Submitted by Mark Hanna
The action last week was quite impressive, in light of the news flow. Market participants entered to a gap down on European worries Monday morning, but lows of upper 1350s that were reached in early April held (potential “double bottom” stuff) and the market reversed upward to finish off the lows of the day, albeit tentatively. Tuesday’s action was amongst the strangest/most confusing of the year – the “Investors Business Daily” stocks were taken out on stretchers while the rest of the market was quite benign. Many of those stocks sold off on very heavy volume, as investors awaited Apple’s earnings – it almost felt if a high beta type hedge fund was forced to liquidate that session.
Of course Apple’s earnings were superlative once more, and a gap up ensued Wednesday causing everyone to ask “is this going to be the start of the upteemth (sp?) low volume, V shaped rally? Ben Bernanke also helped the cause when in his news conference he gave us another “David Tepper” moment – either the economy is going to get better (good for stocks) or the Fed is going to wave its wand with more assistance (perceived as good for stocks, rightly or wrongly). Wednesday’s move also triggered an IBD “follow thru day” (FTD) and this widely followed trend following system triggered a “market in confirmed uptrend”. That said the action on Wednesday only took key indexes to the top of their recent ranges, while Thursday’s performance took most of them over (sans NASDAQ). In S&P terms this was 1393+. This despite punk weekly employment claims.
Friday was a solid day of light movement/consolidation even with a GDP miss and Spanish debt downgrade. A key level of 1404 on the S&P 500 was breached briefly but markets sold off late in the session to fall back below it. Technically I’d consider the week typical of the movements we’ve seen since 2009 – big upward moves, on light volume. Doubting such moves due to lack of volume and 45 degree angle upward moves has been a loser’s games the past few years – even though traditionally that is not how market’s confirm uptrends. If not for the Sword of Damocles of Europe exploding on any given overnight session, this type of advance in light of not so great news would be easier to embrace. I should also mention the U.K. went into technical double dip recession, Spain confirmed it’s in a modern day depression, and the Bank of Japan announced an expansion of quantitative easing.
Hence the environment we face is an impressive technical move, a hold of the key 1393ish level, in light of slowing U.S. economic data, the powder keg that is Europe’s sovereign debt, and a wall of global economic data this week – much of it not expected to be good. That said, it’s all about expectations and if they have been lowered enough the market may be better able to absorb poor data.
Below we see the charts of the S&P 500 (annotated), NASDAQ, and Russell 2000 – note the former and latter broke over recent ranges on Thursday while it took NASDAQ a day extra. A notable change from most of 2012 where NASDAQ was the leader – let us call this ‘mean reversion.
I’d also like to point out the action in the dollar, which Bernanke punished with his words of “more assistance if needed” Wednesday afternoon. As it has weakened, by definition all assets priced in dollars “benefit”.
On the flip side, bonds are not exactly signaling ‘risk on’. However since the Fed has come to dominate the bond market, our “price signals” are bastardized – so this could be saying “The U.S. is a relative safe haven” or “more QE” or any number of things – we don’t have old fashioned supply and demand in these markets anymore as a player with unlimited pockets hovers over it.
We continue with earnings season as about half the S&P 500 companies have reported with the typical 70% beat rate. But the first week of the month is the doozy for economic data – especially the two ISM figures, and the monthly labor data. With weekly jobless claims spiking the past 3 weeks expectations for job growth have ratcheted down – the question is are they low enough to compensate for the data Friday? European PMIs will also be released but we saw in the flash figures last week that it’s ugly “over there”.
The key reports for the week:
Monday – 9:45 AM: Chicago PMI. The consensus is for a decrease to 60.8, down from 62.2 in March.
Tuesday – 10:00 AM: ISM Manufacturing. The consensus is for a decrease to 53.0 from 53.4 in March. Market players will be looking at sub indexes such as new orders and employment.
Wednesday – 8:15 AM: ADP Employment. The consensus is for 178,000 jobs added, down from 209,000.
Thursday – 10:00 AM: ISM Non Manufacturing. The consensus is for a decrease to 55.9 from 56.0 in March.
Friday – 8:30 AM: Employment data. The consensus is for an increase of 165,000, up from the 120,000 jobs added in March. And the rate sticking at 8.2%.
French elections are next weekend, although the market hopefully has absorbed Sarkozy losing. If he wins, that would be an unexpected ‘upside surprise’.
Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog