Market rally continues into the new week

Local weather forecaster Kaj Goldberg is a little excited about Hurricane Irene...   

     The major indexes continued their recent rally into the new week as two major Greek banks merged and consumer spending reached its highest level in 5 months.  At 1:00 pm Pacific Time, the DJIA was up over 250, the S&P 500 was up 33 to 1210 and the technology heavy NASDAQ was up 82 points!

     Small caps stocks were outperforming with the Russell 2000 up over 4.5% to 724.  Gold prices were lower by $30 and the 10 year bond yield rose to 2.27% as people sold gold and bonds and put money to work in stocks.  Oil was up 2% to 87.50.

     Financial stocks rallied as Greece's EFG Eurobank and Alpha bank merged to shore up their finances.  This alleviated fears of a complete meltdown of the Greek banking system.  Banks and insurance companies were the top performing sectors in today's trading.  Insurance companies rose after damage from Hurricane Irene was less than expected. 

     Stocks were also supported by word out of Europe of a radical new plan to recapitalize banks.  The program would be similar to the TARP program implemented in the US during the 2008 credit crunch.

     "The government's of the healthier European banks could inject new capital into the banks, while the most extremely pressured banks could also receive backstops for their debt, (just as happened in the U.S.)," according to John Carney of NetNet blog.

       If true, this could be a game changer in the European debt crisis.

      European shares rallied smartly on the news with the German DAX up 2.5%, the French CAC up 2.4% and the Spanish IBEX up 2.6%.  The British FTSE was closed today for summer bank holiday. 


     Market action today was very positive.  Stocks steadily rose throughout the day and finished on their highs.  This type of action usually bodes well for tomorrow.  Interestingly, small caps are outperforming once again and over the past few days the small cap index has risen over 10%!  I was looking at small caps to lead a sustained rally higher and it looks like we are getting it.  We could rally for the rest of the week until we get unemployment data for August on Friday.  This data will confirm or deny the rally.

     Technicians I follow say that this 1210 level is important because it is where the rally failed a couple weeks back.  We are sitting on that level right now on the S&P.  If we can break through this level convincingly on good volume, the rally should continue.  I'm of the opinion that it will so I'm looking for the SNP to trade up to 1240-1250 in the next week or so.  If the double bottom pattern I outlined last week is confirmed we could even rally up to 1300, but I consider that unlikely in this environment.  Let's see what happens....