Friday's Action: Stocks finished modestly higher Friday with traders reluctant to make major moves amid continued uncertainty about interest rate hikes and worries about inflation. Volume was fairly light despite it being a quadruple witching day. Major world markets posted mostly higher results on Friday. London's FTSE closed up 0.28%; Frankfurt's DAX closed up 0.36%, and Paris' CAC 40 finished higher by 0.61%. Japan's Nikkei closed down 1.95%, Hong Kong's Hang Seng closed down 1.88%, and Sydney's All Ordinaries finished higher by 0.47%. In economic news, the Current Account deficit for the first quarter widened to a record $144.9 bil from a revised $127.0 bil in the previous quarter. Volume came in at 1.49 billion shares traded on the NYSE and 1.73 billion shares traded on the Nasdaq. Market breadth was mixed, with NYSE advancing issues over declining issues by 1.27, and up volume over down volume by 1.57; Nasdaq declining issues over advancing issues by 1.13, and up volume over down volume by 1.33. Leading sectors were Gold Bugs, +2.47%, Gold/Silver, +1.95%, Chemicals, +1.22% and Biotechs, +1.21% Laggards were Hardware, -0.63%, Retail,-0.41% and Natural Gas, -0.27%. Sep Nasdaq 100 futures closed 1.50 pts lower to settle at 1468, while the Sep S&P's settled up 2.40 pts at 1134.
Weekly Recap: Stocks finished the week essentially where they started, as investors hugged the sidelines. Through Thursday, volume at the NYSE averaged some 1.25 bln shares, and on the quadruple witching Friday, it failed to top 1.50 bln. Under more normal trading conditions, volume has approached 2.0 bln shares for a quarterly expiration. Concerns about interest rates, inflation, oil prices, Iraq, terrorism, and the outcome of the presidential election have dampened investor enthusiasm, offseting encouraging earnings and economic news.
The result has been a range-bound market that is expected to continue at least until the June 30 FOMC meeting and when coalition forces turn over the reigns of government to the Iraqi's at the end of the month. There are no guarantees that market interest will pick up after the end of June, however, as the fear of terrorist activities will most certainly heighten leading up to key events this summer, such as the Democratic National Convention in Boston during July 26-29, the Summer Olympics in Athens during Aug 13-29, and the Republican National Convention in New York City during Aug 30-Sept 2.
For the week, the Dow gained +0.1%, the S&P 500 finished -0.1% lower, while the Nasdaq slipped -0.7%. The small cap Russell 2000 edged up -0.2%. Next week the economic calendar is light, but there will be some important earnings reports from the likes of Walgreen, Goldman Sachs, Morgan Stanley, FedEx and Nike. Each should generate some added trading interest, but overall, the action is likely to remain lackluster as investors will probably continue to hang back until the pivotal June 30 date.
Is the Economy Really Expanding?: One indication of whether an economy is expanding or contracting is measured by the production of iron and steel products. Similar to other favorite measures of economic growth, like rail car loadings, the Baltic Dry Index, or Mr Greenspan's favorite, corrugated box production, steel production is an indication of the economy's consumption of tangible finished materials, i.e., autos, white goods, building products, etc. So far this year, steel production has totaled 47 million tons with an average capacity utilization rate of 90.3%. That compares to year-ago figures of 45 million tons and an average capacity utilization rate of 85.3%. And the rate of production is expanding, not contracting. Last week's figures were 4.9% higher than the previous week, while capacity utilization edged up to 92.0%. Steel production is "on a roll" (no pun intended) and that should be good news for the US economy.
Update on SMT's Market Trend Indicator: Our Market Trend Indicator (MTI) picked off the latest market rally in good fashion. Looking at the chart below, the MIT generated a buy signal on May 12th, two days after the Dow bottomed on May 10th and three trading days before the Nasdaq bottomed on May 17th. The sell signal came on June 15th as the major averages were making an "M" top. Investors trading the 2 beta NDX funds (Rydex or Profunds) had gains of 8.7%.
The MTI has consistently out-performed a buy-and-hold strategy. The indicator is updated each evening after the market close and is available to subscribers of our Basic Service. To learn more about the MTI and the other features included in this service, click HERE.
The COT Report: The latest Commitments of Traders report from the CFTC shows that Commercial Hedgers bought some 9,600 S&P 500 futures contracts last week to bring their net short position to -15,292 contracts. Large Traders remained net short -38,967 contracts, with the entire offsetting net long position of +54,259 contracts held by Small Traders, the so-called "weak hands". For the Nasdaq 100 futures, Commercials bought some 600 contracts to bring their net long position to +24,201 contracts. Small Traders were net short -20,086 contracts in the Nasdaq. Commercial action in Dow futures saw the smart money buy some 6,900 contracts, reversing their position back to net long by +5,672 contracts.
Commercial Hedgers were better buyers in the S&P's last week but remained net short, while Small Traders were better sellers. For the short term, their actions could be considered mildly bullish, but for the intermediate term, their opposing positions should be considered bearish.
Sentiment Surveys: The latest Investors Intelligence survey showed that the percentage of bullish newsletter writers came in at 55.7%, while the percentage of bears was 17.5%. The bullish ratio (bulls/bulls +bears) was 76.1%.
The latest AAII survey showed a decrease to 41% bulls, and an increase to 28% bears. The bullish ratio came in at 59%, while the 4-week moving average is 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 65%, 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 price action was mixed, and that's how the market ended on Friday. Friday's price action was also mixed, so we don't have a clear directional bias for Monday. While the major averages mucked around on Friday to closed slightly positive, there were a few short-term bearish developments. Oil workers in Norway initiated a strike and global oil output is expected to be reduced by 10%. That pushed crude oil prices back to a 10-day high, trading at $38 the barrel. Unlike strikers in Nigeria, who are routinely bought off by government bribes, the Norwegian workers tend to stick to their guns. A prolonged oil strike in Norway will undoubtedly put upward pressure on energy prices, and that's a negative for the stock market.
Thursday night after the close, the Semiconductor Equipment and Materials International announced that its book-to-bill ratio is showing waning demand. As a result, the PHLX Semiconductor Index (SOX) was one of the few tech sectors to lose ground on Friday. Shares of chip heavyweight Motorola shed more than four percent after a major brokerage firm downgraded the stock to "equal weight" from "overweight". The firm also lowered its target price for the security to $20 from $25, stating that the "1Q04 margin performance will be difficult to sustain". As long as the SOX continue to languish, the techs in particular and the market in general will have difficulty finding any traction to sustain a move higher.
Also potentially negative was the action of the Nasdaq Volatility Index (VXN) on Friday. While the NDX managed to eke out a gain of just 0.04%, the VXN dropped 6.14% and once again broke through support. Since volatility is "mean-reverting" and the VXN is "out-of-bounds", the expectation is for the VXN to revert back towards its mean. And rising volatility means a falling NDX.
SMT's Pivot Point Forecast; 1-2 Weeks: Our Pivot Point RS indicator is currently on a SELL signal. Our next Pivot Point is forecast to occur on or near June 18th.
The 60-min NDX chart below shows that the StochRSI indicator is in the NEUTRAL zone. For Monday, resistance for the S&P's comes in at 1141 and then 1145. Support lies at 1127 and then 1121. For the Naz, resistance comes in at 1481 and then 1495. Support lies at 1457 and then 1448.
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 is currently negative and trended slightly lower on Friday.
Good Trading!
Charts and data appearing in today's column are courtesy of:
StockCharts.com
Economagic.com
