Fear of the weekend may have knocked a few points off the indexes ahead of the close but Dow Industrials, Dow Transports and the Russell 2000 hit new highs intraday.

Market Statistics

There were three things moving the market on Friday. Jobs, oil prices and Federal Reserve speakers. Oil closed at a new 2.5 year high and jobs came in slightly higher than expected. Fed speakers continued their war of words as hawks and doves sparred in the press with competing views for the end of Fed stimulus. The Dow and Russell hit new highs on the first day of the quarter and fund managers should be very pleased. Now the hard work begins. Can they keep the markets moving higher or will the "sell in May and go away" crowd decide to take profits early and exit in April?

The NonFarm Payrolls showed a gain of +216,000 jobs in March. That was slightly more than the 185K to 200K estimates and the unemployment rate declined to 8.8% and the lowest since early 2008. The private sector added +230,000 jobs but the government sector lost -14,000. This is the first time we have seen back-to-back private sector job gains over 200,000 in more than five years. The manufacturing sector saw its fifth consecutive month of increases with +17,000 new jobs in March.

This was a good report although not quite as strong as most traders would have liked. It takes job gains of 150,000 per month to absorb new workers graduating into the work force plus newly immigrated workers. Just holding over 200,000 is not that positive long term but it is one more step in the right direction. We need to see job gains in the +350,000 range to really see an improvement in unemployment.

Payroll Chart

After the payroll report we saw speeches from two Federal Reserve presidents on opposite sides of the policy spectrum. New York Fed president William Dudley said the upturn in the economy as shown in the jobs data was a clear reason to continue the Fed's loose monetary policy rather than end it. Dudley said the +216,000 jobs number was a "notable" improvement and evidence the $600 billion QE2 program was successful. "We provided additional monetary policy stimulus via the asset purchase program to help ensure that the recovery regained momentum," Dudley said. "A stronger recovery with more rapid progress toward our dual mandate objectives is what we have been seeking. This is welcome and not a reason to reverse course."

He said the problems in Japan, the Middle East and Northern Africa and the severe austerity measures in the Eurozone would continue to weigh on the U.S. and there is "no reason to be overly optimistic about the outlook for economic growth." He said rising commodity prices would only raise inflation on a temporary basis and should be transitory. Merrill Lynch said they would favor Dudley's outlook as evidence of continued policy stimulation and ignore that of Lacker and others. As president of the NY Fed, Dudley has the clout and respect for his views. He is a permanent voting member of the FOMC.

BAC said the hawks on the Fed have sent a long string of false signals to the markets over the last couple of years. Second, chairman Bernanke has made it clear the Fed will move in measured steps as it heads for the exit. Bernanke wants to see how the markets react to one action before piling one move on top of another. The bank also sees this slow exit strategy as very bullish for the economy.

Meanwhile Philly Fed President Plosser was cautioning on leaving rates low too long and suggested the FOMC could hike rates in 2011. Most analysts believe it will be 2012 before they take any action. Plosser said the Fed should not be too sanguine in believing the time to reverse easy monetary policy is a long way off and it will be gradual.

Richmond Fed president Jeffrey Lacker also said he would not be surprised if the Fed hiked rates before year-end. He also said the QE2 program should be reviewed with an idea on how to end it early. He said at some point the Fed will need to pull back from asset purchases and begin asset sales and that could happen this year.

Minneapolis Fed President Narayana Kocherlakota told the Wall Street Journal on Thursday the Fed could raise rates by 75-basis points by year-end. He is a voting member of the FOMC and he has recommended letting QE2 end on schedule.

I can't remember when we have had so many high profile Fed speakers with such divergent views. There were 14 speeches by Fed presidents last week and eight next week. Any one of them could move the market significantly. You can bet that each one has dissected the speeches made by their peers last week and will be including points in their coming speeches to counter points made by those with differing views.

The next Fed meeting is not until April 27th but it promises to be a fireworks show. I can't even imagine how much pre-meeting market volatility we are going to see as the competing Fed speakers try to make their points in the press ahead of the FOMC meeting. This is even more critical because Bernanke will be holding his first ever post FOMC press conference after the announcement and it promises to be must see TV. When the market reacts negatively to a minute change in phraseology in the FOMC statements, what is it going to do when the Fed head takes 30 minutes to respond to pointed questions and has to answer without a prepared statement? I would not want to be long for that event.

The other report out on Friday morning was the ISM Manufacturing Index. The index slipped two tenths of a point to 61.2 from 61.4 but remained solidly in expansion territory. Orders decreased slightly to 63.3 from 68.8 but production increased from 66.3 to 69. The backlog fell from 59.0 to 52.5 mostly due to the acceleration in production and the ability to get the orders out the door quicker. This was a positive report and it suggests the manufacturing sector is still growing. Remember, the February print at 61.4 was the highest level since 2004. Only giving up two-tenths of a point is bullish.

ISM Chart

Late Friday afternoon manufacturers reported auto sales for March. Ford beat GM in percentage sales gains for only the second time since 1998. Overall auto sales rose +13% in March despite rising fuel prices. Ford saw a +19% rise in sales to 212,777 vehicles. GM saw a +9.6% gain to 206,621 vehicles. For the entire first quarter GM sold 592,545 vehicles to Ford's 496,720. Chrysler beat them both with a percentage gain of +31% but with only 92,623 vehicles. It was the company's best sales month since May 2008. Honda posted a gain of 18.9% to 133,650.

Manufacturers said sales of small economical cars had spiked and inventories were low thanks to the sudden rise in fuel prices. However, they said overall sales slowed later in the month as those fuel prices took off. Sales of light trucks and SUVs slowed dramatically towards month end.

Next week's economic calendar is very light with more Fed speeches than economic reports. The only major economic report is the ISM Services on Tuesday. With earnings not starting until the following week there will be little to energize traders other than Fed speculation.

Economic Calendar

The jobs report and the comments from Fed presidents caused a monster spike in the dollar at the open with the dollar index gaining nearly a full point before further Fed speak knocked the props out and the crash began. All the gains were lost and the dollar closed with a loss for the day.

Dollar Chart

The rise in jobs, drop in the dollar and rebel losses in Libya powered oil prices to new 30-month highs. U.S. WTI closed over $108 and Brent is nearly $119. However, of the top 50 or so energy stocks I monitor daily, only five were up more than $1. This has been a good week for energy stocks so profit taking ahead of the weekend was not unexpected.

The price of oil was being supported by a request for a ceasefire by the Libyan rebels. Apparently the three-day advance by Libyan tanks and troops has recaptured several important cities freed by the rebels early last week. Coalition forces have been unable to fly for the last three days because of bad weather. This has allowed the Libyan military to charge forward with their armor and massive firepower advantage. In fear of being overrun the rebels requested a ceasefire in order to hold the ground they have while a formal agreement is being worked out. Gaddafi immediately refused the ceasefire offer and continued to push forward with tanks and artillery.

To further complicate conditions on the ground the U.S. is going to pull all its forces out of Libya including the fighter planes that had been so effective on Gaddafi's armor prior to the bad weather. According to Defense Secretary Robert Gates and Joint Chiefs of Staff Admiral Mike Mullen, the American combat mission would end on Saturday. Nato partners and other coalition nations are expected to pick up the slack and continue to fly missions over Libya.

To the uneducated observer it would appear the best days for the rebels and their revolution could be over. If Gaddafi is allowed to continue shelling towns and reducing them to rubble the rebel's desire to fight is going to evaporate. Unless something changes drastically next week it appears Gaddafi will remain in power or the revolution will morph into a long drawn out civil war. Either way oil production may not be back this year.

U.S. gasoline prices rose to a national average of $3.61 on Friday and there is a very good chance they will be going higher.

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WTI Crude Oil Chart

Brent Crude Prices

There was very little stock news on Friday. This is the quiet period before earnings so news is very light. The big deal monopolizing the headlines was the Nasdaq/ICE offer for the NYSE Euronext. The pair announced an unsolicited $11.3 billion cash and stock bid for the NYSE in an effort to derail plans to merge with Deutsche Borse.

Nasdaq and ICE expect to save about $740 million over three years plus improve operations through significant consolidation of effort. Under the terms of the deal the Nasdaq would acquire the NYSE and other stock related businesses while ICE would acquire the NYSE derivatives unit, known as Liffe. The combined Nasdaq NYSE would be called Nasdaq NYSE Euronext. The firm would retain the NYSE floor operation and the Nasdaq electronic trading platform.

The $42.50 per share cash/stock offer trumps the $35.29 all stock offer from Deutsche Borse. Both companies have previously failed in takeover attempts. The Nasdaq tried to buy the London Stock Exchange and failed. ICE tried to buy the Chicago Board of Trade that went to the CME instead. If they are successful this time they will have to pay a $355 million breakup fee to Deutsche Borse. Moody's downgraded Nasdaq debt to negative from stable because of the amount of debt required for the transaction. The Nasdaq already has $2.2 billion in debt.

NYSE Chart

Apple shares declined -$4 after a web security company said it found the LizaMoon virus on the iTunes.Apple.com website. The LizaMoon virus has infected as many as four million websites in the last couple days. Apple claims it has software specifically designed to kill these types of viruses but the carrier content was found on the iTunes site. The virus inside that content may have been neutralized but the script still exists.

The LizaMoon virus is a SQL injection attack where a web application vulnerability is exploited to inject malicious code into affected websites. If you visit that website it will redirect your browser to a rogue website that in the case of LizaMoon tries to install a "scareware" file. The file generates a message warning the user that their computer is infected by a virus and directs them to another website that sells a program to "clean" your computer of viruses. It is actually relatively harmless as viruses go but any virus on iTunes provokes a knee jerk reaction.

While I am sure the virus news had some impact on the stock thanks to the news feeds trying to find something to report on Friday, I thought the intraday selling in Apple was related to a big sell program that hit the market at 2:30. The sell program appeared to target big cap stocks and I suspect it was a fund unwinding its quarter end window dressing. When you consider the event risk over the weekend I am surprised there was only one sell program. You would have thought there would have been a dozen taking profits from the window dressing.

Apple Chart

OEX Chart

Logitech (LOGI) was downgraded to hold by Oppenheimer after the company warned of lower sales and earnings. Logitech now expects revenue to be around $2.36 billion and their prior forecast was $2.41 billion. Profits are expected to drop to $145 million from the prior median estimate of $175 million. The company said weak sales in the Middle East, Africa and Europe were to blame. Shares fell -19%.

Logitech Chart

F5 Networks saw its estimates lowered by Oppenheimer based on expectations of lower sales after the broker conducted channel checks. Oppenheimer rates them a market perform. William Blair also warned that F5 was seeing slowing demand based on channel checks. Blair said Japan is 8% to 10% of F5 sales and budget cuts by U.S. state and federal governments seems to be impacting the company significantly. They believe the company will warn for the June quarter. FFIV shares fell -9%.

FFIV Chart

The stock stories for Logitech and F5 Networks could be a leading indicator for the month ahead. Japan is a big consumer nation. With 450,000 people currently homeless and living in shelters and panic over the spread of radiation we could see a significant drop in sales of business and consumer products. Eventually there will be a rebuilding period but sales in March-June could be a challenge.

The Middle East and Northern Africa may not be large consuming nations individually but when lumped together they do represent a significant amount of sales volume. We saw Egypt shutdown for nearly a month. Disruptions in countries like Yemen, Tunisia, Bahrain, Jordan, etc have not been as drastic as Egypt or Libya but there have been disruptions in normal product flow.

There is also the problem of parts supply from Japan. Even though most manufacturers are back up and running there was a 2-3 week blip in the supply chain. Auto manufacturers in the U.S. are still closing plants for a week at a time to "conserve parts" or wait on supplies.

We really don't know how the civil unrest in the MENA nations and the earthquake in Japan are going to impact product manufacture or sales for Q1. We may see many more warnings in the weeks ahead.

With the Q1 earnings cycle kicking off on the 11th when Alcoa reports we could see some impact to results. When Intel reports on the 19th the earnings for tech stocks will be moving into high gear. You have to wonder if companies will warn on short notice or simply miss estimates because of one-time charges for "earthquake impairment" or some similar excuse.

After Friday's hit to FFIV and LOGI you have to wonder what money managers are thinking. Do they hold through earnings in hopes of a strong cycle and companies beating the +14% earnings growth S&P is projecting? Or do they bail on fears of a flurry of quake warnings? The Nasdaq indexes are weaker than the rest of the market and could be the leading indicator for quake concerns.

Don't forget the "Sell in May and go away" crowd. With the FOMC meeting and Bernanke press conference on the 27th, do they wait for May?

I don't want to try and predict a market top because there are other writers with much more experience in that than me. However, there are some things to worry about. The first is the potential double top now occurring in the S&P around 1340. If we see any material window undressing next week we may not see that 1340 level again soon. Double tops are easy to see and almost every trader with access to charts can see the potential.

A double top is technical. Add in the fundamental problems with a possible hit to earnings from overseas factors and the impending FOMC meeting and possible change in statement and there are reasons to be cautious.

If I were going to pick a top the two days I would name as possible targets would be April 1st and April 19th. The 1st because we got the short squeeze spike on jobs numbers to a new high on the Dow and there will be no upside news next week. The risk is for more warnings not upside surprises.

The 19th is the day Intel and IBM report. If we make it through next week without a material decline then the next hurdle will be the earnings from those tech giants. If there is any weakness at all in either report I believe investors will run to the exits ahead of the FOMC meeting.

Obviously those are only two scenarios out of dozens but that is the way I see it today. I don't really see the markets continuing to move higher just because the bulls want to rally. Granted they have been buying all the bad news fit to print for two weeks now but there is still a lack of conviction. Volume is terrible. The two lowest volume days of the year were last week. Friday was only 7.1 billion shares and that was the high for the week.

I know a lot of people who are not invested in this market because they are still scared. They believe the deficit matters and the markets are being manipulated. They have missed out on a 26% rally over the last nine months from much lower levels. Odds are good they are not going to jump in today with the Dow up +2700 points from the July lows.

Don't get me wrong. I am still bullish long term. I am just cautious about the next 90 days until we see the reaction to the end of QE2. There are going to be some potholes in the road we are traveling.

April has been up 64% of the time since 1930 and it averages a +1.48% gain. If you were a money manager would you risk your double-digit returns since last August on the chance of capturing another 1.48% gain? I doubt it.

Some analysts believe the end of QE2 could cause a correction of 10-15%. Stocks are up +25% since the Jackson Hole start of the QE2 rally. Unless the economy is literally exploding very soon they believe the odds are good we are going to see a decline before the end of QE2. Money managers will not wait until the end of June to sell just like they did not wait until it started in November to buy. They began in August, two months before the official announcement. Buy the rumor, sell the news. The news will likely be disseminated on April 27th.

On the flip side we have that underinvestment scenario where everyone is waiting for a mythical dip of epic proportions. (If we did get one those same reluctant buyers would run for the hills screaming the sky is falling rather than buy stocks but that is another story.)

For the past 12 months only 50 stocks in the S&P-500 are down more than 5%. This has been a very broad market rally and on low volume. Volume is actually shrinking and it is not even summer yet. This continues to suggest a lack of conviction on the part of buyers and that means a lack of investment. The small dips should continue to be bought but once the fund managers unleash the sell programs the bears will come out of their cages.

I hate to be so cautious the day after the Dow set a new intraday high but we have to look at all the facts not just a single candle on a chart. I hope I am wrong and none of those possible scenarios come true. The major brokers are still predicting 1350 to 1530 on the S&P before the year is out. All of those expectations require the U.S. economy to move from simmer to boil relatively quickly or those estimates will be coming down.

We have had a great seven month rebound and on the surface it would appear the March decline was a exactly what we needed to build a base for the next leg higher just like we saw in October. There are positive signs suggesting the rally could continue so we can still look at the glass half full as well.

The Dow Transports ($TRAN) broke out to a new two-year high at 5400 on Friday at the same time the Dow was making a new two-year high. If the Dow had held above 12,391 that would have been a confirmation of a new bull move according to Dow theory. The Dow missed that close by -15 points but I suspect nobody cares.

The Russell 2000 broke out to a new four-year high at 850 intraday and closed at 846. This is VERY bullish. The Russell has gained nearly +10% since March 16th. Can you say, "overextended?" However, nothing is more indicative of bullish sentiment than a new four-year high on the Russell. The all time high is 855.77 on July 13th 2007.

To summarize we have a mostly bullish market, techs excepted, moving into a fundamental minefield of earnings and Fed action, with volume at the lows for the year. What could possibly go wrong?

The S&P moved over 1331 and the resistance from late February but it could not hold its gain. The S&P nearly touched 1338 but declined to close on 1332. Is that enough to claim a breakout over 1331? I doubt it although I am glad it closed over that level rather than under it. If something happens over the weekend to push us back below 1331 I think the outlook turns cloudy. Similarly if we gap higher on Monday because Gaddafi falls off his balcony then 1331 becomes real support. I think more than any other week our futures are going to be tied to the news headlines. S&P 1343 was the February high close. Market trivia: Did you know that 1333.58 was exactly a +100% rebound from the March 2009 low at 666.79?

S&P Chart

The Dow moved to a new two year high intraday over 12,391 but pulled back at the close when a sell program knocked -40 points off the index. A close over 12,391 would have triggered a bullish Dow Theory event since the Transports were also breaking out to a new high.

I don't believe the decline was meaningful. However, look at the green candles since mid March in the chart below. That is classic overextension and the potential for a double top. If the Dow did find traction and move back over 12,400 I would expect it to keep going since the short covering would be strong. When you weigh the pros and cons the odds of it moving higher and holding the gains for the rest of the year are pretty close to zero. Initial support should be 12,250.

Dow Chart

The Nasdaq is the bearish index this weekend. The Nasdaq failed to break through 2800 and came to rest about 11 points under that level. Initial support is well back at 2765. Much of the weakness was due to FFIV -9, APKT -3, and Apple -4.

The dead stop at 2800 was bearish. The Nasdaq gapped up to 2797 at the open and could not capitalize on the event to move higher. I believe the Nasdaq is the leading indicator of overseas related earnings problems yet to be disclosed.

Nasdaq Chart

The Russell 2000 came very close to a new historic high at 855.77 missing it by only five points. The close at 847 was still a new four-year high. Since the March lows the Russell has been on a mission and gained +2.78% last week and is now up over 8% for the year. If fund managers are hesitant about putting money to work in small caps you could not tell it from the Russell last week. Support should be 830.

Russell Chart

The Dow transports broke out to a new two-year high but they ran head-on into uptrend resistance and resistance highs at 5410 from 2008. The Transports are in rally mode because of expectations the U.S. economy is accelerating. A new high on the transports while the Dow Industrials is making a new high is considered rally confirmation under Dow Theory.

Dow Transports Chart

The NYSE Composite, an index of more than 2000 NYSE stocks, came to a dead stop at resistance at 8470. Is it poised for a break out or a break down? I would not say this was specifically bullish but a break over 8470 would be a buyable event.

NYSE Composite Chart

There are two questions for next week. Will money managers close their window dressing positions that pushed the market higher last week? Second, will the bad news bulls trample any bad earnings news as already priced into the market? I think those will be the two issues powering the market next week.

I don't see any specific direction but I am concerned until we get past the current resistance levels. If we do move lower next week I would be cautious about buying the dips. Friday was April Fools Day but if traders are not careful the entire month could turn into a bad April Fools joke.

Jim Brown

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