The Dow finished sharply higher after moving positive for
the year. Slow and steady was the move on Monday as stocks opened higher then
slowly built on their gains throughout the day buoyed by the news that U.S. New Home Sales
beat estimates and FedEx boosted its forecast
Early in the trading session, stocks got a boost as
investors were able to set aside risk because of the acceptance of the European
bank stress test results. Some traders were worried that given the weekend to
digest last weekâ€™s stress test data, investors would reconsider their bullish
tone set in motion on Friday. This was not the case, as investors held stocks
steady to better overnight despite widespread criticism of the techniques used to
assess the solvency of the European banking system.
Technically, the September E-mini Dow Jones futures contract
turned the main trend up on the daily chart with a move through 10367. The
chart indicates the market is in a position to test the .618 retracement level
at 10516 and the June top at 10536 over the near-term. The September E-mini
S&P 500 turned its trend up on the trade through 1099.25. This market is
struggling at a 50% level at 1107.00. Holding above this level could launch an
acceleration to the June top at 1129.50. Finally, the September E-mini NASDAQ
is in an uptrend on the daily chart. Holding the 50% level at 1875.75 could
help drive this market to the 61.8% retracement price at 1917.75.
Cycle watchers may have been disappointed by todayâ€™s strong
finish since several technical timers had been looking for a reversal top.
Todayâ€™s action does not negate the outlook however as several key cycles are
also set to converge later in the week. Continue to watch for higher-highs, but
become cautious if an intraday reversal top develops.
While equity traders looked at todayâ€™s New Home Sales Report
as friendly, Treasury Bonds and Notes rallied on the news. A one-month bounce
off of last monthâ€™s low was not enough to convince investors that interest
rates would rise because of the news. In fact, the Treasurys are still
suggesting the possibility of a double-dip recession because of the recent weak
economic reports as well as Fed Chairman Bernankeâ€™s bearish testimony.
Longer-term investors are pricing in the possibility of the
first rate hike in years by the Fed in September 2011. This clearly shows the
market still does not have strong confidence in the economy. This logic flies
in the face of the stock market rally which is being driven by better than
expected earnings and revenues. The question is what is the best indication of
the state of the economy, the broad-based economic reports or the earnings
The Australian Dollar surged on Monday as rising equity
markets drove up demand for higher yielding assets. Traders are also chasing
the higher yield in Australia
due to the weaker outlook for the U.S. economy.
Early Monday morning, the Aussieâ€™s rally slowed a bit due to
a disappointing Producer Price Index report. The PPI rose 1.0% compared with a
forecast 1.5% rise. After a slight retreat from the early session high, the
market regained its momentum to test .9000 in the U.S. session for the first time
since the middle of May.
Although initially concerned with the modest gain in the PPI,
traders quickly turned their focus on Wednesdayâ€™s Consumer Price Index. Traders
are looking for this report to show an increase of 0.8%, keeping in line with
the Reserve Bank of Australiaâ€™s
overall target band of 2% to 3%. A report greater than the estimate could be
the trigger which gives the RBA a reason to hike its benchmark rate once again
at the next policymakers meeting on August 3.
The RBA has been on the sidelines since May, choosing to
ignore the economy over the short-term because of the financial problems in Europe at the time. Now that is seems the European
financial system is sound, the RBA will shift sentiment back to the economy.
The Australian economy has been strong but traders will have to decide on
Wednesday whether it has been strong enough to warrant another rate hike based
on the inflation data. A spike in consumer prices will put inflation over the
target band, setting the table for a 25 basis point hike to 4.75%.
Despite questions about how the European bank stress tests
were conducted, investors seemed satisfied enough with the results early Monday
morning to underpin the Euro while waiting for fresh news regarding the U.S.
Following the release of U.S. new home sales data which saw
an increase in June by more than economists had forecast, the Euro rallied and
is now pressing a minor .618 retracement level at 1.2998. This puts this pair
in a position to challenge last weekâ€™s high at 1.3028.
Stocks extended their gains following the housing report,
driving up demand for higher risk assets, helping the Euro maintain the upward
momentum which helped drive the market higher late last week.
The British Pound finished higher but momentum slowed when
the market neared a weekly swing top at 1.5523. A breakout over this level will
turn the main trend up and set up a possible acceleration to a major 50%
retracement level at 1.5635.
Fundamentally the Sterling
is being driven higher by last weekâ€™s release of better than expected second
quarter GDP. Last weekâ€™s news that the U.K. economy expanded by a strong
1.1 percent was a sign the economy was more stable than previously estimated.
This news led some investors to believe that the Bank of England will have to
seriously consider raising its benchmark interest rate sooner than expected.
As the Pound approaches a key retracement level at 1.5635,
investors have to realize that the second quarter expansion took place before
the government implemented its proposed deep spending cuts and tax hikes. The
biggest fear amongst bullish traders is that the governmentâ€™s proposed
austerity measures will curtail the gains that the economy is currently
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