Global markets are setting up for warmer times. Prospects look especially sunny in precious metals, energy and ETFs that short the dollar.
With stocks staging a significant breakout from a technical perspective to start the week, a nice summer rally is officially here.
After four weeks of consolidation, the S&P 500 dropped as low as 878 on May 15. More importantly, it held above key levels of resistance. Then yesterday, the index broke above the 943 high of Jan. 6, setting a new high for the year.
We're basically in a new trading range that could go up to 1050. That's where the next level of resistance seems to come into play. Such a rise would represent another 11% upside from early trading on Tuesday.
If you remember our last column, we were wary of headwinds at the mid-900-level. But with strong volume on Monday, the broad market index has staged a second-leg move up. This indicates institutional investors are supporting this next phase of a rally that began some 12-weeks ago.
Still, we remain a secular bear. When it became apparent over the weekend that General Motors was going to declare bankruptcy on Monday, my fundamental instincts were stung. Helping to feed those feelings was the fact that I'm a native of Michigan. My father and brother worked at GM for decades, and my cousin still works there.
Thousands of people are going to lose their jobs. For each job that will be lost at GM directly (including the likely closing of the plant in which my cousin works), probably four other ancillary positions will also be pulled down from this bankruptcy. Those include everything from caterers who serve lunch to auto workers to outside wholesale suppliers and local merchants.
The GM news was part of an ongoing set of dour unemployment events taking place since the bear market began in October 2007. But on the real estate front, we received some positive news on Tuesday. Pending home sales were announced and the latest readings showed a gain of 6.7%—the fourth increase in five months. California and Florida, two of the worst-hit areas in the past two years, led the way. Another number that came out today tracking an affordability index for homes was up, hitting its second-biggest reading in history.
Financials, another big area of concern following the freezing of credit markets, seem to have finally found a floor. Some banks are even moving to pay back the government for their bailouts. That can only free-up more credit and spur greater consumption of big-ticket items, something any new growth cycle could use to build momentum.
Throw in a seemingly quick GM and Chrysler bankruptcy process, and our biggest economic headaches appear to be much less severe than just a few months ago. In fact, inflation looms as a bigger concern than deflation if we're moving into a prolonged summer rally.
If interest rates do start moving up, of course, that means mortgage rates will go up as well. Inflation could curtail prospects for a prolonged stock rally. That's why we're strongly suggesting the use of stop losses with all exchange-traded fund investments. We're in a very fragile recovery.
Economists are going to have to rewrite college textbooks—we've moved into entirely new ground with the government's role in supporting GM and other private industries.
But as we move into a new set of potential problems, let's take a look at what the market is signaling from a technical perspective.
First, all the major indexes have broken above significant 2009 resistance levels. And they each appear to have at least another 10%-or-so potential upside. The second leg of this rally won't lift all boats the same, though.