Friday's Action: Stocks finished sharply higher Friday as traders were encouraged by a payroll report that showed employment last month rising at its fastest pace in nearly four years. Major world markets posted mostly higher results on Friday. London's FTSE closed up 1.24%; Frankfurt's DAX closed up 2.11%, and Paris' CAC 40 closed up 1.91%. Japan's Nikkei closed up 1.13%, Hong Kong's Hang Seng finished up 0.44%, and Sydney's All Ordinaries Index closed down 0.19%. In economic news, Nonfarm Payrolls in March rose by 308,000 jobs, much higher than anticipated, the Unemployment Rate rose to 5.7% from 5.6% and Hourly Earnings rose 0.1%. Volume came in at 1.61 billion shares traded on the NYSE and 2.21 billion shares traded on the Nasdaq. Market breadth was positive, with NYSE advancing issues over declining issues by 1.11, and up volume over down volume by 2.74; Nasdaq advancing issues over declining issues by 2.26, and up volume over down volume by 6.69. Leading sectors were Hardware, +6.09%, Semiconductors, +3.73%, Airlines, +3.59%, and Biotechs, +2.82%. Laggards were Gold/Silver, -0.99% and Gold Bugs, -0.66%. Nasdaq 100 futures closed 36.50 pts higher to settle at 1495, while the S&P's settled up 8.50 pts at 1142.10.
Weekly Recap: The March Employment Report capped what had already been a good week for the market. The March numbers were well ahead of consensus estimates of 120K and delivered a message that all aspects of the economy are strong. Not surprisingly, the stock market and the dollar rallied on the news, while the Treasury market took a beating. The benchmark 10-yr note fell more than 2 full points, bringing its yield up to 4.15%. Homebuilders were ahead 1.2% for the week before the jobs report, but with the sharp backup in interest rates, they got hammered on Friday amid concerns the jump in rates would crimp demand for new homes. Homebuilders weren't alone, as other rate-sensitive sectors, like financials and utilities, also suffered. Employment services were among the standouts for obvious reasons.
Prior to Friday, the Dow, Nasdaq, S&P 500 and Russell 2000 were up 1.6%, 2.8%, 2.2% and 3.9%, respectively. The bullish bias was helped along by some end-of-quarter window dressing by fund managers. Besides the jobs report, the other key events of the week were the OPEC meeting and a reshuffling of the components in the Dow. The former occurred on Wednesday, and as anticipated, OPEC stuck by its decision to cut production by 1 mln barrels per day, effective April 1. Crude futures for May, however, dropped 3.8% for the week to $34.39/bbl as speculators unwound some of their positions. Reports that the Bush administration may suspend rules for some states that mandate cleaner burning gasoline provided some relief.
For the week, the Dow gained +2.5%%, the S&P 500 finished +3.0%% higher, while the Nasdaq rose 5.0%%. The small cap Russell 2000 gained
+5.3%%. Next week will be a shortened trading week, with the market closed Friday ahead of the Easter holiday. On the earnings docket, some of next week's major reports include Alcoa, Genentech, Yahoo, Abbott Labs and General Electric.
Is Gold on its way to $500?: Gold took a hit Friday with the jump in interest rates as a result of the strong jobs report. But the gold price in euros appears to be in the process of completing a bottom that would create a technical target of around 390 euros. The 390 level roughly correspond to the top of a 5-year upward-sloping channel. This action suggests that the gold price in terms of the euro looks bullish as far as the next several months are concerned. The gold price in terms of the Swiss Franc also looks bullish. Gold is correlated more closely to the Swiss Franc than to any other major currency. In Swiss Franc terms, gold recently broke out from a 4-year consolidation pattern and has now created a technical target of around 640.
At current exchange rates, a euro gold price of 390 and a Swiss Franc gold price of 640 correspond to a US Dollar gold price of $480 to $500. Any sizeable rally in the gold price would most likely occur in parallel with strength in the European currencies against to the US Dollar. If the Dollar should weaken further against European currencies, which appears likely, then the $480-$500 becomes a reasonable upside target range for the gold price in Dollar terms.
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The COT Report: The latest Commitments of Traders report from the CFTC shows that Commercial Hedgers bought some 12,600 S&P 500 futures contracts last week to bring their position to net short -12,637 contracts. Large Traders remained net short -35,538 contracts, with the entire offsetting net long position of +48,175 contracts held by Small Traders, the so-called "weak hands". For the Nasdaq 100 futures, Commercials bought some 3,100 contracts to bring their net long position to +21,057 contracts. Small Traders were net short -7,623 contracts in the Nasdaq. Commercial action in Dow futures saw the smart money buy some 500 contracts to bring their net long position to +1,462 contracts.
Commercial Hedgers were better buyers in the S&P's last week, but still remain net short. For the intermediate term, their position should be considered a bearish sign.
Sentiment Surveys: The latest Investors Intelligence survey showed that the percentage of bullish newsletter writers came in at 46%, while the percentage of bears registered 25%. The bullish ratio (bulls/bulls +bears) came in at 64.8%.
The latest AAII survey showed an increase to 55% bulls, and a decrease to 22% bears. The bullish ratio came in at 71%, while the 4-week moving average remains high at 57%. One thing to note about the AAII survey is that, while membership in this organization is quite large as investor groups go, the number of members that actually participate in the survey is very small. Thus, large fluctuations in survey results from week to week are not uncommon.
The latest Market Vane survey came in at 66%, indicating that the majority of commodity trading advisors (CTA's) remain bullish on the future direction of the S&P's.
The Short Term Outlook; 1-5 Days: We said in Thursday night's column that the odds favored making higher highs on Friday, and that happened. Friday's price action favors making higher highs on Monday, but the Naz has a better chance of closing lower on the day. Friday's price action may have been a little too much too fast. The NASD McClellan Oscillator hit a high of +182, an overbought reading that often precludes a pullback. The NASD Thrust Oscillator gave a sell signal Friday, as did the NYSE Up Volume indicator. Volatility tanked on the rally, with the VXO and VXN dropping 9.3% and 8.8% respectively. In the process, both fired CRV3 sell signals. The VXN gapped lower Friday and closed below its lower bollinger band, while the NDX:VXN Ratio closed above its upper band. That combination is a bearish sign for the NDX over the short term.
From a technical standpoint, the Nasdaq Comp closed above its upper bollinger band and just below resistance formed by the March highs. The 5-day RSI closed over 80% (overbought territory), and it also left an upside gap in the process. Gaps always get filled, sooner or later. How soon this one gets filled should be determined early next week.
SMT's Pivot Point Forecast; 1-2 Weeks: Our Pivot Point forecast is currently on a sell signal. Our next Pivot Point is forecast to occur on or near April 12th.
The 60-mn NDX chart below shows that the StochRSI indicator is in the SELL zone. For Monday, resistance for the S&P's comes in at 1149 and then 1154. Support lies at 1136 and then 1127.50. For the Naz, resistance comes in at 1507 and then 1514. Support lies at 1483 and then 1465.
The Intermediate Term Outlook; 2-6 Weeks: The Risk Aversion Indicator, represented by the NDX:Dow Ratio, has been a good forecaster of the general market trend over the last couple of years. As the chart below shows, the ratio crossed below its 70-day exponential moving average at the end of January, coinciding with the yearly high for the Nasdaq Composite on Jan 26th. The slope of the EMA is still trending down, but with the recent rally in the NDX, the ratio has broken out to the upside. Until the EMA turns upward however, the current action appears to be a counter-trend rally in a generally downward trending market.
Our Market Trend Indicator (MTI) is currently positive and trended higher on Friday.
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Charts and data appearing in today's column are courtesy of:
StockCharts.com
