Out Fox The $treet

After a 3% rise on Friday, China markets are soaring some 2.5% today. The Shanghai Index had been trading between 2600 and 2700 since late July and as of Friday it had finally broken above the range signaling a likely significant rise ahead. This is great news for bullish US investors as a breakdown the Chinese stock market and 2nd largest world economy could have doomed the US rally. As of midnight in New York, Shanghai is trading above 2800. On Tuesday the index is likely to consolidate back around the 200ema of 2744, but any pullbacks should be bought. The chart below doesn't show today's action, but the 2+ month channel that has been broken to the upside. Chinese investors clearly came back from the holiday in a buying mood.

As we've reported in the past, Junk bond funds such as the Lehman High Yield Bond ETF (JNK) continues to rally higher as the stock market pauses at the June and August highs. Sure its people desperate for higher yields then the absurdly low Treasuries and even high grade corporates. The reality though is that it signals too many people placing emphasis on the direction of the stock market has how it relates to the economy. Investors wouldn't rush into JNK unless they were confident of a stable economy. Weakness in the stock market has much more to do with structural changes away from stock investing. This is just another signal that any pause at the 1130 range in the SP500 will likely be short lived. An assault on the April highs of 1220 is likely around the corner towards year end.

The market seems to do what it has to do and it'll always find headlines to justify the move. Today we've had nothing but supposedly negative news from Europe. Anybody find anything actually negative? Please something more then a few snippets from an old Fed President is needed. More likely the scenario is that Mondays open created a gap in the SP500 that the market just can't stand to leave open. You won't see it on the $SPX on the market because of the sloppy open where numerous stocks are delayed several minutes before opening. The SPY though captured it. With the swoosh at the open today, that gap has been filled and in fact created another one on the opening today. The market has bounced nicely off the $113.5 level and must eventually fill the gap back up to $116 now. That will also be where it meets the 20/50ema likely for the ultimate test of whether this market is heading back up to old highs at $122 or back into the bear market abyss.

Most importantly to us, Regions Financial (RF) and Synovous Financial (SNV) our both up sharply today. For RF its clearly partly technical as they hit new 52 week highs and breakout from a double top. For SNV its like just a move with the sector today. Cramer was bullish on banks yesterday and in general the tone seems to be improving. The Opportunistic/CVIM Model is doing the best today as it has a higher concentration in those 2 stocks while the Growth Portfolio is also gaining in large part to a high concentration in the financial sector at roughly 20%. Though it contains much more of Hartford Financial (HIG) and ICICI (IBN) then these 2 regional banks. The chart on RF looks similar to how we expect the SP500 to go over the next few weeks. Initial weakness at the recent high (Jan in the case of the SP500) and then support from the rising 20ema and an eventual push to new highs on the 3rd try at 1150. SP500 Finally the chart of SNV. Not as impressive as RF. Still need to work thru s...