Volatility returned to the markets with a vengeance and triple digit days are becoming the norm. Thursday's 200-point gain on the Dow was nearly wiped out by a -150 point drop Friday afternoon but bargain hunters appeared just before the close to recover some of the losses. Market sentiment took another beating as oil soared and negative guidance continued to appear.
Chart - Daily
Nasdaq Chart - Daily
SPX Chart - Daily
There were not any economic reports on Friday but it did not stop the constant flow of economic forecasting. Warnings from Eastman Kodak and Costco helped to dampen outlook for consumer spending and prevented the markets from expanding on Thursday's gains. Kodak posted a loss of -50 cents per share compared to a gain f seven cents in the same period last year. EK took a charge of 53 cents for cost cutting and would have posted a minor profit of +3 cents without this charge. Still analysts were expecting a profit of +33 cents per share and without charges this represents a -30 cent miss on lighter than expected revenue. It was the second consecutive quarterly loss for Kodak and probably not the last. Kodak is cutting -15,000 employees by 2007.
Costco warned on Friday that earnings for the current quarter and the year would be below Wall Street expectations and blamed it on higher gasoline prices. COST said lower margins on higher priced gasoline was pressuring profits as well as consumer spending. COST fell -3.85 on the news. Appliance maker Maytag fell -4.21 after reporting its Q1 profit fell and cutting its forecast for the year in half due to slower than expected consumer sales. They announced some new cost cutting measures and plans to restructure but the damage was already done to the stock price.
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Oil also pressured equities on Friday with a spike back over $55 to a high of $55.95 and a close at $55.30. Last weeks dip to $50 on the May contract has been forgotten. Oil is being pushed higher by continuing refinery outages in Louisiana, Texas and Kansas and an increase in violence in the Middle East. The so called "terror premium" is being priced back into the market ahead of the increased demand of the driving season. The Mecca incident on Thursday put fear back into traders and nobody wanted to be short over the weekend. Two suspected militants and two Saudi security personnel were killed in a gunfight in the Muslim holy city on Thursday. With al-Qaeda still calling on supporters to target oil facilities it is only a matter of time before there is a successful attack. CNBC's Ron Insana interviewed President Bush this week and there was some conversation questioning the ability of Saudi Arabia to raise production any higher if needed. The crown prince of Saudi is meeting with Bush next week in Texas and you can bet the question will be high on the list of topics. One TV personality was calling them serial liars on Friday. I have been saying that since October and listed the facts in my Oil Crisis Report. I heard two separate analysts this week claiming that Saudi could NOT increase production more than +500,000 bbls per day. There is an effort currently underway by Saudi to raise/invest $50 billion to increase production to 15 mbpd by 2009 showing it is not as simple as just opening the valve. Any Saudi increase in production will not happen any time soon and it would only be in the heavy, sour grade of crude. Spot oil is trading below futures contract prices for delivery late this year and that shows buyers are already worried about delivery of product when the home heating oil surge begins. If you took my recommendation and bought oil stocks at $50 you should be a happy camper today.
Google soared to a high of $224 on Friday after reporting earnings that blew away estimates. Analysts, who had been neutral on the stock after its fall from over $200 earlier this year were quick to jump back on the wagon with targets of $250 or higher. Google has surpassed Yahoo as the Internet leader and appears to be increasing their lead very quickly. Yahoo fell -1.00 on the news and appears stuck under resistance at $35.
Dow Chart - Weekly
Dow Chart - 30 Min
SPX Chart - 30 min
On Friday the markets struggled all day to hold on to Thursday's gains and were doing a decent job until 2:PM. A late day sell program appeared right at 2:00 that knocked the Dow to a loss of -150 before buyers appeared at the close. The talking heads blamed it on a report that the U.S. had warned China that North Korea was nearing a test of a nuclear weapon. I seriously doubt this was the cause given the market action before and after 2:PM. It appeared to me that the markets were struggling to hold support levels at 10175, 1940, 1155 and that 2:PM sell program was simply more than the low volume support could handle. When the bottom fell out the buyers showed up right on schedule at Thursday's support lows on the Dow at 10075 and S&P 1145. Note the 30 min chart above and the influence of the 100/130 exp averages. Do you think that is a coincidence the Dow stalled there on the rebound?
Rather than trying to determine exactly what happened to cause the afternoon drop it is more important to look at the markets from a broader viewpoint. The Dow has fallen to 10,000 from 10984 in about seven weeks. That is nearly a -10% correction and a drop that should have quieted the bears and given the bulls an entry point to love. The surprise economics/earnings on Thursday morning bought buyers back into the market and a monster short covering rally appeared. Unfortunately, just like the short covering spike on Apr-12th there was no conviction behind it. Resistance held, volume dried up and weak support finally failed. Declining volume beat up volume 3:1 on Friday and new 52-week lows beat new highs 295:78. Is that confirmation of a +200 point rally? Not in my book.
Before I get too bearish I need to fill in that picture some. The afternoon dip found buyers exactly at Thursday morning's support on the Dow and S&P. Secondly, given the shaky geopolitical scene, higher oil and a coming FOMC meeting there was little reason to be long over the weekend. Traders who were jerked out of their shorts on Thursday had no real reason to get back in before the weekend uncertainty. The lack of conviction by both buyers and sellers left the market vulnerable to any program trade that happened to appear. I am not going to draw any conclusions from Friday's trading. I believe it was a throw away day that should be ignored.
Next week will be critical to market sentiment. We will have sales numbers on both new homes and existing homes on Mon/Tue. Both are expected to fall but it will be the magnitude of the fall that is important. Any surprise gains could go a long way towards soothing the market. Tuesday we also have Consumer Confidence, Mass layoffs and the Richmond Fed Survey. After the surprising strength in the Philly Fed survey on Thursday any future survey results will be far from a sure bet. Wednesday has Durable Goods and Oil Inventories. Thursday could be a big day with the first look at the Q1 GDP. The final for Q4 was +3.8% growth and while the consensus estimate for Q1 is +3.7% there are whisper numbers in the +4.2 to +4.4 range. A low number here could be a serious blow to the market while a high number could produce a bounce. However, bad news here could be good news, etc. A low number means the Fed would be less likely to continue raising rates while a high number could mean an acceleration of rates. Tough to play by the rules when 2+2 does not equal four. Friday is the really big day with Semiconductor Billings, Employment Cost Index, Personal Income, NAPM, Consumer Sentiment and Chicago PMI. This will bring April to a close economically although it will only set the stage for the FOMC meeting on Tuesday May-3rd.
Next week's Fed meeting has got to be one of the most cussed/discussed in recent memory. The official bet is for another quarter point increase and a retention of the measured pace language. However, there have been over a dozen Fed speeches over the last two weeks and confusion reigns supreme. Some led you to believe that the Fed would take a pass soon while others led you to believe they were poised to trash the measured pace language in favor of rampant rate hikes. Inflation reports have been alternately heated and tame with energy weighing on the economy far more than any rate hike. On Friday Fed Governor Kohn set the stage for next weeks round of speeches by saying the Fed should not hesitate to raise rates just because the housing market would suffer. And, the size and persistence of current imbalances (trade and budget deficits) pose a risk that may prove disruptive. His stance was rather hawkish and suggests there is more support for continued hikes than we have seen in recent reports.
June Crude Chart - Daily
SOX Chart - Weekly
I believe the current market outlook is no different than it was last week or the last month. The risk for equities is still to the downside with critical support at 9800 not 10000. We could see 10K serve as the bottom of our current range but I do believe it will be broken. Earnings are coming in better than expected at +12.7% growth but guidance has been weak. This week's rebound was almost completely short covering without any material improvement in internals and no follow through. We are entering the "sell in May and go away" period and I believe many more investors will use that strategy this year than last. The economy is lackluster and the Fed is raising rates. Two simple facts that many retail traders will see as a reason for a summer vacation away from the markets. Indexes and ETFs, the favorite vehicles for hedge funds could be trapped in the twilight zone of summer as some individual stocks rise and some fall giving index traders no trend to trade.
All eyes will be on the Fed meetings on May-3rd and June-28th for signs of a
halt in hikes. Until that sign is seen there is no reason to hold equities. Once
they do pause it will
be the all-clear signal for investing once again. Now is
the time for watching the opposing forces as they circle each other on the
battlefield. The inflation monster and the retiring Fed head in the grudge match
of the century. Greenspan would probably like to go out a winner one last time
and preferably not with the economy in another Fed induced recession.
Unfortunately for Greenspan the Fed's movements are being hampered by an oil
slick of historic proportions that is taxing consumers
at every turn. Like
gawkers slowing down at a traffic accident investors will be moving to the
sidelines for the summer to see who ends up on the stretcher. Greenspan may end
up winning the inflation battle but the harsh medicine could put the economy
into an interest rate coma. The potential outcome could keep investors cautious
until fall and without conviction the path of least resistance is still down.
Definitely enter passively and exit aggressively.