Friday's Action:   Stocks finished the day in negative territory, ignoring positive employment data, as interest rate fears continued to pressure the markets. Major world markets closed mostly lower on fears of U.S. interest rate increase timing. London's FTSE ended down 0.39%; Frankfurt's DAX closed down 0.35%, and Paris' CAC 40 closed 0.02% lower. Japan's Nikkei closed down 1.15%, Hong Kong's Hang Seng closed down 0.83%, and Sydney's All Ordinaries closed down 0.16%. In economic news, April Non-farm Payrolls were higher by 288,000. The Unemployment Rate for April dropped to 5.6% while Hourly Earnings were higher by 0.3%. Finally, March Wholesale Sales were up 2.7%. Volume came in at 1.65 billion shares traded on the NYSE and 1.65 billion shares traded on the Nasdaq. Market breadth was negative, with NYSE declining issues over advancing issues by 12.29, and down volume over up volume by 7.99; Nasdaq declining issues over advancing issues by 2.83, and down volume over up volume by 1.73. Leading sectors were Semiconductors, +1.00%. Laggards were Gold/Silver, -5.22%, Airlines, -4.52%, and REIT's,-3.46%. Nasdaq 100 futures closed 13 pts lower to settle at 1406, while the S&P's settled down 17.50 pts at 1095.50.

Weekly Recap:   Stocks came under pressure for a second week, as a spike in interest rates continued to weigh on the major averages. The sharp rise in rates was the result of an FOMC directive on Tuesday that hinted at the likelihood of a rate increase no later than August and a stronger than expected April employment report on Friday that suggested a rate increase could come as early as June. Crude oil futures nudging $40.00/bbl, continued talk of China looking to curb its growth and a strengthening dollar acting as a drag for earnings growth gave investors more reasons to sell stocks rather than buy them.

Friday's market sell-off occurred on moderate volume. The depressed semiconductor sector was a notable exception with a gain of 1.0% for the day. Its divergence from the broader trend, and the relatively light volume associated with the broader sell-off, could very well be an early sign that the recent correction in the stock market is nearing an end. Chip stocks were one of the best-performing industry groups with a gain of 3.26% for the week. The only group to do better was Internet software, which gained 3.95%. The jump in interest rates took its toll on economically sensitive issues such as autos, construction materials and home improvement. The dollar's strength depressed gold stocks, as the gold price slipped below $380 the ounce. The list of weak groups was broad based, which simply underscored the general lack of buying interest.

For the week, the Dow lost -1.1%, the S&P 500 finished -0.8% lower and the Nasdaq slipped -0.1%. The small cap Russell 2000 lost -2.0%. Next week, important large cap earnings releases include Cisco's fiscal Q3 report after the close on Tuesday, Wal-Mart's Q1 report before the open on Thursday and Dell's Q1 report after the close on Thursday. Economic reports that revolve around employment and inflation include the PPI, Initial Jobless Claims, CPI, and Capacity Utilization.

The Jobs Report Chain Reaction:   We said in Thursday night's column that a strong jobs report would have the predictable effect of pushing interest rates sharply higher, and that certainly came to pass. The monthly chart of the 10-yr T-note shows that bond yields have decisively broken a four-year down trendline. The latest surge in yields started last month with a stronger-than-expected March jobs report. The April figures released Friday morning showed 288,000 new jobs created and the unemployment rate dropping to 5.6%. Market reaction was not surprising. Bond prices fell sharply as yields rose. Rising yields boosted the Dollar, which pushed gold and gold shares lower again. The stronger dollar also weakened commodity prices and weighed on material stocks, which were the day's weakest group. Rate-sensitive financials and home building stocks were also under heavy pressure. Areas of relative strength were consumer staples and healthcare.

The Peak Open Interest Indicator:   The Peak Open Interest Indicator (POI) has predicted where the S&P 100 Index (OEX) will close on options expiration day with a high degree of accuracy. The OEX tends to be attracted to price levels where the largest amount of open interest exists. The indicator is simply a chart showing the amount of call and put options open at each strike price in any given expiration month. Typically, a stock or index will be attracted to the strike price that has the most combined open options contracts for the front month, or the month closest to expiring. What makes this indicator particularly useful for the OEX is its low implied options volatility index. Below is a chart of the POI for the May OEX options contracts with two weeks to go before expiration.

A review of some previous months' options activity illustrates how the indicator functions. February's expiration saw the OEX close at 564.88, only -0.90% from peak open interest at the 570 strike level. In March, the 550 strike held the most open interest. The OEX was once again attracted to that strike level, this time closing at 543.88, or just -1.15% away. In April, it closed just -0.9% away. In fact, over the past 13 months, only twice (November 2003, and March 2004) did the OEX close more than one percent away from its peak strike price on expiration day. Below is a table of the previous 13 months of data displaying this phenomenon.

The peak strike level will obviously change as expiration draws closer. But that does not diminish the usefulness of this indicator. Of note is the fact that the peak strike level does not normally changed at least one week prior to expiration. One strategy employing this indicator is to put on either a bearish call spread or bullish put spread. For example, in February, a trader could have put on a bullish put spread, selling the Feb 560 Put and simultaneously buying the Feb 555 Put. The spread credit was good for $190 per contract. Since the OEX closed at 564.88 and above the 560 strike, both puts expired worthless. The trader would have received the full credit amount less commissions. A $5,000 investment (10 contracts) would have returned $1,900 for a 38% gain. The March peak open interest settled at the 550 strike during the last week before expiration. We recommended opening a Bullish Put Spread, selling the Mar 540 Put and buying the Mar 535 Put, for a $1.35 credit. Since the OEX closed at 543.68 on expiration, both of our options expired worthless and we captured the full credit, less commissions. We were only "in the market" for four days and realized a 27% return on the trade.

The April peak open interest settled at the 560 strike during the last week before expiration. We recommended opening a Bullish Put Spread on Tuesday, April 13th, selling the Apr 550 Put and buying the Apr 545 Put, for a $1.30 credit. Since the OEX closed at 554.94 on Friday, both of our options expired worthless and we captured the full credit, less commissions. We were only "in the market" for four days and realized a 26% return on the trade.

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Commercial Hedgers were better sellers in the S&P's last week, and increased their net short position. For the intermediate term, their position should be considered bearish.

Sentiment Surveys:   The latest Investors Intelligence survey showed that the percentage of bullish newsletter writers came in at 46.4%, while the percentage of bears was 23.7%. The bullish ratio (bulls/bulls +bears) was 66.2%.

The latest AAII survey showed a decrease to just 39% bulls, and an increase to 27% bears. The bullish ratio came in at 59%, while the 4-week moving average remains high at 70%. 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 63%, 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:   Friday's price action favors making lower lows on Monday, but the S&P's have a better chance of closing higher on the day. Breadth on the NYSE Friday was extremely lopsided. Declining issues swamped advancers by better than 12:1 and volume associated with declining issues was 88% of total volume. Following Thursday's 4:1 decline/advance reading, Friday's breadth figures suggests that selling pressure may be reaching exhaustion. This type of action rarely results in a sustained sell-off, as everyone who had a mind to sell did so on Friday. Rather, extremely lopsided breadth often relates to a trend inflection point, with the SPX trading higher within three sessions. The NYSE McClellan Oscillator also hit an extreme reading of -274. The McClellan isn't of much value to short-term traders except at extreme readings. Values of -200 or less often coincide with swing lows for the SPX.

The OEX Volatility Index (VXO) surged 8% Friday and fired a CRV3 buy signal. Developed by Larry Connors, the CRV3 uses moving average bands to measure extreme VXO readings. It has been about 70% accurate in predicting a higher OEX close when the VXO reverts below its upper band. The VXO also closed above its upper bollinger band, which is also a short-term buy signal for the OEX and the SPX.

SMT's Pivot Point Forecast; 1-2 Weeks:   Our Pivot Point RS indicator is currently on a BUY signal. Our next Pivot Point is forecast to occur on or near May 21st.

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 1105.50 and then 1123. Support lies at 1084 and then 1078. For the Naz, resistance comes in at 1420 and then 1442. Support lies at 1390 and then 1383.

The Intermediate Term Outlook; 2-6 Weeks:   The ratio of the Australian Dollar to the Euro has been a good predictor of the intermediate-term trend of the US stock market. The A$ is heavily influenced by commodity prices, which have been declining. The XAD:XEU Ratio has been in free-fall since early April, coinciding with the overall weakness in US stock prices.

Our Market Trend Indicator (MTI) is currently negative and trended lower again on Friday.

Charts and data appearing in today's column are courtesy of:
StockCharts.com

Have you traded any of our recommended plays along the way? We'd love to hear from you and how you did. Please send your stories to comments@talkingpoints.com.

With the continued good news coming out of the drug sector these days, many venture capital firms are starting to show a lot of enthusiasm for some of the biotech startups. Just recently InKine Pharmaceutical Company (INKP) announced the completion of a Phase IV study evaluating Visicol tablets in patients with Irritable Bowel Syndrome. Visicol tablets are currently approved to cleanse the bowel prior to colonoscopy procedures. The pills are a better alternative to drinking thick liquids. The significance of this announcement is that it goes a long way in helping the company toward getting Visicol approved as a laxative, which is a much larger market.

Consider also the positive news released by the large biotech firm Genentech (DNA). This major drug player said that its cancer drug Tarceva drastically improves survival rates for some lung cancer patients. The announcement spurred heavy demand for not only Genentech shares but also put a hefty surge into its partner’s stock OSI Pharmaceuticals (OSIP).

This wave of good news has prompted many venture capital firms to not only take notice but start to aggressively deploy funds into the biotech sector. The goal of course is to uncover the next Genentech story and potentially reap the enormous profits from such start-ups. Of course they are exercising some caution especially after the dot-com or “dot-bomb” fiasco just a few years ago.

Even though the $943 million in new money provided to biotech pursuits in the first quarter of this year was slightly down from the $1.1 billion figure posted in the fourth quarter which broke a trend of quarter to quarter increases the momentum for venture capital money into biotech is extremely strong. One of the main reasons is the huge stock gains achieved by Genentech and OSI Pharmaceuticals.

Thus far the actual performance of these new biotech start-ups have been average at best. Consider since July of 2003 the average climb of these newly public biotech companies have appreciated 6 percent while the NASDAQ index has appreciated 24 percent over the same period. However, the recent wave of good news events within this sector has many venture capital firms ready to pull the trigger.

According to market experts this upsurge in venture capital money for biotechs is still unlikely to reach to $28.5 billion figure that was pumped in during the year 2000 at the zenith of the dot com craze. However, the long anticipated IPO of Goggle should help keep the recent momentum flowing.

In addition, the biotech sector continues to show signs of growth. For example, many of the large biotech companies that provide large laboratory equipment, consumable reagents and supplies are demonstrating tremendous growth. These results are a great sign as it suggests that spending among academic and corporate labs continues at a strong pace.

The Biotech Index ($BTK) continues to do very well, especially as compared to the NASDAQ. As this index retraced back to its 100-day month moving average over a month ago the index quickly rebounded and advanced firmly above these price levels. At the same time the NASDAQ dropped to its 200 day moving average in March before showing any life at all. Now that the earnings figures are coming in strong for many of the large biotech companies, there appears to be enough investor enthusiasm to maintain an upward trend in these issues. This should fuel even more interest of the venture capital firms for biotech start-ups going forward. With the large baby boom generation starting to retire and the continued innovations we are seeing in the biotech field makes this a potentially very hot sector to watch in the future.

Happy Trading.