Market Comment - February 2

(Marco Bonelli) Psychology works, always did and always will!

Market participants expressed disappointment after the weaker than expected January Chicago PMI and even used it as a trigger to describe the state of the economy in a more downbeat way. Then, the national ISM Manufacturing Index got releases, came in slightly below expectations but showed improvement over the prior month (and the best report in 7 months, primarily on better new orders, order backlog and export orders). As investors probably anticipated a weaker number, the actual data was perceived as a "positive" surprise, which contributed to yesterday's rally!


After a lot of contradicting reports about retail activity in December, the sentiment in this sector is probably neutral without too much expectation. Everybody was bullish following record Black Friday sales, but reports about high promotions that forced many retailers to slash earning guidance, weak December retail sales but strong holiday sales and record online sales left many investors confused. Although the sector participated in the recent rally, with 8 to 10% performance since middle of December it sharply underperformed other sectors (which, however, resulted also from a relative outperformance between August and December). Now, overall same-store-sales for January get reported "surprisingly" strong and all of a sudden, the sector might be back on investor's radar screens!

You add strong January vehicle sales, December construction spending and falling weekly jobless claims and the economic picture looks quite favorable. The outcome was an impressive market rally yesterday that showed the healthiest market breadth so far this year (that even improved in the last 15 minutes of trading while the major averages experienced some late profit taking). Now the Dow Jones and Nasdaq Composite trade right at their highs from May and July last year. The Nasdaq Composite, NDX, RUY, MID and Value Line Index closed all at new rally highs with financials leading the way (once again), followed by industrials and basic materials.

Finally, it even appears that the US stock market moves higher on a rising and a falling Dollar, the best of all worlds... The Fed's reckless monetary policy action in combination with increasing complacency regarding the European crisis put an end to the Dollar rally that lifted the DXY Index 9% from beginning of November until middle of January, but now the index trades again below 80 and lifted basic materials (i.e. metals) higher in the past trading days. Let's see how that works out; a not so strong Dollar should be a psychological positive for the international companies.

Although most of today's activity will be sitting and waiting for tomorrow's job report, the retail sector will probably join financials, industrials and technology (once again supported by quite strong earnings) for the rally to continue a little longer.

Trade well.


(Marco Bonelli is the Managing Director of International for CL King & Associates in New York. The opinions expressed are his own.)