The increase in volume was excellent to see yesterday, and that increase in volume added further conviction to the bullish move higher past 1280 resistance.

Bank of America (NYSE: BAC) missed earnings estimates badly, and tech behemoth IBM (NYSE: IBM) came in light on sales.

One thing that seems to be missing is the timetable for Greek default. It would be good to know exactly when the Euro-banks have to book the losses.

It’s easy to see how extra cash will help credit card companies. And overall, this is a very good move.

Caterpillar (NYSE:CAT) was expected to earn $1.54 a share after it warned that the quarter would be weaker back in August. But this morning, Caterpillar posted $1.71 a share and raised its guidance for the rest of the year.

Goldman Sachs (NYSE:GS) Chief economist, Jan Hatzuis is forecasting 0.5% GDP growth for the first quarter of 2012. He also predicts that the Fed will announce QE3 in the next 6-9 months.

The market lost ground again last week. Despite early optimism from Europe and a rise in bank stocks, the bulls could not muster any meaningful rally. And the bears quickly resumed the selling pressure, defended 1175 on SPX, and dragged the market back to within 3% of this year's low.

Volume was also high in the decline, which indicates that there still is a large base of investors who are more than willing to sell at lower prices.

Consumer spending trends consistently higher for the most part, and has been trending consistently higher since the second quarter of 2009.

The market was slammed yet another time yesterday. Although unlike Thursday and Friday, the indices recovered into the close.

Once again financials led the charge lower and the big banks like JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), Goldman Sachs (NYSE:GS) and Citigroup (NYSE:C) were down 3%. Energy and technology components were also hurt and stocks like Microsoft (NASDAQ:MSFT) and IBM (NYSE:IBM) were down 1% and Exxon Mobil (NYSE:XOM), Apache (NYSE:APA), Continental Resources (NYSE:CLR), which we're short, and Halliburton (NYSE:HAL) were down 2%.

The market soared higher for a third straight session on Monday. Volume was once again above average as stocks, led by financials and energy, blasted higher by nearly 2%.

Big banks like BAC (up 7%), WFC (up 4%) and C (up 4%) led their index higher. And mega oil and gas companies like XOM, CVX and CHK closed 3% higher to lead the energy industry.

More important than the 2% climb from the indices was that SPX made its second attempt to take out 1197 resistance. In fact, in the final few minutes, the SPX blasted-off to session highs and closed above 1200.

But the index will need to post consecutive closes above 1197 for the bulls to claim victory and consider it a support zone. And it doesn't appear as though that will be an easy feat.

Bad news from Germany this morning. Europe's one economic bright spot reported lower than expected GDP growth for the second quarter.

This shouldn't be too big of a surprise, though, because we've known that Europe has been struggling with debt, and austerity measures are causing big slowdowns in the afflicted countries. Greece, for instance, saw its economy shrink 6.9% in the latest quarter.

On the upside, industrial production expanded more than expected. The 0.9% gain was the biggest jump this year and the first increase since March. This is related to the earthquake/tsunami that Japan suffered earlier in the year...

It's been a wild ride lately. I think this two year chart of the Russell 2000 Small Cap Index pretty much sums it up.
 

There are a lot of opinions being offered regarding the current state of the U.S., European and global economy. I'm sure you've heard many of them so I won't go into great detail here today.

The bottom line is that evidence suggests GDP growth is slowing, despite government stimulus. And many governments, ours included, are running out of options given their relatively high debt to GDP levels and already low interest rate policies.

"Uncertainty is the worst of all evils until the moment when reality makes us regret uncertainty." - Jean-Baptist Alphonse Karr (1808 - 1890)

The French novelist Alphonse Karr had another apropos quote, "Plus ça change, plus c'est la même chose." Translated this means, 'The more things change the more they stay the same'.

How do his words fit my message today?

According to the Congressional Research Service, the debt ceiling has now been raised 75 times since 1962.

Financial markets like money. When the Fed was pumping cash in to the system via QE2, stocks moved relentlessly higher.

Yesterday's vicious sell-off was a snapshot of a market worried about a lack of money.

The debt deal passed in Congress yesterday calls for $2.4 trillion in government spending cuts over the next 10 years. We looked at some of the impact of reduced government spending yesterday...

The debt deal in Congress is as good as passed. And yet stocks sold off hard yesterday. And today isn't shaping up to be much better. The reason, in my opinion, has to do with government spending cuts, austerity and what that means for economic growth.

Yesterday, I asked the question "where will new demand come from?" And I recently received a reader question that hits the same theme...

The market didn't exactly fall apart yesterday, but at the same time, there wasn't exactly any conviction buying. But the bulls, despite another down day, did not lose a support zone.

Volume tracked higher again as the indices jostled up and down all day. Large cap technology rebounded, as did big banks, but consumer services and energy experienced a weak day.

While I certainly did not like being stopped out of numerous positions this week, I am content heading into this big weekend in cash. I think many traders may have that attitude as well,  which could make it difficult for the indices to gain any bullish traction until Monday.

The stock market recovered from Wednesday's sharp drop. The major indices traded higher for most of the day, before a late sell-off drove them in onto the red. The S&P 500 closed less than a half-point form support at 1,301.

But while investors seem to be feeling at least slightly better about a budget deal getting done before Tuesday, another negative catalyst has reared its head -- weak economic data.

As expected, today's Nonfarm Payroll number was just as bad as the ADP Payroll indicated it might be. Expectations were that 165,000 jobs were added in May. The reality is that we got only 54,000 jobs.

Soft patch, indeed.

The economy has been adding an average of 220,000 jobs for three months running. 54,000 is a big miss, big enough to push the unemployment rate up to 9.1%.

Any first year economics student will be able to slowly and cogently explain the theory of maximum employment, or even give you a run-down on modern monetary theory.

Certainly, most hobbyist economists will be able to fumble their way through an explanation of Keynesian stimulus theory.

But where their book learning and theories and financial models break apart is during a crisis.

Why?

Because: you can’t model a currency crisis. You can’t say when one will occur. You can’t say how bad it will be once it starts.

A currency crisis occurs outside the realm of even the best mathematically correct theories. Such a crisis results from a massive, widespread loss of faith in a given currency. It doesn’t happen in textbooks or in charts, models or in Paul Krugman’s daily hack-job column.

It happens in the minds of men.

My belief as a researcher and an analyst is that undue speculation in not just the copper market - but nearly every market, including the stock market, currency markets, the bond market, etc. - my belief is that this speculation is being fueled predominately if not completely by the actions of the Federal Reserve. 

The Fed has a mandate, for better or worse, constitutionally or unconstitutionally, to maximize employment and keep GDP growth slow and steady. And now we're seeing the breadth of their power to implement those two goals - they can simply transfer "dollars" from out of thin air into the bond market, into the financial system, into the mortgage market. Those dollars have to go somewhere. Goldman Sachs (NYSE: GS) isn't likely to sit on billions of dollars - they'll put it to work speculating. The same is true of all of the Fed's member banks.

As we saw with the oil markets between 2008 and 2010, when the bets turn against the speculators, the price tends to drop to ridiculous lows. Looking at a copper chart, the same thing happened there too.

Oil is the biggest single cost input into many businesses, goods, commodities and products. We know it, but it bears repeating.

So, if you’re looking for a reason for commodity prices to rise in price, you probably don’t have to look any further than the single biggest input.

Right now, oil prices are scratching around the $110 a barrel range – a price unthinkably high even three and a half years ago. Laughably high. Ridiculous. Who could afford gasoline over $4 a gallon?

The Financial Times recently published an astonishing story that just isn’t getting enough attention. I like to think of the FT as the newspaper The Wall Street Journal would like to be if it wasn’t trying so hard to impress everyone with fancy Weekend sections and glossy magazine forays.

If you want to look distinguished, you might read the WSJ in public. But if you want to be informed, you’ll also read the FT in private.

The Bank of Japan pumped $183 billion in yen yesterday to try and contain the damage to the Japanese economy and stock market. It didn't work.

 

The Nikkei dropped over 1,000 points in Tuesday trading, better than 10%. That's after a 5% drop Monday.

 

That qualifies as a crash. And it's no "flash crash", either.

There's no doubt that the Federal government's deficit spending is a problem. Deficit spending is expected to run at approximately 10% this year. And efforts by Congress to force budget cuts by refusing to raise the government's debt ceiling may prove effective in cutting some spending.

It could also cause a big sell-off in Treasury prices if the word "default" starts getting thrown around.

2011 is starting off with a bang. Stocks are up big today. And the catalysts are coming from every angle. China's manufacturing index is expanding, despite measures to slow inflation, Bank of America (NYSE:BAC) settled some of its mortgage put-back exposure, oil is higher as growth expectations improve, price targets for Apple are higher, and China has said it will continue to buy Spanish debt.

Each of these news items I've listed addresses an important point of uncertainty. If China can grow its economy at the same time it attacks inflation, then the global economy continues to enjoy Chinese demand for raw materials. That's a clear benefit for resource economies like Australia and Canada, and even benefits American and German exports.

The final revision for 3Q GDP came in this morning at 2.6%. That's only slightly higher than the previous number, 2.5%, and there's no doubt that investors were looking for more. But that disappointment may not be a bad thing...

The feeling that economic activity has picked up in 4Q is palpable. And there have been a slew of upward revisions to both 4Q GDP growth and 2011 growth. We can assume that some of the expected gains from 3Q will show in the 4Q number. Spending will be strong, that's for sure.

There are plenty of analysts and economists that think QE2 is a bad idea. I've been one of them.

And even now, as economic data improves to the point that GDP forecasts are moving higher, the Fed appears steadfast that the economy needs more stimulus. The language in yesterday's FOMC statement was unchanged.

The inflationary risks of QE2 have been well articulated by the anti-Fed crowd. And even though today's CPI number shows that inflation is not happening, it's easy to interpret the rise in bond yields as sign that inflation is right around the corner.

Well, new unemployment claims rose by 13,000 to 462,000 last week. I probably don't have to tell you that unemployment is moving in the wrong direction.

Of course, we've discussed the fact that unemployment is a lagging indicator and will be among the last data points to improve until we're blue in the face. And really, investors seem to be looking beyond the weekly swings.

What are they looking forward to? Why, quantitative easing, of course. These days, any weak data makes it seem more certain that the Fed will dump as much as $500 billion into the system in some form of asset buying.

Technology can fix anything: even the Federal government's deficit. At least, that's what the Technology CEO Council told White House officials yesterday. The council, headed by IBM (NYSE:IBM) CEO Sam Palmisano said investments in efficiency technology could save the U.S. government $1 trillion over the next 10 years.

Of course, the meeting was basically just a sales call. And seeing how much loot the government's been doling out, I wonder what took them so long.

The parallels between the current recovery and the "jobless recovery" of 2003-2004 just keep coming.

Readers may remember the period, marked by investors' "not too hot, not too cold" bias. Stocks would sell-off if economic data was too good, because it implied the Greenspan Fed would reverse its interest rate policy.

Conversely, data that hugged the flat line, came in slightly positive, or even slightly negative, would rally stocks because it meant there was no danger of an end to the low interest rate environment.

I know - I'm supposed to talk about gold or oil or coal again today. That's what you were promised as a reader of this publication.

I hope you'll forgive me, but today's missive has little to do with commodities.

I read an article that just can not go unmentioned. It's either the funniest and best written nod to George Orwell I've ever seen, or it's a frightening representation of the world we live in.

Before I go on, you should take a look for yourself - it truly must be seen to be believed.

The most important thing for your investments isn't gold or the dollar, or the consumer price index or Treasuries or even the stock market.

It's energy. More specifically, it's crude oil. Oil absolutely dwarfs everything else.

As I wrote back on June 3:

"...in April of this year, a new daily volume record was set on the Intercontinental Exchange (ICE) for West Texas Intermediate Crude (WTIC) contracts - with an astounding mark of 464,381 contracts traded in just that one day. Each contract trades 1,000 barrels of oil.

With oil prices around $84 that day, each contract was worth about $84,000. So, it means that over $38 billion worth of oil contracts traded hands in that one day alone.

As expected, the Fed didn't have much to say about the U.S. economy or future stimulus plans that could be construed as positive. The Fed acknowledged that the economic recovery has slowed in recent months. But I think we all knew that.

The Fed also announced it will reinvest the proceeds of its mortgage-backed securities into Treasury bonds. The $10 billion a month the Fed is making off these assets is quite literally a drop in the Treasury bond market's bucket. It will do little to effect interest rates or liquidity.

Investors are disappointed with the Fed's reaction to the recent downturn in economic growth. That's evident in the futures market, where Dow Industrials futures were down 145 points in pre-market.

This must be a first. Citigroup (NYSE:C) CEO Vikram Pandit abandoned the attitude of entitlement that has characterized so many bailed out banks and simply said “Citi owes a debt of gratitude to American taxpayers…We look forward to helping them realize value on that investment.”     

 

Let’s not forget, too, that it was Pandit who volunteered to work for a $1 salary while Citi dug itself out of the hole. Meanwhile, other bank CEOs were fighting to keep their multi-million dollar compensation packages coming. 

It seems like Pandit is the only one who realizes he’d be out of a job were it not for government bailouts.

The first revision to fourth quarter GDP is out this morning. And amazingly enough, it was revised higher, from 5.7% to 5.9%. This is the first time I can recall a significant piece of data being revised higher in the last year.

Of course, we know that much of the strength in the economy is a direct result of government stimulus policies. Real growth may be running around 2%. But the bottom line is that the government has, and will continue to, support the economy. That should keep us looking for upside for stocks, even though the economy is basically treading water.

Oil and the U.S. Dollar

Investors seem to think it's now a law that oil and other commodity prices will trade in tandem with the U.S. dollar. In other words, because oil and other commodities are priced in dollars, as the relative value of the dollar falls the price of oil and other commodities will rise.

The relationship makes sense. And for much of last year, it was actually working. But times have changed…

To keep things simple, we're going to have a look at just two charts today – the U.S. dollar index and the light, sweet crude oil futures chart, the WTIC. As we'll see, the relationship between oil and the dollar changed in early December 2009.

On December 7, the dollar started to rally. You may recall that at the time the bearish talk for the dollar was rampant, and in good contrarian fashion, I had been anticipating a rally for the dollar.

Somewhat more unexpected was that oil rallied right along with dollar, as we can clearly see on the WTIC chart...

Even now, as the dollar sits at a 6-month high, oil also remain near its 6-month price high. It should be clear that the accepted inverse relationship between the U.S. dollar and oil prices has changed. The relative value of the U.S. dollar holds much less sway over prices now than it did even a few months ago.

We could make the argument that the global economy has improved and so oil demand should pick up. But at present, most estimates for oil demand have not increased. And likewise, OPEC has not made an attempt to cut production and ramp up prices. Something else is in play...