Where did the rally go? Stocks have stalled. I was expecting more follow through to the upside after the June 5th non-farm payroll numbers came in better than expected. Instead the U.S. markets have been stuck churning sideways as investors search for another catalyst to drive stock prices. European markets are facing similar challenges with the German DAX and the English FTSE both struggling under resistance levels. Meanwhile Asian markets continue to climb. The Japanese NIKKEI broke out over round-number, psychological resistance at the 10,000 mark. We continue to get economic data that is merely "less bad" and the markets want more positive reinforcement that conditions are truly improving. Meanwhile the U.S. dollar/commodity relationship might be changing. For weeks the commodities and materials-related stocks have been surging on dollar weakness. Now the dollar is starting to bounce again from oversold levels and commodities, while still in an up trend, look like targets for profit taking. Oil has been the headline in this group with a surge past $72 a barrel. The rise has not been driven by fundamentals but by hope that any economic rebound will see demand return and by too much money chasing performance in market without a lot of leadership. Speaking of rising energy prices, have you noticed the price of gasoline lately? There is normally a seasonal rise as we move into summer but the jump this year over the last six weeks has been huge. Rising fuel prices undermines consumer confidence. The recent consumer confidence report, the preliminary reading for June, came in above May's reading but not quite as good as economists were expecting. Investors ignored the improvement. What was worrisome was the 12-month outlook component in the consumer survey, which plunged several points from May to June. This drop in confidence as consumer look ahead may be due to unemployment. The unemployment rate continues to rise. We're already at 25-year highs over 9% and many economists are expecting it will hit 11% by mid 2010. As you know rising unemployment fuels the rising tide of foreclosures. Last week the May 2009 foreclosure filings were released. They came in at 321,000. That's 1 out of every 398 households receiving a foreclosure notice. May was the third month in a row that foreclosure filings were over 300,000. I believe that's a new record. A typical foreclosure takes anywhere from 90 to 180 days to be processed and the banks are getting faster at it. That means a couple of months from now we're going to see the next wave of foreclosures hit this country. What's that going to do to our housing market and consumer confidence? I've said it before. Consumer confidence is critical. Without any confidence consumers don't spend. The savings rate is already at multi-year highs. This is going to make the economic rebound a very slow process and retailers could suffer. A lot of professional traders feel the specialty and high-end retail stocks remain bearish candidates. What's amazing is that the market has been pretty resilient in spite of rising unemployment and lackluster consumer confidence numbers. The fact that stocks are not selling off is great news. The path of least resistance still appears to be up as investors keep buying the dips. This doesn't mean that the market won't see a correction. A correction would be normal and probably healthy at this point. Yet the market has been waiting for a correction so long that more and more investors are afraid it won't show up and they're putting money to work anyway. That's one reason why stocks are slowly drifting higher. My short-term outlook remains positive but we're going to need to find new leadership. Those sectors that had been leading the market higher are looking tired. I suspect the financials may end up moving back into a leadership position but they need to breakout from this sideways consolidation that has lasted several weeks. I still want to keep an eye on the transportation sector. The Dow Jones Transportation index is still trying to breakout over significant resistance. If the transports are successful they could really improve investor confidence and fuel another surge in the wider market. Continue to email me your thoughts on potential candidates to buy LEAPS on. ~ James Brown
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