With most of Wall Street absent in advance of the long weekend, those few traders on the street took advantage of the low volume to gun the market higher last week. This, combined with end of the Quarter performance gaming resulted in the market going positively vertical.

From a purely technical standpoint the S&P 500 has bounced hard off of it 200-DMA. We’ve now broken above the 50-DMA and are closing in on major resistance at 1,350:

As I’ve stated numerous times before, stocks are always the last asset class to “get it.” So with that in mind, we need to consider what other asset classes are doing in order to determine if last week’s rally was based on anything real or simply Wall Street shenanigans.

First let’s have a look at agricultural commodities. They lead stocks and other asset classes during the QE lite/ QE 2 rally by several months. They also peaked first in February 2011, well before stocks and other asset classes took a dive. So they’ve worked extremely well as leading market indicators in the last year.

This has to be one of the ugliest charts out there. Having fallen below their 50-DMA, agricultural commodities have since been rejected by that line multiple times. And we are now on the verge of posting a death cross: when the 50-DMA breaks below the 200-DMA.

The picture is equally ugly for Oil and Silver: the other two big market leaders during the last year. Indeed, Gold is the standalone market leader that continues to hold up relatively well, primarily because it’s now the “go to” asset to protect against sovereign default risk:

In light of this, it’s difficult to believe the stock market rally from last week as totally legitimate and not by end of the quarter performance gaming by hedge funds taking advantage of the light volume. This week’s action will go a long ways to explaining what’s to come in the weeks ahead.

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The above chart shows the return Rapid Fire Options Alert ’s trades would have on $10K so far in 2011. What you’re looking at is over $25,000 in profits… using just $10K to trade.

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Best Regards,

Graham Summers

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