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So how do we view a stock market that can’t hold its early highs, sells off to slightly negative territory mid-day, and then recovers roughly 50% of the decline by the close? Is that bullish behavior? Is it bearish? Or is it just plain weird?

While there’s certainly no shortage of weird out there – like the 7% rally for Lennar (NYSE: LEN) today when housing data appears to be getting worse – we have no choice but to see yesterday’s action as bullish. After all, the major indices finished in the green.

No we didn’t see new highs, and no we didn’t even see a close near the intra-day highs. But the bulls stepped in right when it seemed the market was about to roll over. That’s classic “buy the dips” action. And it shows that a 60-point drop on the Dow Industrials is nothing to fear, it’s an opportunity.

Now, we’ll need to see if the bulls can push stocks higher again.

That’s really the problem with the stock market. The battle may be won or lost, but the war will never end.

*****The S&P 500 broke above 1,260 on the first trading day of 2011. And it’s been finding support there ever since. Intra-day ranges have been wider than anything we saw in December.

As much as some might want to interpret the current action as bearish, that might be a mistake. The S&P 500 has yet to show any kind of reversal pattern. Volume is picking up. And today, oil rebounded to close above $91. Even gold and silver put in decent rallies.

Now, gold is a bit of a special case. It’s a fear trade. But when there’s no fear in the air, gold becomes a U.S. dollar trade. Lo and behold, the dollar was down slightly vs. the euro and the British pound yesterday.

*****Europe's efforts to help Portugal with its debt problems is giving the euro some temporary strength against the U.S. dollar. And pressure from the Obama Administration on China to revalue the yuan may also weigh on the dollar.

As we know, China is trying to reel in inflation. It's already raised interest rates and reserve requirements for banks. Letting the yuan appreciate would almost certainly be at least as effective in curbing inflation than these other methods, if not more so.

*****The financials continue to lead this market. Bank of America (NYSE:BAC) is pushing $15 a share. That's a nice move from the $11-$12 level where I was recommending it here in Daily Profit.

Financials and energy are excellent leaders for this rally. Commodities, too. In a perfect recovery, banks should lend, things should be built, and it should take energy to build them.

My colleague at Wyatt Investment Research, Jason Cimpl, had some interesting thoughts for his TradeMaster Daily Stock Alerts readers this morning.

On Commodities:

Of course we know it's all bs. Not just oil either. All commodities, with the exception of soft assets, which have a fundamental story behind them, although the 100% rally for a few is probably excessive. That leaves the oils, coals, irons, and coppers of the world. And how do we know this run is bs? Well, look no further than the dry bulk index. When oil, iron, copper or coal are actually being used for production, the commodities are shipped from point A to point B in bulk ships. With record high industrial commodity prices one would also expect a similar increase in shipping rates, which would be tied to the increase in demand for shipping. But bulk shipping rates are at a decade low. And that lack of demand for shipping shows us these goods are not heavily transported, which likely indicates they are not being used traditionally.

Before my inbox floods with unsavory emails, I am bullish on commodities. No one else is selling so why should I, but put a little time in research and learn the caveats to commodity trading.

Jason is a firm believer that the commodity rally is a function of the weak dollar and asset-price inflation. And you can probably read between the lines and see that his a bit bearish right now, even though he has been leading his TradeMaster Daily Stock Alerts members to a sweet string of profits on the long side (22 of his 33 trades have been winners with gains like 40%, 21%, 19%, 18% 16%, and 15%).

This is probably one of the best investment lessons we can learn. Jason is skeptical. But he's also reading the market's signs, and not letting his personal bias get in the way of making money. When the market does turn, and heads for a correction, I'm sure Jason will be among the first to start profiting.

And I'll be the first to let you know what he's thinking...





Posted 01-12-2011 2:05 PM by Ian Wyatt