Narrow leadership, rising commodity prices, and continued weakness in the transports and utilities continue to be problematic. The leadership troika of the semiconductors, oils, and select biotechs is deeply overbought and vulnerable to a setback. Beyond these 3 groups there is little to sustain an upward advance. Internet stocks are enjoying their second dead cat bounce since their April peak, but the exuberance which propelled their euphoric rise is long since gone. The small caps lagged behind the larger cap glamour issues yesterday, and are likely to continue to underperform the larger caps during rallies as investors continue to react to interest rate uncertainty with a flight to perceived quality.
Uncertainty remains the stumbling block to any sustainable rally by the major averages.
While yesterday's Beige book did not show any signs of a dramatic pickup in inflationary pressures, it did show continued labor market tightness in all regions. We expect this strong demand, combined with a need to rebuild inventories, to lead to a strong pickup in third quarter GDP from its second quarter pace. While the continued strength of the consumer fed economy is troubling, it is in the labor market where we see the greatest threat to the present low inflation environment. Labor market tightness and the upward push to wages will continue to grow as the economy picks up speed this quarter. Today's initial jobless claims came in below expectations at 284,000, with the four week average falling to its lowest level in a decade.