Market Commentary

We are now at a crossroads in the market. As we talked about yesterday, the trend towards blue chips and out of growth-oriented stocks was clearly seen in the market action this day.

The DOW 30 was up 20 points but the Russell 2000 was down almost 1% today.

In the last six-day drop in the dollar, the stock market has advanced, but notice that small caps have not sprung back like the blue chips have, recovering only about half of what the other indexes have. The dollar is now at minor support and is becoming short term oversold again. Take note of that.

The fact that the OTC and Russell 2000 indexes are showing internal weakness is a sign of risk aversion and defensive maneuvering. The health sector and the large cap sector have done the best by far over the last two weeks, suggesting rotation and defensive maneuvers.

Up to this point, the Fed has largely been able to fuel the rally in the stock market because of its quantitative easing policies by buying government bonds and undercutting the dollar.

Some have noted this as a “carry trade”, with the stock market rally largely a result of a plunge in the dollar, i.e., benefiting from commodity driven equities.

However, we are now coming into the holidays. Does the Fed really want to spike oil prices and compete with the retailer – and crush the economic reports in the first quarter? There is something seriously, seriously wrong with our system if they do.

Since October 21st, oil prices have been hovering at $80 a barrel and since that time market breadth has worsened.

Notice, oil prices are now exactly at a key long-term resistance level at the monthly middle Bollinger Band line.

This is a very important chart. The Fed has to make a critical decision here. Do they want oil prices to break above this key long term resistance level and choke off economic growth going forward?

Notice how the media is mute on this issue. Not a word is being said about $80 plus oil prices or what kind of damage this might mean to the economy going forward. Don’t you think this is peculiar? You don’t hear the President talking about the evil oil companies now that he is the President, do you? And you don’t hear the Republicans warning of the dangers of soaring oil prices---nothing.

Yet I promise you that if the Fed elects to push oil prices past $80 a barrel they elect to crush an economy whose populace is already pushing unemployment rates a kin to the Great Depression---why?

Why isn’t the government putting restrictions on commodity speculators? Could it be the largest oil speculator is Goldman Sachs who is highly interconnected with the Fed? Why isn’t the President threatening to release oil from its strategic oil reserves to bring down oil prices to help the economy?

I don’t have an answers to these questions but when it comes to our precious retirement funds and protecting them from risk we can’t be blind to the risks here because of our greed. This is a huge problem. It was a huge problem for the market in 2007 and it will be for the market in 2010 if oil breaks above this resistance level.

State Taxes Plunging

You have to wonder how real any recovery is if both Federal and State income taxes are rapidly deteriorating.

According to the October report from the Nelson A. Rockefeller Institute of Government, which highlights state tax collections, tax revenues are showing record drops.

*State tax collections for the second quarter of 2009 showed a record drop of 16.6 percent, the second consecutive quarter in which revenues fell more sharply than during any previous time on record.

*Forty-nine states saw total tax revenue fall during the quarter, with 36 states reporting double-digit declines.

*For the year ending in June 2009, the period corresponding to most states’ fiscal years, total state tax collections declined by $63 billion or 8.2 percent from the previous year. That loss is also a record, and is roughly twice the amount states gained during the year in fiscal relief from the federal stimulus package.

This report certainly puts into question the false hype about a recovery in consumer spending if people are struggling to pay their taxes.

TECHNICALS

On a short term basis, we are now pushing again into overbought territory again.

Notice we are now back again at overbought territory where pull-back problems can happen any day now.

Notice, the Russell 2000 is now struggling at the daily middle BB line. Notice, the RSI values remain under 50%, yet we are nearly overbought, illustrating clear weakness now.