Can you say “Non-Confirmation”?

Market Action:
As the market opened on Monday, the traders seemed happy to bid up the prices in the early going only to lose their resolve over the course of the day. Most of the broader indexes were down on the day while the Dow stood alone with a positive close. In fact the Dow managed to score a new high in the early minutes of trading. The blue chips managed to stay positive for the day after just a few minutes in the red late in the afternoon.

Opinion/Analysis:
Jumping to our opinion section, there is a chance that the market showed us a very important non-confirmation on Monday, with the Dow making a trading high without any other indexes doing the same. Is it possible that the subtle top is in as of Monday morning? Well, the first test of this theory, a theory that the market has just espoused, comes on Tuesday morning when we see the CPI for April. We will have to wait and see but while we do here are few items for consideration…

The SP 500 index seems to have peaked on May 9th at 1513.80. Monday’s close at 1503.15 is about 10 points below that peak: did not confirm Dow’s move to a new high on Monday.

The NASDAQ Comp index seems to have peaked on May 7th at 2580.06 with Monday’s close of 2546.44 about 33 points lower. Comp did not confirm Dow’s new high.

NDX (NASDAQ 100) seems to have peaked on May 9th at 1909.30 about 20 points above Monday’s close of 1888.08. NDX failed to confirm Dow’s new high.

Furthermore, RUT (Russell 2000) seems to have peaked on May 9th at 836.99 which is 14 points above Monday’s close of 822.33. Not only that, the RUT has been the leader in this market for several years, and on Monday it closed below its February highs. This index has been substantially weaker than the others over the course of this last three months. RUT has failed to confirm the Dow’s Monday high.

You may recall our post on the evening of May 9th titled "Rally May Be Done".

There is one other item for your pleasure. One of the main reasons the Dow dropped so much back in February, you remember, over 400 points, was that the Chinese market had dropped about 9%. That day the Chinese index dropped from 284 to 259. As we write this tonight, the Chinese index is trading around 408. Doing the math, the move from 259 to 408 is roughly 57%.

So, one of the world’s major markets has climbed 57% in about three months. We consider that to be just a bit speculative, maybe a house of cards would be a better description. The Chinese market has the capability of stumbling very badly leading to another world wide collapse in stock prices over the next several months. We do not feel the need to stand in the way of that.

CPI:
Before we go, let’s talk about the CPI. For the most part the market has signaled a high is in place so now we have to see whether or not it is paying attention to itself.

The world has learned that the “CORE” CPI is the only number that matters to the market when it comes to inflation. We note that a 0.2% upward move in that number has been accepted as tolerable to the market. The market would need to see something much higher than that in order to sell off on the news, because that would signal the Fed had the leeway to raise rates…

We are not in the inflation camp even though gas prices have gone through the roof recently. We stand firm on our position that the housing market will wring out any inflation that is out there. We stand in the camp of those who see a rate cut coming from the Fed sometime this year because the economy will evoke that kind of response by the Fed. The market may actually not like a rate cut when it comes because it might be too small or, as they say, too little, too late. But that is for another day.

This day, Tuesday, the market is at an important cross road in our opinion. The CPI figure stands to be greeted with a new market, one that may not take kindly to any number that is published. We expect the CPI to be contained at the “core” level to the 0.2% increase amount but now we await the market’s response. This should be interesting.

Dow Industrials: 13,346.78 +20.56
VIX: 13.96
HUI: 331.00
QQQQ: 46.46
QQQRS: 0.37 bid
QQQRT: 0.64 bid
RYVNX: 15.29
RYAIX: 20.52
RYCWX: 31.54
TLT: 87.96
BEGBX: 13.91