S&P 500 Eclipses 1000 Amid Recovery Hopes; Oil Gushes Above $71

Better-than-expected economic data helped to bring about broad-based buying, The calendar change did little to cool off the red-hot stock markets as the S&P 500 surged on Monday above the 1000 threshold -- recouping exactly 50% of its plunge to 666 in March -- as Wall Street cheered the latest signs of an economic recovery.

Stocks got a big boost at the start of the day from data showing the manufacturing sector edged closer to growth. Adding to the positive mood, Ford Motor Co gained 4 percent to $8.33 as the auto maker reported its first year-over-year monthly sales increase since November 2007. Car buyers took advantage of a government program to trade in gas guzzlers.

The Institute for Supply Management said its index of national factory activity rose to 48.9 in July, the highest level since August 2008. While the reading was below 50, the level separating contraction from expansion, it was higher than analysts had expected.

"That translates into future business," said a senior Wall Street analyst.

Today's Market

The Dow Jones Industrial Average rose 114.95 points, or 1.25%, to 9286.56, the Standard & Poor's 500 added 15.15 points, or 1.53%, to 1002.63 and the Nasdaq Composite picked up 30.11 points, or 1.52%, to 2008.61.

“What a great way to come into work on a Monday,” said NYSE trader Jason Weisberg of Seaport Securities.

Emboldened buyers helped to prop up the broader market, but materials stocks provided the most leadership and saw the richest gains. The sector's 3.5% advance was helped along by a sharp rise in steel stocks (+6.5%). Sharply higher commodity prices provided a catalyst for the run by basic materials stocks. The CRB Commodity Index spiked 3.4% and is now up more than 9% during the course of the past three sessions. A weaker dollar helped the case for commodities.

Global Markets
The results out of the British banks helped send European stocks to their highest level since the fall. London'sFTSE 100 rose 1.61% to 4682.46, France's CAC 40 rallied 1.5% to 3477.80 and Germany's DAX gained 1.78% to 5426.85.
In Asia, Japan's Nikkei 225 closed flat at 10352.47, Hong Kong's Hang Seng rose 1.14% to 20807.26 and China's Shanghai Composite climbed 1.48% to 3462.59.

Economic oil spill on the horizon?
Oil prices are on the march again, rising above $71 a barrel Monday for the first time in more than a month.

The good news is that increased optimism about an economic recovery is one big factor behind the jump in crude prices. The bad news is that if oil prices continue to rise, we may have to kiss those recovery hopes goodbye.

New York light sweet crude reached a near two-month peak of $US71.95. Oil later fell back slightly but remained strongly higher compared with closing levels on Friday.

Many are still nervous about the economy, and the memory of last summer's $4 a gallon gas and $140 a barrel oil is still fresh in the minds of most people.

The latest gain in oil prices brings oil within sight of the 2009 high of $73.38 set in June, though some see resistance that prices could struggle to rally beyond. Oil researchers feel that the market has gathered so much momentum and crude may be overpriced at this point. The market climbed about 2 percent last week -- the third straight week of gains -- which helped to reverse steep losses in the middle of the month and brought July's monthly decline to a marginal 0.6 percent.

Supply curbs by the Organization of the Petroleum Exporting Countries since last year in response to falling demand have helped crude rally from below $33 in December.

So where will oil prices go from here?
Hembre said that it seems that oil prices are rising more as a result of investors being willing to take on more risk as opposed to actual changes in fundamentals. Even though expectations of increased energy consumption by China due to its massive stimulus package are having some effect, China by itself is not enough to justify oil prices more than doubling from lows earlier this year.

"Oil has gone from $30 a barrel to $70, but the global improvement in demand is not commensurate with that increase," declared an economist. "If you look at current supply and demand, oil at $71 is not justified. We've jumped the gun a little bit. It is going to be a tepid economic recovery in the second-half of the year."

Many agrees. He thinks oil prices should self-correct if it becomes more clear that a recovery won't be as robust as some expect.

"The forces exerting themselves on oil prices have mostly been speculative. Any good economic news immediately translates into higher oil prices on the assumption that demand will increase. But that assumption hasn't always proved correct."

And they warns that if oil prices do go above $100, that could be enough to send the economy back into recession by the second quarter of 2010.

So here's hoping that sanity returns to the commodity trading pits before another oil bubble forms.