Friday's Action: Stocks finished mixed Friday as investors mulled a mixed batch of economic data. Nasdaq tumbled following disappointing reports from Dell and BEA Systems. Blue Chips finished little changed, helped by gains in Altria and ExxonMobil. Major world markets reported mostly lower results on Friday. London's FTSE closed down 0.27%; Frankfurt's DAX closed down 0.57%, and Paris' CAC 40 finished lower by 0.30%. Japan's Nikkei closed up 0.23%, Hong Kong's Hang Seng closed down 1.05%, and Sydney's All Ordinaries closed down 0.28%. In economic news, CPI for April rose 0.2%, with the Core Rate up 0.3%; Business Inventories in March rose 0.7%; Industrial Production in April rose 0.8%; Capacity Utilization rose to 76.9% from 76.5%; Consumer Sentiment (preliminary) for May is 94.2, unchanged from April's number. Volume came in at 1.34 billion shares traded on the NYSE and 1.53 billion shares traded on the Nasdaq. Market breadth was mixed, with NYSE advancing issues over declining issues by 1.30, and down volume over up volume by 1.11; Nasdaq declining issues over advancing issues by 1.87, and down volume over up volume by 4.28. Leading sectors were Gold Bugs, +2.21%, Natural Gas, +1.69% and Integrated Oils, +1.53%. Laggards were Disk Drives, -4.10%, Networkers,-2.94%, Airlines, -1.93% and Semiconductors,-1.86%. Nasdaq 100 futures closed 9.50 pts lower to settle at 1400, while the S&P's settled up .90 pts at 1094.70.
Weekly Recap: Stocks fell for the third week in a row, again on concerns about rising interest rates, escalating energy prices, and the situation in Iraq. Crude oil for June delivery topped $41/bbl. Rising energy prices rattled international markets as well, particularly Japan, which is also bucking concerns about a slowdown in China. The Nikkei sank 5.2% for the week, with the yen falling 1.8% against the dollar.
On the economic front, inflation worries increased with the release of the PPI and CPI reports, but overall, the data continued suggest an improving economy. Consumer prices rose 0.2% in April and have increased 2.3% over the past year. Core inflation rose 0.3% for the month and now stands at 1.8% over the last year. The modest increases for this month should help quell anxiety about rising inflation in the near term. Industrial Production for April increased 0.8% versus consensus +0.5%, while Capacity Utilization was 76.9% versus consensus 76.7%. An 80.0% rate is considered inflationary for the industrial sector.
A slightly higher than expected core-CPI rate of +0.3% sent the yield on the 10-yr note to its highest level in nearly two years soon after its release. It quickly reversed however, when a short-covering rally drove the yield back down to 4.79%. That reversal could support the idea that the Treasury market is accepting the notion that the Fed's expected tightening has already been priced in. If the bond market can find a footing, the stock market's fortunes should improve.
For the week, the Dow lost -1.0%, the S&P 500 finished -0.3% lower and the Nasdaq slipped -0.7%. The small cap Russell 2000 lost -0.9%. Next week, economic reports take a back seat, as there are only a handful of releases scheduled. Earnings releases are also falling off since their peak a few weeks ago. Nonetheless, there are some important reports in the retail and technology sectors, including Applied Materials, Hewlett-Packard, Home Depot, JC Penney, and Gap.
Is the Real Estate Bubble Bursting?: Last week's headline real estate news read...."A sharp increase in mortgage interest rates pushed the MBA index for mortgage applications down by 5% last week to 742.2. The decline, however, occurred solely in the refi index. The purchase index increased to near record highs. With mortgage interest rates expected to continue rising, the housing market is set to slow in the coming quarters, although last minute home-buying will keep the path downward from being a straight one." Behind the headlines are these startling facts:
- The average interest rate on 30-year mortgages has reached an eight-month high.
- Mortgage lending rates have climbed for eight consecutive weeks.
- Adjustable rate mortgages (ARMS) as a share of applications reached its highest level in 10 years.
- The number of newly licensed realtors has swelled to an all-time high.
- The Wilshire REIT Index (RWR) has lost nearly 20% of its value since April 1.
Real estate analysts have been claiming all along that there is no housing bubble and prices will remain high despite rising interest rates. But the fact that a large percentage of homeowners are opting for ARMÕs is a bit frightening. In a rising interest rate environment, those rates can only go higher, and will most likely result in forced liquidations. In an economy fueled by debt rather than savings, the consequences could be devastating.
Day Trading the E-mini's: SMT's Day Trade Service consists of two primary elements; a time & price forecast graph and our proprietary support and resistance levels. When used in conjunction, they can be a powerful system to day trade the S&P and Nasdaq E-mini futures contracts. We prefer to trade the first move of the day, simply because it consistently makes money. But the second move can also be profitable, as the graph for Friday's S&P forecast shows. For those unfamiliar with the E-mini's, one S&P contract controls about $55,000 of stock in the S&P 500 Index. Each point is worth $50 and the day trade margin requirement is approximately $1,750 per contract, depending on the broker. Brokers have some discretion in setting day trade margins, whereas overnight margins are set by the exchange.
The forecast graphs are posted by 8:25 AM CT, before the RTH open. The red lines are the forecast, the green lines are the actual price movements and the horizontal blue lines are the support and resistance levels. The expected turning points are numbered on the graph, 1,2,3, etc. On Friday, we were looking for the S&:P to rally off the open during the first 5-15 min of trading and head towards the R1-R2 resistance zone. This is a typical trading pattern known as the morning rotation. The index will bounce around until the market makers get all of the stocks in the index open for trading. The e-mini hit our resistance level at R2 (1096.50) right in the expected time zone at point #1. That was our signal to go short and we sold the e-mini at that point. Price then declined to Point #2 at our S3 support level (1087.50). The first move took less than 45 min and was good for 9 S&P points ($450 less commissions). Price then reversed at Point #2 on the graph and headed for Point #3, topping out right at our R2 resistance level. The second move was also good for 9 S&P points, or $450 less commissions. In less than two hours, our system forecast two trades good for $900 per contract in profits (less commissions) on a $1750 investment.
Friday's trading is not an isolated example, as these patterns occur over and over again. If you can afford to spend an hour or two a day, our system is a simple, yet effective day trading method that consistently makes money. To learn more about SMT's Day Trade Service, click HERE.
The COT Report: The latest Commitments of Traders report from the CFTC shows that Commercial Hedgers sold some 1,100 S&P 500 futures contracts last week to bring their net short position to -20,307 contracts. Large Traders remained net short -38,240 contracts, with the entire offsetting net long position of +58,547 contracts held by Small Traders, the so-called "weak hands". For the Nasdaq 100 futures, Commercials sold some 1,500 contracts to bring their net long position to +20,270 contracts. Small Traders were net short -11,356 contracts in the Nasdaq. Commercial action in Dow futures saw the smart money sold some 1,000 contracts to bring their net long position to +1,1107 contracts.
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 44.6%, while the percentage of bears was 25.7%. The bullish ratio (bulls/bulls +bears) was 63.4%.
The latest AAII survey showed a decrease to just 33% bulls, and an increase to 43% bears. The bullish ratio came in at 43%, while the 4-week moving average remains high at 60%. 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 59%, 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 was mixed, so we don't have a directional bias for Monday. We said Thursday night that Dell would be a drag on the Nasdaq for Friday's trading and that certainly was the case. Dell dropped about 3% on heavy volume, but managed to bounce off its 50-day moving average. Dell weighed heavy on the Nasdag, but again, the Comp managed to remain above critical support. As we mentioned earlier in the week, it's essential for the Nasdaq to trade above critical support if the market as a whole is to have any chance of moving higher.
We mentioned above that the 10-yr T-Note yield spiked higher Friday, hitting 4.90%, on higher-than-expected CPI data. Once that data was digested, the bond market lost its jitters and rallied the treasuries, dropping the yield back to 4.79%. While the yield is still high, action in the bond pits seemed to stabilize the broader stock market. Any bond market rally follow-through next week should be positive for stocks.
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 SELL zone. For Monday, resistance for the S&P's comes in at 1103 and then 1110. Support lies at 1086 and then 1078. For the Naz, resistance comes in at 1412 and then 1430. Support lies at 1385 and then 1376.
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 year-to-date high for the Nasdaq Composite on Jan 26th. The slope of the EMA has now turned flat however, confirming the trading range the market has been locked in over the last three months.
Our Market Trend Indicator (MTI) is currently positive and trended slightly higher on Friday.
Good Trading!
Charts and data appearing in today's column are courtesy of:
StockCharts.com
