S&P Finishes Higher but Erases Most Day−Session Gains

James Hyerczyk from ForexHound.com at 11/24/09

All three major stock indices finished higher but intra-day trading action suggests that the markets may be getting expensive at current levels.  This morning the three indices surged to the upside mostly on strong buying in Asia and Europe overnight.  These markets were buoyed by the weaker Dollar and strong demand for higher yielding assets.

Overnight, stock indices got a boost when the Dollar weakened following bearish comments from St. Louis Fed President Bullard.  He suggested that the Fed consider extending its mortgage buyback program beyond the March 2010 ending date.  This put pressure on the Dollar because it told traders that interest rates would remain low for a long time.  It also offered hints at how Bullard feels about the economic recovery.  This caused traders to pile on the Dollar and drive up stocks and commodities.

After an initial surge following the U.S. opening, traders got a dose of reality with a better than expected U.S. Existing Home Sales Report.  The Dollar strengthened on the friendly report triggering a profit-taking break in stocks.

Treasury futures started the day weak and traded lower until the existing home sales number was released.  The strengthening Dollar and the weakening intra-day stock market helped drive down yields throughout the day.  Trading was light because of tomorrow’s U.S. GDP number and a holiday-shortened week.

After early morning weakness plunged the Dollar toward last week’s low at 74.75, shorts began covering their positions when the U.S. reported better than expected existing home sales.

The Dollar was trading sharply lower overnight and had retraced more than 50% of last week’s rally following bearish comments over the weekend by St. Louis Fed President James Bullard who restated his case for extending the central bank’s mortgage buyback program.  Bullard said, “unemployment is high, and labor markets are lagging.”  This comment triggered a sell-off in the Dollar because it strongly supported the Fed’s stance that interest rates would remain low for a “prolonged period”.

The December Euro once again took a run at the psychological resistance at $1.5000 before sellers stepped in.  The rally in the Euro is being triggered by Bullard’s bearish Dollar comments and last Friday’s news that European Central Bank would take steps to make it tougher for banks to make loans.

Traders are starting to look at the fundamentals which drive currency markets, namely the interest rate differential.  If the ECB is getting ready to exit its stimulus programs then this is a sign that interest rates will remain at 1% and possibly move higher by early next year.  This would make the Euro a more attractive investment than the Dollar because the Fed is not set to raise interest rates until at least mid-2010.

This morning’s U.S. existing home sales report came out better than expected.  This stopped the decline in the Dollar as it indicated the economy may be stronger than previously thought. Rather than take the risk of holding large positions into tomorrow’s U.S. GDP Report, many traders used today’s housing report as an excuse to lighten up on the long side.

The December British Pound was able to hold onto its gains.  Traders are now beginning to think that the U.K. economy is in a position to recover faster than the U.S. economy. 

December Gold posted a new all-time high overnight, but the market fell from the high as the Dollar strengthened throughout the day.  Central bank buying by Russia helped boost the market this morning as well as the weaker Dollar.  Look for this rally to continue until the Dollar begins to clearly show signs of a bottom or when central banks stop buying gold. Cautious traders should watch trading activity in January Platinum and December Silver for signs of a divergence from the gold market. These two markets may be in a position to take over the leadership in the metals complex because of overbought technical conditions in gold.

January Crude Oil tried to rally along with other higher risk assets but failed to hold on to early gains.  The supply/demand picture is still bearish as a faltering U.S. economy is leading consumers to drive less and use fewer gallons of gasoline. This market went up early in the session on geopolitical news from Iran, higher equity prices and a lower Dollar.  Once traders realized that the Iranian situation was a non-event and stocks began to give back gains, crude oil turned lower.