for the last week of February with prices in the major indexes off less than 1 percent. The above-mentioned S&P was down 5 points, which is a 0.4% loss in the broad based market barometer. The Dow was down 77 points, -0.7%, and the NASDAQ lost 6 points, -0.3%, for the week ending February 26th.
The "square root" recovery was not my original description but aptly summarizes market action over since the latter half of 2008. As the name implies the recovery is that of a square root sign, which is a sharp initial recovery followed by leveling off later down the road. The V shaped recovery has stalled with prices moving sideways in most assets since the highs of December 2009 and January 2010.
Stocks had led the way for the past year and look ready for another attack on the S&P 1150 then the original breakout of 1300 from August 2008. Since my research service, Resource Trader Alert, focuses on trading commodity futures, not stocks — not stocks — the question remains: how does that affect our futures plays?
How to Find the Positive
The upside potential is magnified in natural resource assets, which were crushed in the previous economic decline. Prices in commodities have another 15% to regain half of the overall drop from 2008. Stocks have long ago rallied above that level and signal a continued recovery with resiliency short lived selling pressures.
A Commodity stock rally from the February 5, 2010 lows is leading the way: US Steel $42 to $54 (28%), Cleveland Cliffs $39 to $58 (49%), and the worlds largest Gold producer Barrick Gold $33 to $38 (15%). (Percentage gains as of early March.)
One natural resource that is not exchange traded, Iron Ore, has made new yearly highs. This from Bloomberg:
"The cash price of iron ore delivered to China, the world’s biggest buyer, rose to the highest in more than a year on demand from the nations steelmakers.
"The cost of 62 percent iron-content ore delivered to the port of Tianjin increased 1.4 percent to $133.10 a metric ton today, the highest in at least 14 months, according to The Steel Index. The so-called spot price has gained 9.8 percent in the past four weeks and has more than doubled from its 2009 low on March 27."
As mentioned in late February, sometimes clues come from not what happens, but rather what does not. The comeback from the depths earlier in the winter was a good sign for continued trend strength.
In fact the Dow gained 2.6% during the month of February, as the S&P 500 added 2.9% when our fighter looked knocked down. Gold also added $40 an ounce and crude over $6 a barrel for the month. This powerful resurgence was surprisingly against the headwind of a rising US dollar.
That all boils down to one thing — if our square root recovery holds true, we can expect stocks to track sideways for a while. And while that’s not great news for all of the folks who are betting hard against the market right now, it’s great news for traders like us… After all, a sideways track for the market gives us plenty of short-term opportunities to trade for maximum profit. You can bet that’s exactly what we’ll be doing in the second quarter of 2010.
Making Sense of This Irrational Market
In the meanwhile, we can’t help but be amazed — and even a bit amused — at what’s happening in the market right now. Some people are calling this the worst recession to hit the U.S. since the Great Depression. And now other people are debating whether the recession is over and whether we’re now beginning a recovery.
Take the stock market, for example. Gains there continued for the sixth consecutive week as the Dow lingers around the 11,000-level (as of mid-April) and a full recovery from the July 2008 lows that began the decline…
I had to pause as I typed that last word
Even as a 20-year market veteran, the old timers liked to point out that most traders have never really seen a sustained bear market — only corrections. The 1987 Black Monday when the DOW lost 22% in one day occurred my freshmen year in college. Healing over time it regained all of the losses in 2 years by 1989 while I was still learning business theory and hitting the books. So the word "decline" may underplay the force and magnitude of the financial uncertainty that occurred.
Profits Anytime
Price is relative and money can be made in all market conditions, which is important to keep in mind while looking back at the past 2 years.
Further more, it hasn’t been long since the NASDAQ hit 5000, Crude oil was at $10 a barrel just a few short years ago and Gold was below $100 an ounce in the 1970s. Interest rates recently hit zero for short-term money — marking an inexplicable negative real return. Corn has traded below 60 cents in the past with Soybeans hitting $16.00 a bushel in 2008. With a broad perspective it’s plain to see price movement goes both ways.
Ups and Downs with Downs and Ups
Much to my continued amazement, the reflation of beaten down assets continues to surprise and bewilder investors. I find myself in a day-to-day battle among colleagues and TV’s talking heads defending the current uptrend — but as you can see, it’s still intact.
The depressed stock shares and commodity resources stopped digging the hole lower in March 2009 and resumed the value role for investors, who were searching to retain and maintain returns. Look no further than the new yearly highs in crude made in the beginning of April at $87 coinciding with new yearly S&P highs at 1188 (already eclipsed by recent upside action).
The current move to Dow 11,000 measures an even shorter 18-month time period to regain ground than the 1987 sell off. This bullish stock price recovery action has left many commodities lagging behind and relatively unappreciated in many uses of the word.
More-Mentum — Courtesy of Earnings Season
We’re now looking at the beginning of the earnings season for the quarter once again. The four times a year short-term corporate scorecard can be a boost or bailout for sidelined skeptics that have watched the S&P 500 rally more than 75% from the 2009 lows. Better than expected results can fuel the hot running furnace of finance.
This from Reuters:
"U.S. stock investors will watch the earnings numbers flow in this week to see how much momentum the rally can get from early profit reports. Some 72 percent of companies beat earnings estimates in the fourth quarter, down from a record 79 percent in the previous quarter, but still well above the 61 percent in a typical quarter, Thomson Reuters data showed."
Keep your eyes pegged to the market — earnings numbers could easily fuel a buying frenzy as companies to marginally better than the Wall Street set expect.
