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Market Wrap

Drop in Oil Punctuates Month End

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WE 04-29


WE 04-22


WE 04-15



+  34.80


+ 77.37


- 381.00



-  10.51


+ 24.04


-   91.20

S&P 100


+    1.34


+   3.64


-   14.93

S&P 500


+    4.73


+   9.29


-   38.58



+  26.22


+ 90.52


- 387.81



-    3.70


+   6.66


-   34.31



-  10.15


+   8.78


-   29.97



-  13.61


+ 60.27


- 216.92















Drop in Oil Punctuates Month End

The Dow was in danger of posting the worst April in 35 years until the bottom fell out of the oil market. Crude dropped more than $2 just prior to the close of trading and was credited for several buy programs that hit the tape. The end of day sell off in oil was obviously influenced by month end portfolio shuffling but that point was all but ignored by TV commentators. The sharp end of day moves in oil, bond, and equities were likely all related to rebalancing by funds.

Dow Chart - Daily

Nasdaq Chart - Daily

Friday contained a diverse blend of economic news and like the prior weeks that news was a mixed pot of economic stew. The Employment Cost Index came in at +0.7% and lower than expected and showed that labor costs were actually moderating rather than climbing. This was the fourth quarterly decline in total compensation and suggests the labor market is weakening rather than firming. A weak jobs market allows employers to pay less due to competition for available positions. Higher benefit costs are weighing on wages meaning employers are cutting wages to offset the higher cost of benefits like health care. This tame report should be Fed friendly as it shows there is no wage inflation to support price inflation for consumer goods. In fact Friday's number was the weakest index showing since 2000. Wages grew by only +0.6% or +2.4% year over year and is the slowest growth in recent memory.

Personal Income and Spending was also released on Friday with a headline number of +0.5% and right at consensus estimates. Wages in this report grew +0.3% for the month and spending rose by +0.6%. The increase in spending over income reduced the savings rate by -0.4%. The PCE deflator, closely watched by the Fed as a gauge of inflation, rose by +0.5% due mostly to higher energy prices. The core deflator rose slightly less at +0.3%. These numbers were slightly faster than the Fed's forecast. This could cause some Fed concern next Tuesday but only slightly.

The final Consumer Sentiment for April fell to 87.7 from 92.6 with the expectations component leading the drop. This was the fourth consecutive monthly decline and the largest of the four months. Economic fears, rising interest rates and high gas prices continue to be blamed.

On the positive side of the economic ledger the NY-NAPM rose sharply to 341.2 from the prior month level of 329.1. This was a +3.7% jump and it was led by a +50% increase in the six-month outlook from 50 to 77.8. Current conditions also jumped from 58.3 to 74.2. The only material declines came in the quantity of purchase component from 80.0 to 65.0 and the average days of inventory on hand which fell to 15 from 30. Lower inventory levels could lead to a short squeeze if demand suddenly increases and the soft patch suddenly releases its grip on the economy. This report suggests the NYC economy rose sharply in March in direct opposition to what we have been seeing nationwide. This could be seen as a leading indicator of a broader rebound ahead.

The Chicago PMI fell from 69.2 to 65.6 and showed a slight cooling of manufacturing activity in that region. A slight decline was expected after the very strong reading in March and a +7 point jump over February. Analysts should be happy with the minor decline, which was actually better than the forecasted drop to 64. Inventories rose +6 points and employment fell -4 but both remain strongly in positive territory.

This has been a rocky week for economics with the GDP and Durable Goods orders both painting the picture of a continued soft patch for the economy. In hindsight this could be good news given the FOMC meeting on Tuesday. Many analysts are now calling for the Fed to step aside until the economy picks up some speed and that call is growing in strength. They are still expected to raise +25 points on Tuesday but now there is increasing doubt that they will continue hiking past June. This makes the May economics very important for Fed watchers and the calendar is full of events next week. The ISM Index on Monday is a look at manufacturing on a national level. The index has fallen for four consecutive months and another drop just ahead of the Fed meeting could be market positive. I know that sounds crazy but a weaker economy means the Fed is less likely to continue raising rates as long as they previously planned. The best scenario for traders would be an end to rate hikes at the August or September meeting. This would give buyers a very green light to buy a late summer dip.

There are lots of other reports next week but the Jobs report on Friday will be the next wall of worry bulls must climb after the Fed meeting. The gain of only +100K jobs in March was well below the recent averages. Estimates are dropping, currently at +175K with whisper numbers UNDER +100K. Should this jobs report vary much from +150K in either direction the market should react very strongly. The Fed will get an advance look at the numbers so it will already be priced into their decision but most traders don't realize this. They will react to the actual Jobs announcement instead.

Friday was a crazy day for those not accustomed to looking at the market with a broader view. At 1:30 a sell program hit the oil futures and knocked -1.55 off the price in a matter of minutes. Commodity traders felt this was due to the expiration of the front month contract in heating oil and unleaded gas. Personally I believe there were more factors at work. Recently we have had short covering price jumps in oil ahead of the weekend. I believe there were a lot of longs hoping for a repeat and time ran out on them with no movement. Those longs could have been mutual funds facing a month end and losses across the board in their portfolios. They could have been hoping for a last pop in oil before rotating back into equities for month end.

Funds that must remain balanced with certain percentages of assets in bonds and equities were faced with a -3% drop in the Dow and -4% drop in the Nasdaq for the month. This meant they needed to sell bonds and buy equities going into the close to maintain their stated balance. Bonds sold off sharply beginning at 12:45 just as equities began to rally. There were three distinct buy programs on equities in the afternoon, which provided the majority of lift.

The drop in oil could have been related to heating oil and unleaded gas expiration but I believe it was related to funds once again. Funds needed to take profits in oil to offset losses in equities. The combination of movement in oil, equities and bonds was too coincidental to be an accident. This was a pure bout of end of month tape painting at its finest and should not be construed as having any bearing on real market sentiment.

Oil drops -$2.00 to close under $50 for the first time since February 18th! That will be the headline in the weekend papers. Oil closed at $49.60 and more than -$6 off the $56 level seen the prior week. However, most oil stocks rallied on Friday despite the sharp drop in oil prices. Confused? The 100-day average is currently $49.75 for crude and this is a strong buy level. Conoco Phillips led the rebound at +2.09 for the day with most oil stocks finishing higher. I have been recommending adding to oil positions under $50 and that recommendation has not changed. Remember, we have been expecting a drop in demand as we transition from the heating oil season into the gasoline season. This drop in demand creates a build in oil inventories and that is what we have been seeing. Once the driving season begins those inventories will begin to shrink once again. We have been waiting for the pull back to $50 to buy oil not sell it. I received several emails asking if we should be exiting oil but that is the wrong thinking. You need to understand the seasonality and trends. Even at $50 we are still well above last years levels. The current chop on the chart looks exactly like the chop we saw in Oct/Nov last year with a bottom just over $40. Once demand begins to pick up again prices should rise into the fall months. We could see prices retreat even further but I continue to see it as a buying opportunity not a sell signal. An ideal entry opportunity would be a dip to the 200-day average at $47.

Crude Oil Chart - Daily

SOX Chart - Daily

SPX Chart - Daily

If you recall last Tuesday I showed you a chart of the advancing/declining volume and the new highs and lows for the last two weeks. The activity since then has been even more bearish with new lows shooting up to 441 on Friday compared to new highs at only 79. This is not a good sign for the markets. The declining volume has also been rising despite two days of positive markets. Thursday declining volume was 3.6B shares compared to only 802M shares of advancing volume. Decliners were 5:1 ahead of advancers. Friday's tape painting exercise barely managed to reverse that ratio to 1.5:1 in favor of advancers. Volume was very high at nearly 5B shares. In technical terms most of us would understand the market sentiment stinks.

Earnings have improved with 74% of the S&P now reported and earnings growth is well over +15% and +50% better than analysts had predicted just a month ago. That has failed to produce a meaningful rally or even a hint of positive times ahead. Now that earnings are fading the interest in stocks could fade with it. The Friday tape painting was unsuccessful in creating any material short covering and that suggests shorts are comfortable at current levels.

The Dow still has strong resistance from 10200-10260 and we could not even reach that 10200 level on Friday despite the tape painting. The morning dip to 10050 should have been enough to produce some bargain hunting but buyers other than the 11:00 program were noticeably absent. The opening spike to 10135 was sold hard as was the program trade spike from 10050. I still believe we will see 9800 soon and this chop is just sparring between the bears and the dip buyers. The market volatility continues to be very strong with alternating triple digit days but no trend. This is not the kind of action that attracts buyers off the sidelines. They see wave after wave of bargain hunters get chopped to ribbons 24 hours later and that is not the kind of game they want to play.

The Nasdaq was hit harder than the Dow on Friday with a technical breakdown below 1900 at midday. Were it not for the tape painting it could have been much worse as there was no material attempt to move off the 1895 level until the programs started running at 12:45. Nasdaq 1900 should be strong support but a real breakdown appears imminent. A breakdown could target 1750 for a new low.

Uptrend support across all the indexes has broken as well as the 200-day average on all but the S&P. That 1155 level on the S&P continues to act as a magnet on an intraday basis but so does current support at 1140. That support has been tested three times over the last two weeks and buyers appeared each time. This would be my key level to watch for market direction. Periodically a level will appear that has become the battleground where forces are evenly matched. This is currently 1140-1160 on the S&P. A break under the bottom of this range could trigger additional selling as a sign the bulls are surrendering.

The SOX also broke to a new five-month low of 376 at Friday's open. The support at 385 finally failed and the SOX spent most of the day under 380. The end of day buy programs returned it to close right on 385 once again but it looks very heavy. KLAC lowered guidance for the current quarter and warned that sales could be down -10%. On Monday we will see the Semiconductor Billings for March and another drop there could accelerate the weakness in the SOX. Chip results have been very mixed depending on what type of product each company produces. There have been some good reports like MCHP but they were offset by reports like we saw from Taiwan Semi and KLAC.

The real picture is one of earnings growth in nearly all areas with current earnings much better than expected. In theory stocks should be celebrating this earnings cycle instead suffering. The problem is the economy, the Fed and the future. While earnings guidance has been mostly positive there have been the occasional potholes. Because the economic reports have been mixed with a heavy dose of worry investors are concerned that the current earnings growth may not last. This is heightened by the current Fed cycle. While the term economic stagflation has returned to the mainstream press it is probably the stagnation in the markets that worry everyone most. We are oversold in most cases given the nearly -1000 point drop in the Dow from the years highs to the recent lows. Despite that drop we have not seen a rebound stick for more than 48 hours since early March. While one analyst on Friday was calling the S&P a perfect buying opportunity with a "W" bottom I fail to see it.

April is typically one of the strongest months of the year and at one point Friday morning we were only 35 Dow points away from the worst April in 35 years. My point to this is simple. March and April have been a disaster. Volatility is rapidly increasing and while alternating triple digit days are good for the swing traders they are damaging to overall market sentiment. Money flows into the market have shriveled to nothing. Fund inflows in March totaled only $14.9 billion but only $3.1 billion flowed into U.S. equities with the rest going into funds investing overseas. Trimtabs estimates April will be even slower with only $1.8 billion moving into domestic funds and $1.2B into overseas funds. To put this into perspective it would be like trying to stretch a single $30 fill up in the family car for the entire month. Fund managers are having to trim positions to pay the bills and handle disbursements. Buy stocks? Not until the cash flows appear again. You can't buy on good intentions and most managers have already trimmed the most likely positions to keep from selling the good stuff.

Everyone is praying Dow 10K, Nasdaq 1900 and S&P 1140 will hold and not subject them to another round of forced position reductions. I fear that any new leg down could produce some real belt tightening and a change in mindset from a simple correction to something more serious ahead. That could produce an even bigger drop since we always over do every move. So far we are holding in normal correction territory on the Dow at -9% from the high to the recent low at 10,000. The S&P has fared a little better at -7% from the highs to its 1136 low. The Nasdaq is the black sheep and has fallen nearly -14% since its January highs. In the grand scheme of things these numbers are normal for a pull back but given the calendar and the weak economy the summer doldrums are not likely to impress us with gains.

Starting with May we have the worst four months of the year ahead of us with July being the exception. May, August, June and September have historically been the four weakest months for the Dow and in that order with Sept the worst. For the S&P the worst five months are May, June, August, February and September with the insertion of February the wild card. Any way you look at it we have a potentially rocky period ahead unless somebody starts injecting cash into mutual funds. Obviously all the market history in the world does not assure the coming months will follow the historical averages. There are far too many factors that impact investor sentiment on a continuing basis. It does however help color that sentiment for those traders who have suffered through more negative summers than they care to remember. This is why the "sell in May and go away" strategy has earned so many followers. I would continue to be cautious on long entries and use any rallies as opportunities to enter short positions. The current volatility is providing plenty of opportunity but none of it is the buy and hold type. If you are not a trader it may be time to go fishing. Unless something changes the path of least resistance is still down but we are oversold enough that another short squeeze could be just around the corner. Definitely enter passively and exit aggressively.


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