With two pieces of the puzzle coming together, the stock market is now into the beginning stages of a year-end rally. The third piece of the puzzle however, is the wild card that may or may not occur.
So, what is the third piece of the puzzle, and why is it important? The third piece of the puzzle are investors that can simply be defined as "Johnny Come Lately's".
Seasonality is never a certainty, and short covering will only drive the markets so far, but investors who jump in on a rally in fear that they will miss the next big move is what allows that market to rally break beyond reasonable levels. Do I think that will happen? I don't know.
This is one reason I have been so emphatic about the 1250 level on the S&P, and the 10,800 level on the Dow as my initial targets to get increasingly cautious.
Sure, I have given you euphoric targets like 1300-1400 (S&P), 11,000-11,800 (DJIA), and a 2250-2400 (NASDAQ). In order for these breakouts to occur, the "Johnny Come Lately's" have got to enter the market and start buying.
So far, the Wall Street gang has done a good job on the financial talk shows putting a positive spin on the year-end rally. My best guess is this spin will work, and investors will jump into the market for its final 3-5% move.
Personally, if the markets break above my initial targets of 1250(S&P),10,800-11,000 (DJIA), and 2250 (NASDAQ), I will leave the last 3-5% on the table, and set my sights on the short side while others get increasingly bullish. One thing I learned from some very successful Wall Street guys is sometimes you have to sit back and wait.
MARKET BRIEFS:
Oil vs. Transports: The DJ Transportation Average has been in a strong uptrend as the price of oil has pulled back. FedEx (FDX) has rallied sharply, and it looks like UPS (UPS) is right on its heals.
It looks as if Oil has decent support at the $55-57/bbl level, and a break below $50 will not be in the cards until the economy softens.
Commodity Prices: Commodities have pulled back along with the price of oil, but raw material prices are still very high. This is the true hidden inflation that no one seems to want to talk about.
These higher commodity prices are putting a damper on the real estate market, as prices for homes and new construction are extremely expensive.
Congress will be grilling the oil executives this week, and I am sure they will be asking oil executives if they have plans to build or expand their refining capacity. The executives will probably dance around the question because they know that the costs associated with building new refining capacity has skyrocketed. They would rather buy and existing refining company than build because its less expensive.
Interest Rates: I hate to keep boring you with my continued assessment of why rates must go higher, but you curb commodity price inflation by bringing down the demand for raw materials. The only way to do this is to reduce demand for real estate.
I think before it is all said and done, you will see 7% mortgages again.
