After a 98-point Dow drop at the open on news of another earthquake in Japan the markets rebounded but it was a fight. Volume was light again and lacking conviction.

Market Statistics

It was a slow news day with no material economic reports and a lack of any major deals. Investors seem to be just passing time as we wait for Q1 earnings to begin next week. Even without the news from Japan I am not sure the markets would have continued higher. Stocks that have been big winners over the last several weeks are being sold hard but others that have been out of favor are finding buyers. It appears there is a stealth correction in progress as we wait for Q1 earnings.

On the economic front there were only two reports of note. The Chain Store sales for March showed +2.0% growth but that was significantly less than the +4.2% growth in February. It was the weakest showing since October. However, analysts believe the sales number was skewed by the much later Easter holiday in 2011 and the shift of sales into April. Easter is three weeks later in 2011 than 2010 and the latest date since 1943. The ICSC is predicting sales growth in April to be over +5%.

Wholesale clubs saw sales increase by +12% and helped by sharp price increases in food and gasoline prices. Luxury stores saw a +7% increase and drug stores +2%. Discount stores, department stores and apparel store all saw sales decline.

The fly in the ointment is the rising cost of fuel prices. AAA said the average price for gasoline rose to $3.73 per gallon on Thursday. That is an increase of 68-cents since Jan-1st. This means consumers are spending an extra $247 million PER DAY than they were on January 1st. That is going to be an increasing drag on discretionary spending and on consumer sentiment.

Initial jobless claims declined by 10,000 to 382,000 and a five-week low. The labor market is improving but the speed is equivalent to watching grass grow. There are still 8.4 million still receiving unemployment payments. That is down from 12 million at the peak of the recession but still a huge number of people. 44 million are still on food stamps. This is only going to get worse as gasoline prices rise.

Food Stamp Chart

Reports out on Friday include Wholesale Trade and the ECRI Weekly Leading Index. Nobody will notice either report.

Crude prices were rocking higher again after Gaddafi bombed his own pipelines in order to keep the rebels from selling oil and using the proceeds to buy supplies and arms. Gaddafi then blamed Britain and NATO for striking the country's largest oil field saying they wanted to cripple the infrastructure in Libya and save the oil for themselves. This was the second attack on oil facilities in two days by Gaddafi forces. Earlier this week they attacked Messla and on Wednesday they struck Sarir. Production and transport of oil was halted due to attack damage. Over the last several weeks I warned about this probability so it should not come as a surprise to readers.

The attacks on the oil facilities caused prices on U.S. WTI to rise to $110.27 and Brent to nearly $123 intraday.

With the Nigerian elections scheduled for this weekend there is the potential for another disruption of light crude. Typically the oil facilities in Nigeria are targeted ahead of the elections in an effort to sway support for opposition candidates. However, the MEND rebels claim they have cancelled the threat of attack this year and will wait to see how the newly elected government responds to their demands. The elections come in three different sessions over the next two weeks.

WTI Crude Chart

Brent Crude Chart

Energy stocks were mostly down for the second day despite the higher oil prices. It appears to be a case of sector rotation after the big gains in the first quarter.

In stock news Seagate Technology (STX) rose +8% in after hours to $15.80 after saying it would reinstate its quarterly dividend of 18 cents as of June 1st. Seagate had suspended the dividend in April 2009. The company also predicted revenue for the quarter at $2.7 billion and analysts were expecting $2.62 billion.

Expedia (EXPE) announced it was going to spin off TripAdvisor into another public company with the shares distributed to holders of EXPE stock. Shares of EXPE rose +14% on the news in after hours. TripAdvisor offers trip planning and reviews of hotels and vacation spots. Expedia operates under Expedia.com, Hotels.com, Hotwire.com and CarRentals.com.

Constellation Brands (STZ) posted a profit of $279.8 million on a +17% jump in sales of wine in North America. Wine sales account for 90% of their revenue. The liquor distributor said, "The consumer is definitely back and is definitely purchasing." Obviously they are catering to a different segment than the food stamp crowd I mentioned earlier. However, the CEO said the consumer remained price sensitive and looking for a deal and that required a robust promotional program.

The Gap (GPS) was a loser for the day after they posted a -10% drop in same store sales and warned it would miss earnings estimates for Q1. The store also announced it was selling some new 10-year bonds and had negotiated a new $500 million credit facility and entered into a $400 million five year loan. I am assuming that was before bankers learned their sales had declined -10% and they would miss earnings. Much of its borrowed cash was to be used to fund a share buyback program. Obviously management is grasping at straws.

Bed Bath and Beyond (BBBY) said sales rose +12% and twice as fast as expenses. Same store sales, those from stores open more than a year, rose +8.5%. The company is projecting a 10% to 15% increase in profits for the full year. Earnings for Q4 rose +30% to $1.12 per share. Analysts had been expecting 97-cents. Shares rallied +10% on the news.

BBBY Chart

In the international news the European Central Bank (ECB) raised interest rates for the first time in three years in an effort to inflation. The ECB hiked rates by 25 basis points to 1.25%. Inflation in the Eurozone is 2.6% according to Eurostat. The inflation target is 2.0%. In London the Bank of England kept its own key rate at .5% in order keep support on its struggling economy even though inflation is already over their targets.

The ECB rate increase was probably the most widely telegraphed in history so the impact on the market was minimal. The ECB also suggested it was a standalone event and not the beginning of a series of hikes so that also helped the market.

Portugal became the third EU country to accept a bailout despite months of claiming they would never need one. The country did an abrupt about face this week and asked for money from the EU and the IMF. The request was forced after Portugal had to pay much higher rates to sell debt earlier in the week.

The market dropped hard at the open after Japan suffered a new 7.1 earthquake at 11:32 PM local time. Officials said it was the strongest of the more than 1000 aftershocks since the March 11th quake. The quake was centered 40 miles from Sendai and 70 miles from Fukushima. A tsunami warning was immediately issued but cancelled two hours later when it failed to appear. Japan is still searching for more than 15,000 bodies of people still missing and is just now starting to make progress on the massive cleanup.

The news of the strong shock rekindled the worries over supply chain issues and their impact on the U.S. markets. Auto manufacturers are still struggling with production schedules due to a slowdown in parts. Consistent rumors persist of iPhone and iPad parts shortages but so far no official announcement I am aware of.

The U.S. government appears to be heading for a shutdown after the president vowed to veto a short term funding bill passed by lawmakers. Now that the election cycle has begun everything takes on stronger political meaning. The White House has been warning on the negative impact of a government shutdown every couple hours and using the power of the office to try and force a compromise in the budget battle and protect democratic spending programs. Despite the continuing passage of budget bills by lawmakers as they try to work through the process the blame for a potential shutdown is being placed on the Republicans. In a poll this week 37% of respondents said any shutdown would be the Republican's fault, 20% Democratic and 20% President Obama. With that kind of response it almost guarantees a shutdown because even a presidential veto will focus blame on the Republicans and score political points. This is not a complaint against the president or the democrats. It is simply an explanation of how the process works. If the president was a republican and the tables were turned I believe the results would be the same. It is how the game is played.

The opening dip was immediately bought for a +60 point rebound in the Dow but the bounce was short lived. Thirty minutes later a sell program hit that knocked the Dow to its low of the day at -98 points but that dip was also bought on decent volume. By noon it appeared the worst was over but the selling persisted and another -55 point dip appeared. The bulls were not to be denied and the dip was bought again but with much less enthusiasm. The market closed at the high of the afternoon and it appears to be another case of buyers shaking off bad news from multiple sources.

The S&P traded all over the map with a high at 1338 and low at 1326 but ended exactly at that 1333 level that has been a problem all week. I thought we were over that hurdle on Wednesday when we closed at 1335 but apparently 1333 is still a price magnet. That is the 100% rebound point from the 2009 bear market lows at 666.

The S&P has been consolidating at the 1333 level for seven days and the longer it stays at this level the stronger the next directional move will be. This can be seen in two different ways. This can be seen as a topping process where we have been unable to reach the 1344 high from February and we are in danger of a double top. This is a common formation for a double top.

If you look at the chart below the candles for the last five days have had very small bodies and long legs and tails with the bodies clustered at that 1333 level. Those long legs/tails emphasize the uncertainty by traders and that is a common pattern at market tops.

The other view is a consolidation pattern under strong resistance while we wait for earnings to supply traction for a move higher. I view it as bullish that all three dips today were bought and the S&P returned to that 1333 resistance level.

The low volume and lack of conviction by either side is clouding the picture. Investors are buying bad news but not with any volume. That produces weak support. That initial support today is 1325 and leaves us with a very narrow trading range.

Technically the chart is bearish. Fundamentally earnings and the economy are bullish.

S&P-500 Chart

The Dow is doing slightly better than the S&P with four consecutive closes over prior resistance at 12,391. The Dow is now using that level as support and that is bullish. However, it is not impossible for that to fail since we have also traded below that level for each of the last four days. Like the S&P the Dow is showing uncertainty but the industrial stocks are slightly more bullish and it is holding at those new highs. Support is 12,325.

Dow Chart

The Nasdaq Composite simply cannot make any progress over strong resistance at 2800. Wednesday's close at 2799.82 was the highest close since Feb-18th but still under that critical 2800 level. This resistance is proving to be very tough but maybe there is some light at the end of the tunnel. The Nasdaq 100 closed fractionally positive and suggests the initial negative reaction to the rebalance announcement has faded. We are two weeks away from the big tech earnings from Intel and IBM and it may be time for an earnings run to begin. We have the same long tails on the Nasdaq candles so there is plenty of uncertainty there as well. Initial support is 2780.

Nasdaq Chart

The Nasdaq 100 is being supported by the 50-day average but note the decline in the intraday highs since last Friday. This is still a pattern of either consolidation or topping and we won't know which until the next directional move appears. Resistance has appeared at 2350 and support at 2325.

Nasdaq 100 Chart

The bad news today came from the Russell. The Russell was the biggest loser in percentage terms and the index is struggling with that historic high from 2007 at 855.77. For the last three days the Russell has traded over that level but has so far failed to close over that level. This is turning into decent resistance and another lower close would indicate sentiment has changed.

Russell 2000 Chart

In the recent investor sentiment survey 57% of respondents were bullish and only 16% bearish. That is the lowest reading for bearish sentiment since December 2009. This suggests the market is going to move lower in the coming weeks. These are not levels that act as an electric fence and produce instant reversals and they can persist for weeks but the pendulum has definitely swung too far in one direction and it will eventually correct. As you know from my previous columns I expect some selling later in the month and most likely around the 19th when Intel and IBM report. Temporarily I am in buy the dip mode over 1325 on the S&P. We have not seen any material window undressing by funds so it appears they are planning on staying fully invested into the earnings cycle. That could change at any moment based on news but we have to take each day at a time. We can't spend our trading life always worrying about what is going to happen weeks, months or even years into the future. Carpe diem (seize the day) should be our motto.

Jim Brown

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