Stocks Looking for Direction - Concerns Mount on Impact of Middle East Instability, Oil Moves Higher

February 23, 2011 – Stocks are trading higher this morning, as the Street is coming back into stocks after yesterday’ selloff in reaction to instability in Libya, and despite the fact that Qaddafi is vowing to crack down. Meanwhile, oil prices continue to track higher and gold prices continue to show strength. Interestingly, the mood on Wall Street with respect to the corporate performance outlook remains bullish, despite the fact that rising energy prices are a serious headwind to consumer spending and GDP growth.

In terms of key economic data, the National Association of Realtors is expected to report that January home sales declined to an annual rate of 5.2 million from 5.28 million in December. And the Mortgage Bankers Association said the number of applications for U.S. mortgages increased 13% for the week ended February 18 – the prior week it hit the lowest point since November 2008.

The dollar is softer against the euro with the euro trading at $1.3721. The relative strength in the euro is being attributed to expectations that the European Central Bank will raise rates in response to rising oil prices. We are still waiting for currency traders to react more to rising U.S. debt, the inevitable move in Congress to raise the debt ceiling again and the increasing likelihood that the debt ratings agencies will reduce U.S. debt ratings.

Gold prices are up $2.30 to $1,403.20. With all of the uncertainty out there, and increasing systemic risk in the U.S. economy, gold prices continue to look attractive as a safe haven. We would not be surprised to see gold blow through $1,600 this year.

Oil prices are hitting 2-year highs, up $0.92 to $96.34 as traders continue to calibrate for increasing instability in Libya.

In terms of what we expect in today’s session, despite a higher opening, we expect to see a test of negative territory at some point early on. There is just too much uncertainty out there for the bulls to dismiss at this point. Pundits are talking about how higher oil prices can derail the economic recovery.

Our take is that stocks have been overbought for months, if not for the past year altogether, and that the Street has taken a totally asymmetric view on recovery, dismissing data which should provide cause for concern about whether the economy is really stable enough, fundamentally (housing market, consumer credit, employment) to conclude that we are actually in a recovery. We acknowledge that on many fronts, the data has been “less bad” but we haven’t bought into the recovery thesis.