Optimism Ahead Of CPI...

FUNDAMENTAL ANALYSIS
The better than expected Empire State Index number today totally erased the worse than expected Producer Price Index numbers, leading the Dow higher by 60.41 points. The Producer Price Index (PPI) or sometimes known as wholesale inflation measures inflation at the wholesale level felt by manufacturers through higher raw material cost. Today's PPI showed that most of that inflation at the wholesale level was due to higher crude oil prices, which we already know and that will only get worse as the dollar gets beaten down further. Does this mean a higher CPI number tomorrow? Not necessarily. Even though corporations can transfer these higher costs down to consumers through price hikes that raise CPI, most don't do that. Most corporations raise prices only when it starts hurting their bottomline significantly. That is why PPI never translate directly into higher CPI, even though it may do so years down the road if the trend persists.

The Empire State Index is designed as a forward looking indicator of economic sentiments and outlook through a survey done on executives in New York. It is gaining importance lately due to its uncanny ability to lead the ISM index, which is an extremely heavyweight index. In fact, the Fed looks at the Empire State Index as part of their list of considerations as well. A healthy jump in the Empire State Index always helps lift stock prices especially near bottoms and the Empire State Index jumped by 23 points today! That is the BIGGEST jump in 5 years! Yes, you know what I am going to do next... I am going to add it to my list of signs of the bottom!

On the negative side, crude oil continues to push past the point of capitulation into new highs due to the ever weakening dollar. Not so long ago, Washington held an emergency economic meeting simulating and exploring the effects of $150 a barrel oil. Obviously, $150 a barrel is a scary thing which has widespread economic impact. Crude oil is trading at $113.53 at the time of this writing and we are definitely in uncharted territory right now. Can the market rally with oil rising? Definitely it can but oil needs to be rising at a moderate rate at a moderate price and we are certainly at the top end of that range right now.

Its been a while since we last recap my list of signs of the end of the correction, so, let's look at it again, adding the new sign today and amending some of the old ones:

1. Recovering ISM index

2. Gold getting beaten like dogs

3. Consumer Sentiment index collasped (its always grimmest before dawn) 3. Consumer Sentiment index collasped (its always grimmest before dawn)

4. Fed bailout of BSC is demostration of their resolve not to allow the financial system to sink.

5. Existing home sales rising suggests possible start of the bottom in housing market.

6. Extremely steep bond yield curve suggests that smart money needs to move back into value stocks soon. (which is already rising as money moved back to equities from bonds)

7. GDP has not gone negative despite widespread speculation on an academic recession.

8. Capitulation in the job market with an 80,000 loss in March.

9. Biggest jump upwards in the Empire State Index in 5 years.

Remember that these are signs of the bottom of the market, not signs that the economy is going to recover immediately. The stock market is a predicting mechanism, not a reporting mechanism and it usually recovers first before the economy does. Of course, there is reflexivity at work in this complex relationship as well which might actually make an economic recovery a self fullfilling prohecy of a recovered stock market.

TECHNICAL ANALYSIS
The Dow closed largely sideways with a bit of positive bias by the end of the day along with healthy after-market futures activity. It seemed to have found a strong support along its 30 days moving average as well, which is a good sign. Short term stochastics are now going into oversold territory and could muster enough momentum for the Dow to make a break to upside very soon. All my indications still point sharply bullish suggesting that there are definitely more upside than downside potential. As a smart trader, you always want to be on the side of the winners no matter how grim it looks right now.