Friday's Action: Markets finished mixed Friday, but moved higher in late trading on positive economic news and upbeat earnings led by tech-giant Microsoft. Major world markets closed mostly higher. London's FTSE closed down 0.04%; Frankfurt's DAX closed up 1.10%, and Paris' CAC 40 closed up 0.68%. Japan's Nikkei closed up 1.17%, Hong Kong's Hang Seng closed up 1.78%, and Sydney's All Ordinaries closed up 0.57%. In economic news, the Durable Goods report for March was up 3.4%, higher than expected. Volume came in at 1.39 billion shares traded on the NYSE and 1.95 billion shares traded on the Nasdaq. Market breadth was mixed, with NYSE declining issues over advancing issues by 1.89, and down volume over up volume by 1.50; Nasdaq declining issues over advancing issues by 1.16, and up volume over down volume by 1.81. Leading sectors were Semiconductors +1.56%, Retailers,+ 0.20% and Hardware, +0.20%. Laggards were Airlines, -2.05%, Homebuilders, -1.46% and Internets -1.16%. Nasdaq 100 futures closed 14 pts higher to settle at 1498, while the S&P's settled up 2.70 pts at 1139.50.
Weekly Recap: It was a choppy week on Wall Street. The bearish implications of impending higher interest rates vied with the bullish impact of strong earnings growth, with the earnings numbers proving slightly more influential. Almost 50% of Dow components reported and over 35% of the S&P 500 companies. Through Friday, over 75% of the reports were above the average Wall Street forecast, well above the normal 60%. Total operating earnings growth is running over 3% ahead of expectations, which suggests that the final gain for the S&P 500 will be over 20% for the third straight month.
On the economy, initial jobless claims for the week ended April 17 fell 9,000 to 353,000, but that was somewhat disappointing after the 32,000 increase the prior week, suggesting only a moderate gain in April nonfarm payrolls to be reported in early May. The March PPI rose 0.5%, but the core rate was up only 0.2%. The biggest economic news came on Friday, as March durable goods orders were up a very strong 3.4%. The February increase was revised to +3.8% from an originally reported 2.5% gain and reflects strong business investment. Orders in the first quarter have been strong across the board, and support expectations that real GDP for the period will be up 5% or more. The 10-year note yield closed Friday at 4.44%, up from 4.35% at the close of the prior week. A rise through 4.50% could be psychologically negative for stocks. Still, investor focus is expected to remain on earnings.
For the week, the Dow edged up +0.2%, the S&P 500 finished +.5% higher and the Nasdaq rose +2.7%. The small cap Russell 2000 gained +1.3%. The earnings calendar is jam packed again next week. Some of the major companies scheduled to report include AmeriSource Bergen, Electronic Data Systems, Humana, Pulte Homes, Sysco, Zimmer, Aflac, AirTran Holdings, Avaya, BP, DuPont, Lockheed Martin, McDonalds, R.J. Reynolds Tobacco, United States Steel, UTStarcom, Verizon, Anthem, Applebee's, Bristol-Myers Squibb, Halliburton, QLogic, Symantec, and Boeing.
Greenspan and Deflation: During testimony before Congress last week, Federal Reserve Chairman Alan Greenspan said that deflation is "no longer an issue." Recent Fed policy had stated that inflation and deflation were equal risks. Greenspan said companies are regaining pricing power, but maintained that strong productivity growth should curb inflation for the time being. He is currently optimistic about the economy and job growth. What seemed like optimistic comments about the economy by the Fed Chairman did little to sooth the equity markets. Stocks plunged after investors took Greenspan's comments to mean that inflation is now a concern and that interest rate hikes are imminent.
While Greenspan is now saying what the markets have been telling us for the past year, that deflation is not a serious threat, the markets have started to focus elsewhere. The price of almost everything has risen over the past year because inflation has been seen everywhere except the debt market. The price of money is about the only commodity that has not experienced a substantial rise. What the markets appear to be worrying about now, however, is that the price of money (interest rates) will soon rise and that will force down the prices of all investments that have benefited from inflation over the past year, such as interest rate sensitive stocks.
Bond prices have dropped dramatically over the past month as the bond market has been anticipating a move to higher interest rates. But recent price drops in commodities have occurred (see the CRB and GYX charts below), suggesting that the rapid rise in inflation expectations is abating. In other words, at about the same time Greenspan has started talking about an end to the deflation risk, the markets have begun to anticipate a reduction to the inflation risk. Greenspan, it would seem, is woefully behind to curve.
Ê
A Conservative Approach to Long Term Investing: Our investment philosophy has always been to diversify our capital between high risk and more conservative vehicles. We believe conservative investing should be viewed with an eye towards retirement. The ideal investment vehicle would preserve capital while still generating acceptable long term growth. America First Investor has developed just such an investment model. Based on a Nobel prize winning theory of asset allocation and sector rotation, the model has produced solid results over the last two years. In 2002, the AFI model produced gains of 82.3% while the bench mark S&P 500 Index lost 23.4%. In 2003, the model outperformed the S&P again, gaining 43.9% to 26.4%. But just as important, the maximum monthly draw-down was only 5.1%, while the average draw down was less than 3.0%. Compare that to an average monthly gain of 4.0% and an impressive 88.9% win to loss ratio and you get an idea of just how solid this model is.
Since its inception on January 2, 2002 to April 22, 2004, the America First Investor Portfolio gained a solid +164.5%. During this same time period, a buy-and-hold strategy with the S&P 500 Index lost -1.3%. On a quarterly basis, the AFI model produced steady equity growth, even during the bear market of 2002.
America First is offering first time subscribers a FREE 30-day Trial. To learn more, click HERE.
The COT Report: The latest Commitments of Traders report from the CFTC shows that Commercial Hedgers sold some 4,600 S&P 500 futures contracts last week to bring their net short position to -11,727 contracts. Large Traders remained net short -31,990 contracts, with the entire offsetting net long position of +43,717 contracts held by Small Traders, the so-called "weak hands". For the Nasdaq 100 futures, Commercials sold some 800 contracts to bring their net long position to +18,888 contracts. Small Traders were net short -10,893 contracts in the Nasdaq. Commercial action in Dow futures saw the smart money buy some 1,400 contracts to bring their net long position to just +2,147 contracts.
Commercial Hedgers were better sellers in the S&P's last week, and 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 49.5%, while the percentage of bears registered 21.2%. The bullish ratio (bulls/bulls +bears) came in at 70.0%.
The latest AAII survey showed an decrease to 50% bulls, and an increase to 23% bears. The bullish ratio came in at 69%, while the 4-week moving average remains high at 64%. 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 64%, 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. While the major averages managed to close in positive territory Friday, market internals were not at all positive. Breadth was mostly negative and both the SPX and the NDX formed narrow range days. Narrow range days, sometimes called "wimp" days, are often transition or trend change points. Since the short-term trend has been up, this could mean a trend reversal or a consolidation. Also negative Friday was the action of the VIX volatility index. The VIX closed below it's lower bollinger band, signifying that volatility has been stretched "out-of-bounds". Unlike stocks, volatility is mean-reverting, meaning that it can't remain out of bounds for very long. And rising volatility means a declining stock market.
Also negative is the New High-New Low Index for both the NYSE and the Nasdaq. While the Nasdaq is approaching recent highs, the NAHL is making much lower highs, and actually turned down on Friday. That's not a good sign, since it means fewer and fewer stocks have been leading the Nasdaq higher.
The NDX led the market averages Friday with a gain of 0.8%. But in the process, the NDX hit important trendline resistance. The NDX is in overbought territory and will be challenged to break above that resistance line.
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 1143.50 and then 1147.50. Support lies at 1134.50 and then 1129. For the Naz, resistance comes in at 1505.50 and then 1511. Support lies at 1490.50 and then 1481.
The Intermediate Term Outlook; 2-6 Weeks: A chart we've shown in the past is the monthly S&P 500 Index with its 80-mth moving average. What's interesting about this chart is the fact that the SPX has been unable to close above this resistance line for the last four months now. The 80-mth ma corresponds roughly with the 50% retracement from March 2000 high to the October 2002 low. In a secular bear market, the 50% retracement is an important psychological resistance level, and so far, it has remained intact.
Our Market Trend Indicator (MTI) is currently positive and trended slightly higher on Friday.
Charts and data appearing in today's column are courtesy of:
StockCharts.com
