Thursday's Action: Strong results from Yahoo and an upbeat outlook from Dell helped keep the Nasdaq in the black, but disappointment over Wal-Mart's profit prospects added to the Dow's decline. Major world markets reported mostly higher results on Thursday. London's FTSE closed up 0.47%; Frankfurt's DAX closed up 0.31%, and Paris' CAC 40 closed up 0.15%. Japan's Nikkei closed up 0.61%, Hong Kong's Hang Seng closed down 0.08%, and Sydney's All Ordinaries Index closed down 0.18%. In economic news, Initial Jobless Claims for the week ended April 3 fell 14,000 to 328,000. Wholesale Inventories in February were up 1.2%. Volume came in at 1.19 billion shares traded on the NYSE and 1.71 billion shares traded on the Nasdaq. Market breadth was negative, with NYSE declining issues over advancing issues by 1.70, and down volume over up volume by 1.42; Nasdaq declining issues over advancing issues by 1.15, and up volume over down volume by 1.08. Leading sectors were Internets, +4.71%, Energy, +0.97%, Semiconductors, +0.89% and Oil Services, +0.88%. Laggards were Retailers, -1.46%, Gold Bugs, -1.20% and Gold/Silver, -1.15%. Nasdaq 100 futures closed 0.50 pts lower to settle at 1489.50, while the S&P's settled down 2.70 pts at 1139.60.
Weekly Recap: Stocks slipped slightly last week, as geopolitical events were in the spotlight again with an escalation of fighting in Iraq. Normally, that would benefit the Treasury market, but with concerns about a potential Fed rate hike, the bond market continued to decline. The benchmark 10-yr note rose 6 basis points to 4.2%.
Gold was down slightly for the week to $420.70/oz with the dollar's strength against the yen and the euro acting as a deterrent for safe-haven seekers. A spike in crude oil futures, which followed a bearish inventory report, also acted weighed on the stock and bond markets, re-igniting concerns about inflation and rising energy prices. For the week, crude oil futures gained 8% to $37.14/bbl. The key economic reports last week were mostly bullish however, with the ISM Services Index and initial jobless claims report coming in better than expected. The former checked in at 65.8 (consensus 61.5), indicating expansion on the services side of the economy, while the 328K claims (consensus 340K) for unemployment benefits marked the lowest level since January of 2001.
The earnings reporting period for Q1 officially began after Tuesday's close when Alcoa posted its results. The Dow component came in a penny short of consensus estimates. Both Alcoa, and Nokia, which issued an earnings warning, were the disappointments for the week. Yahoo, however, delivered a solid report and gained 16.3% to close the week. Overall, earnings news was generally good. General Electric, Genentech and Research In Motion all beat their respective consensus estimates, while Dell, Black & Decker, Cummins and Cigna all raised their revenue and/or earnings guidance. A number of retailers did the same after reporting March same-store sales results on Thursday. Many of those stocks failed to benefit as traders sold on the news and left flat for the long weekend.
For the week, the Dow lost -0.3%, the S&P 500 finished -0.2% lower and the Nasdaq slipped -0.2%. The small cap Russell 2000 fell -.9%. Next week is fairly heavy on the economic front, with Business inventories and Retail Sales on Tuesday, the Trade Balance and CPI on Wednesday, Jobless Claims, NY Empire State Index and the Philly Fed Survey on Thursday and Building Permits, Housing Starts, Industrial Production, Capacity Utilization and Consumer Sentiment on Friday.
Inflation and the Yield Spread: The main reason we've seen a recent jump in long term interest rates (see 10-Yr T-note Yield chart above) is bond traders "expectations" that the Fed will be forced to raise the Fed Funds rate sooner rather than later. A rising yield spread, as measured by the ratio of the 30-yr T-bond to the 13-wk T-Bill, reflects this heightened concern by the bond market. The 13-wk yield is effectively set by the Fed, as it tracks closely with the Fed Funds rate. By using the 13-wk yield as the denominator in the yield spread equation, it becomes relatively easy to spot when the Fed's monetary policy is "too easy" or "too tight". Currently, the Fed is insisting that it is going to remain "patient", meaning that it plans to hold the Fed Funds Rate near the current low level until the economy starts creating substantially more jobs. But at the same time, longer term bond yields are getting close to an upside breakout. When bond yields do eventually breakout to the upside, the yield spread will be pushed higher and the Fed will be forced to hike rates whether the jobs picture is improving or not.
When the yield spread is rising, it is often a sign that inflation expectations are also rising. That's bearish for the US Dollar and, therefore, bullish for the gold price. The Fed plays an important role because it controls short-term interest rates and consequently has a big influence on the yield spread.Ê
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The COT Report: The latest Commitments of Traders report from the CFTC shows that Commercial Hedgers bought some 2,600 S&P 500 futures contracts last week to bring their net short position to -10,042 contracts. Large Traders remained net short -40,046 contracts, with the entire offsetting net long position of +50,088 contracts held by Small Traders, the so-called "weak hands". For the Nasdaq 100 futures, Commercials sold some 1,000 contracts to bring their net long position to +20,096 contracts. Small Traders were net short -12,750 contracts in the Nasdaq. Commercial action in Dow futures saw the smart money sell some 500 contracts to bring their net long position to just +993 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 48.5%, while the percentage of bears registered 22.8%. The bullish ratio (bulls/bulls +bears) came in at 68%.
The latest AAII survey showed an increase to 59% bulls, and a decrease to 20% bears. The bullish ratio came in at 75%, while the 4-week moving average remains high at 62%. 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 69%, 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 Wednesday night's column that the odds favored making higher highs on Thursday, and that happened. Thursday's price action favors making lower lows on Monday, and that fits with the Easter holiday seasonal bias expectation of a lower close the Monday after Easter. The stock market closed mixed on Thursday after opening higher, which is consistent with a market that is in a short-term overbought condition. On Wednesday night, we showed the Nasdaq Composite Index as being overbought. The Dow looks very similar. The INDU is backing off from its upper bollinger band with its stochastics rolling over from above 80%, an area that normally leads to short-term profit-taking. The daily MACD lines remain positive, but the RSI and CCI indicators are turning down. Volume was light due to the holiday-shortened week. With more bad news coming from Iraq, short-term traders were reluctant to carry long positions over the long weekend. The Average Directional Index (ADX) is low, suggesting that the market may be entering a trading range between the highs and lows of the first quarter. While the Dow closed lower on Thursday, the Nasdaq managed a modest gain. That discrepancy can largely be explained by the action of two stocks, Yahoo and Wal-Mart. The former surged while the latter sank.
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 BUY zone. For Monday, resistance for the S&P's comes in at 1148 and then 1162. Support lies at 1126 and then 1119. For the Naz, resistance comes in at 1502 and then 1516.50. Support lies at 1477 and then 1466.
The Intermediate Term Outlook; 2-6 Weeks: Wal-Mart Stores is the worldÕs largest company based on sales and has led the S&P 500 Index at important turning points over the past year or so. Although same store sales were up last week, several retailers sold off and WMT was the biggest loser. The chart below shows WMT falling to a seven-week low on Thursday on rising volume and testing its 200-day moving average. The relative strength line is also dropping. If past relationships prevail, WMT could well be setting up to lead the market lower.
Our Market Trend Indicator (MTI) is currently positive and trended slightly higher on Thursday.
Good Trading!
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Charts and data appearing in today's column are courtesy of:
StockCharts.com
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