Better than expected earnings results and benign economic data continue to power the stock market higher. All of the major U.S. indices (S&P 500, NASDAQ, DJIA, Russell 2000) closed at new 52-week highs. It would appear that investors have no fear of a sovereign default by Greece. Risk of a default have been driving the euro currency lower and the dollar has been rising as a result. Money has also been flowing into the U.S. bond market the last couple of weeks but bonds pulled back a bit in the last couple of sessions.
Sadly the Greek meltdown continues. Last week's promise of a $61 billion aid package by EU leaders and the IMF was not enough. The Greek bond market continued to implode and yields on the 10-year Greek bond soared to 9% this past week. The country's finance minister finally capitulated and asked the IMF to activate the country's emergency loan package. Unfortunately this could take weeks to actually happen so the damage in Greece isn't over yet.
There are plenty of pundits of the opinion that this Greece disaster is only the beginning. Portugal is next on the list followed by either Italy or Spain. These last two countries are several times larger than Greece and will have a much bigger impact on the EU and the world stage. For now the U.S. markets seem to have grown bored with the Greece problem. The major indices barely moved on Friday's news that Greece officially turned to the IMF for immediate aid.
Financial news this past week saw big headlines in the real estate sector. The sale of existing homes soared 6.8% in March while the sale of new home sales soared +27%. I want to caution investors to not read too much into this one report. It was just a week ago the headlines were about the record number of foreclosures across the country and it's only going to get worse. Furthermore, last month (February), the pace of new home sales hit an all-time low! The rebound is March is nothing more than an oversold bounce from depressed levels that has been exacerbated by the homebuyer tax credit that expires at the end of April. Of course this didn't stop the homebuilder industry from seeing a big short-squeeze. The DJUSHB home construction index has seen a sharp four-day rally to a new 52-week high.
The real story has been the earnings news. The number of companies that have thus far beat expectations this season is north of 70%. I warned readers a week ago that earnings results could still power the market higher. The idea that we could see a post-earnings season depression (sell-off) is still valid but I'm willing to admit I'm starting to worry it may not happen. On a short-term basis the S&P 500 and the NASDAQ indices both look poised to rally higher from here. I still wonder how close were are to a top. Do you recall, months ago, all the analysts that pegged their upside S&P 500 target around the 1220 level? Well here we are. knocking on the door of 1220.
The NASDAQ's breakout past 2500 is bullish and the next level of resistance appears to be the 2008 Q2 highs around 2550. I would probably focus more on the small cap Russell 2000 index. The relative strength in the small caps has been a very bullish development. Yet now the small caps look the most overbought. Check out a longer-term chart of the $RUT and you'll see that the 760-765 area looks like it could be tough resistance with at least three failed rallies there back in 2008.
Investors should also bear in mind that we're facing another FOMC meeting and seasonal trends that could impact the market. The FOMC meeting is April 27th-28th. After all the positive economic data we've been seeing investors are somewhat concerned that the Federal Reserve could make a change to their "extended period" language concerning low interest rates. If that changes the reaction in the markets could be painful. We're also facing the end of the month and the seasonal trend of the "Sell in May and go away" crowd. The sell-in-May issue is not new and honestly seasonal trends have not been very reliable the last couple of years but it is worth noting. Historically May does mark the beginning of the worst six months of the year.
In summary not much has changed for us. Without Friday's afternoon rally to new highs the major averages would have closed under last week's high. The concept that the markets could see a post-earnings season correction is still valid but if we don't see some weakness soon we'll have to re-adjust our outlook. I am starting to hear arguments that business will finally pick up spending and carry the economy forward instead of depending so much on the consumer.
Speaking of the consumer it seems that consumer spending is not that weak. Almost anything consumer-related has been soaring. I consider Starbucks, with their overpriced coffee drinks, a good indicator of consumer's discretionary spending. SBUX just reported a very strong quarter with earnings above estimates, revenues rose 8.6%, and management raised guidance for the rest of 2010. Granted the company could be reaping the benefits of their store closures but revenues are improving, which is a positive read on the consumer. The second quarter is starting to look a little brighter.
I realize this sounds like a broken record but we need to stay patient. Wait for a normal, healthy correction before launching new long-term bullish positions. Chasing stocks now seems like a dangerous game with the market up almost 12 weeks without much of a pause.
Chart of the S&P 500 Index:
Chart of the Russell 2000 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