Denial... Play the Straight Flush

DJIA 8546 +99 SPX 928.35 +9.03 VIX 24.97 Gold 939.30 +11.30 Silver 13.57 +.19 Oil 70.11 +.22 Dollar Index 79.91 -.515 EURO 141.59 +1.28 TLT (Long Term Gov Bonds)93.62 -.95 IEF (7-10 Yr Gov Bonds)90.15 -.52


Headlines for today

Market up 1% on 4th straight month rise of pending home sales.

Stocks got the second half off to a positive start Wednesday after logging their best quarter in a decade.

"We're seeing a classic bull-bear battle here," said Tom Schrader, managing director for U.S. equity trading at Stifel Nicolaus Capital Markets, adding that traders were watching to see if major indexes break above their 200-day moving averages.

The Dow Jones Industrial Average was up more than 100 points, or about 1.5 percent. The S&P 500 and Nasdaq were also up more than 1 percent.

Meanwhile, the CBOE Volatility Index, widely considered the best gauge of fear in the market, dropped below 25 for the first time since September 2008, just before the collapse of Lehman Brothers.

Investors cheered a fourth-straight increase in home sales and shrugged off a disappointing reading on manufacturing and drop in mortgage applications.

Mortgage applications tumbled to a seven-month low and home-refinancing requests dropped 30 percent as rising mortgage rates scared off new home buyers.

On an encouraging note the housing market, pending-home sales rose 0.1 percent in May, slightly more than expected, and April's reading was upwardly revised. This marks the fourth straight month pending-home sales have risen; the last time there were four straight gains was October 2004.

Meanwhile, the Institute for Supply Management reported its manufacturing index rose to 44.8 in June from 42.8 in May, just slightly higher than expected. The gauge is ticking ever higher to the 50 mark, which indicates expansion; readings below 50 indicate contraction.

But construction spending fell 0.9 percent in May, more than expected, to its lowest level in five years.

Now, the market is turning to the employment situation, waiting for the government's June jobs report, due out Thursday. Typically the report is issued on a Friday but is out a day early this month due to the Fourth of July holiday.

Traders are expecting to see fewer jobs lost in June than in May, which would be a boost for the market. But, if the unemployment rate tops 10 percent, you're likely to see some selling, Schrader said.

We got a couple of preview reports on the jobs situation today: ADP reported that private employers slashed 473,000 jobs from their payrolls in June, more than expected, while planned layoffs fell for a fifth straight month.

A separate report from outplacement firm Challenger, Gary & Christmas showed planned layoffs at US firms in June at their lowest level since March 2008.


The game here is to make you think that the economy is going to recover, They will play the expectations game and ignore the bad news in this case Mortgage applications and focus on the pending home sales. The Jobs report will be bad but probably be reported as better than expected.

This is all part of the denial of the bad economy and the selling of the recovery. The trick is to know what hand you have been dealt. They are holding a pair of deuces and want you to think that your straight flush is a loser. To do this they will bury us in a blizzard of economic numbers and interpret them in a way to make their hand look better.

The denial of the bad economy keeps long term rates up and consumer retail prices of commodities such as oil up. This compounds the problems in the bad economy and it the end drags out the time the economy will remain bad. As long as this denial continues we will have continued deterioration, the downturn will last longer, and it will go deeper than if they told the truth now.

Remember Mikey's rule of 2 next year in May they will give up on the recovery then we have a real chance for it to begin. In the mean time the economic numbers keep coming with all of their experts telling us that it's going to be OK.

The VIX (fear index) hit a low today of 24.80. This is the level we were at just before the crash in last Sept. If you remember in my posts I said that in a bull mrket the VIX trades between 10 and 20 and in a bear market it trades between 20 and 40. So in a bull market we buy when the VIX hits 20 and sell when it hits 10. In a bear market we buy when it hits 40 and sell when it hits 20. We are approaching that level now at 24.80. That tells us that the players are not as concerned about a selloff as they should be given current conditions. That is the result of the price rally in the market and the bullishness of the experts message.

To be a successful investor you must keep your eye on the final outcome that you know and not be distracted by the short term noise. The noise is there to distract you from what you know. The long trend is clearly down and they are selling a story that has had its play and is over. The bottom line is that in this game the solid bet is that this is a bear market rally in the market and the economy and the odds are strong it is going to end bad. Play the straight flush and call the bluff.


The beat goes on ....Mikey