The first four days of the week turned out to be strong for stocks. Positive earnings news from big cap names like JPM, INTC and CSX helped lift the major market indices to new 52-week highs. Unfortunately the market tone took a definite turn for the worse on Friday but more on that in a minute.
Investors continue to ignore bearish news out of Europe and China. The Greece problem refuses to die but it seems like worries over Greece are diminishing following news the European Union and the IMF have finally committed to offer a $61 billion aid package. The EU has pledged more than $40 billion in three-year loans at below-market rates while the IMF is filling in the rest.
Meanwhile on the other side of the globe China is once again trying to slam on the brakes to cool its overheating economy. This time the focus was on China's real estate bubble. Government agencies announced higher mortgage rates and down-payment requirements for all second homes effective immediately following news that properties values surged more than 11% in March from a year ago. With China's economy growing at a double-digit pace it's only a matter of time before the country's central bank begins to raise interest rates and a move like that would be felt around the globe.
Economic data this past week is starting to disappoint. Rising foreclosures are still a problem but then readers of this column already knew this plague of repossessions isn't going away any time soon. On Thursday, RealyTrac announced that the number of homes in the U.S. being foreclosed by banks surged 35% in the first quarter of 2010 compared to 2009. We're on track for over one million foreclosures this year. One out of every 138 homes in this country received a foreclosure-notice. Those numbers are a lot worse for states like Nevada, Florida and California. Don't forget that prior estimates for five to six million foreclosures over the next three years were doubled by the White House a few weeks ago toward the 10 to 12 million range.
Troubled real estate numbers and unemployment go hand in hand. The Labor Department announced that weekly initial jobless claims surged 24,000 to 484,000 while continuing claims jumped 73,000 to 4.639 million workers. With numbers like these it's probably not a surprise to hear that consumer sentiment sank. Economists were actually expecting the Reuters/University of Michigan's consumer sentiment numbers to rise to 75.0. Instead the report showed a drop in consumer sentiment from 73.6 in March to 69.5 in April. This was definitely a surprise considering the rise in the jobs report for last month. There is some speculation that the passage of the healthcare reform bill has dampened consumer spirits. The concern here is that falling consumer sentiment tends to equal falling consumer spending, which accounts for nearly 70% of the U.S. economy.
Goldman Sachs made headlines last week - twice! The first time was on Tuesday when Goldman's Chief U.S. Economist issued bearish comments about the recovery and the U.S. economy in the second half of 2010. Gosh, that sounds like someone else I know. Of course the real headlines were on Friday. The politically motivated SEC fraud charge announcement against GS was timed perfectly on Friday, just two weeks ahead of a vote on financial reform. It doesn't matter whether you admire or loathe the current administration in the White House, you have to give them credit for creativity and some shrewd tactics to get what they want.
I'm not going to dissect the SEC's charges against Goldman. That's already been done ad nauseam across the news at this point. However, I will suggest this could be the event that sparks a bearish reversal in the stock market although I doubt it. It may be more like the beginning of the reversal. The unexpected news from the SEC against Goldman sparked a market-wide sell-off and banking stocks led the decline. The BKX and BIX banking indices fell 3.4% and 2.8%, respectively.
Technically Friday's big down day has created a three-day candlestick bearish reversal pattern on the S&P 500. Yet I would hesitate to launch any short-term bearish trades. This week is one of the busiest weeks for Q1 earnings season with over 120 S&P 500 component companies reporting. There are several really big names that are going to report earnings this week and given the tone of earnings season thus far I expect them to beat estimates.
Stocks could get one last gasp higher on better than expected earnings news before we roll over into a post-earnings depression. We talked about this last week. Stocks run up into their earnings report. If the news is good they might spike higher following the report but then the momentum stalls or reverses. Investors sell into strength. The news is out. What's left to drive stocks higher? Thus we have a good chance the market finally rolls over as we move into the second half of April and earnings season.
In summary, the trend is still up but we're nearing a potential trend change. Investors are nervous about what financial reform means for the banking system and bank stock profits. They're also nervous that the FOMC might change the wording to their "extended period" language on low rates at the April 27-28th two-day FOMC meeting. The next week or two could be the beginning of a much needed correction. I'm still watching the 1150 level and the 1100 level as likely areas of support for the S&P 500. If you're looking for a long-term bullish entry point today is probably not your day. Be patient and let the market come to you.
Chart of the S&P 500 Index:
Weekly Chart of the S&P 500 Index:
LONGER TERM OUTLOOK
Previous Comments on my Long-Term Outlook:
My long-term outlook has not changed. I still expect the economy to see a double-dip, "W"-shaped rebound with the second dip in 2010 (some analysts are predicting it will not show up until 2011). Lousy consumer spending, rising foreclosures, and lagging job growth will be the main culprits. Several weeks ago there were some comments out of the U.S. Treasury concerning foreclosures. The Obama administration's HAMP loan modification program can only help a certain number of homeowners and one official said that even if the HAMP program was a total success we should still expect millions of new foreclosures. This only reinforces my own belief that we will see another tidal wave of foreclosed homes in 2010 and 2011. Some analysts are forecasting upwards of six million foreclosures in the next three years. What is that going to do to consumer confidence and consumer spending? It's not going to help! You can review my long-term outlook here. It's the second half our my "Two Months Left" commentary.
~ James Brown