by Sam Collins 04/02/08
Strong demand for U.S.-made goods drove the Institute for Supply Management's index up to 48.6% -- topping analysts' forecast of 47%. That, coupled with an economic report from the Commerce Department showing that U.S. construction spending fell 0.3% in February versus economists' prediction of a 1% decline, helped bring buyers to a stock market that was primed for a big advance yesterday.
At the beginning of a quarter, there is usually some cash to be put to work in the market. But the good economic reports, the decrease in crude oil prices, a stronger U.S. dollar and successful financing by one of Wall Street's weakest names, Lehman Bros. (LEH), created the Street's eighth-biggest day ever.
Even a huge $19 billion write-off by Swiss investment banker UBS (UBS) and a smaller write-off from Deutsche Bank (DB) of $3.9 billion couldn't stop the Dow (DJI) from gaining 391 points to finish at 12,654. The S&P 500 (SPX) gained 47 points at 1,370 and the Nasdaq (NASD) jumped 84 points to 2,363.
Volume was heavy on the New York Stock Exchange, where 1.7 billion shares traded with a positive breadth of 6-to-1. The Nasdaq (NASD) traded 918 million shares, with advancers ahead by a ratio of 3-to-1.
May crude oil futures fell 60 cents to $100.98, and the Amex Energy SPDR (XLE) gained $1.30 to $75.45. The June gold contract took another hit, this time down $33.70 to close at $887.80, as almost the entire futures market closed lower. The PHLX Gold/Silver Index (XAU) lost $3.88 and closed at $172.87 -- just $4.80 above its 200-day moving average.
What the Markets Are Saying
Even though the news wasn't all that good, the buyers were out in force yesterday, driving stocks higher for most of the session and closing the major averages at or near the highs of the day. Even a confirmed bear has to admit that yesterday's rally made a strong case for the bulls.
You've read from me many times that when bad news is treated well by the market, it means that the bulls are in charge. That was definitely the case yesterday with UBS (UBS) kicking off the day with its enormous new $19 billion write-off, yet the stock closed higher by more than $1 and the other financial holdings rallied, too.
So, what should we do now? First, it is time to cover all short positions. With such a rush to buy, this is no time to be playing the purely bear game. As the song goes, "You've got to know when to hold 'em and know when to fold 'em." Yesterday was a "fold 'em" day.
But some might say that if the market is still in a downtrend, why not hold the shorts? Bear-market rallies are brutally swift reactions that can turn into something more than just a rally. You don't want to be short on a day when all three of the major averages gain 3% or more.
Remember, the potential loss for a traditional short-stock position is infinite. If the rally falters, you can always re-establish your short positions. Both long-term investors and traders should cover their short positions, including the contra Exchange-Traded Funds.
The next thing to do is nothing. It is time to let the market tell us what its next move will be.
The Dow (DJI) is approaching its long-term bearish resistance line at just above 12,800 and could break through it, while the S&P 500 (SPX) is almost 100 points under its line and the Nasdaq (NASD) is almost 200 points under it. But a few more days like yesterday could turn the trend, so it is time to reflect, get into cash and examine our strategies. Winners know when to step aside.
Today's Trading Landscape
Earnings will be reported today from Best Buy (BBY), CarMax (KMX), Lululemon Athletica (LULU), Micron Technology (MU), Monsanto (MON), Research In Motion (RIMM) and Ruby Tuesday (RT).
The following economic reports are due: March American Data Processing (ADP) Employment figures (the consensus expects a loss of 45,000) and February factory orders (the consensus expects -0.8%).
The focus today will be on the employment report and factory orders, as well as the market's ability to follow through on yesterday's heavy buying.
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