The Dow's consecutive winning streak of eight days was snapped on Friday due to a multitude of factors including quadruple witching expiration.

Market Statistics

The Dow came very close to a record on Friday. The Dow has not had a streak of nine consecutive daily gains since 1996. Thursday was the eighth consecutive day but the Dow could not stretch it to nine.

Friday was a quadruple witching option expiration and a quarterly S&P rebalance. Crude oil fell -$2 ahead of expiration on Monday and pressured the entire energy sector. The dollar rocketed significantly higher for the second day as the situation with Greece flared up again. The odds were stacked against the markets closing positive.

The only economic report on Friday had little impact on the market. The Risk of Recession report showed the risk rose to 32% in February from 30% in January. This report projects the risk of recession for six months into the future or in this case August.

Analysts believe the increase in risk was weather related. Consumer spending fell simply because everyone was snowed in for several days in February. Jobless claims held over 400,000 per week and that is a big factor in the report. Housing starts declined and that helped push the percentage higher.

The economic calendar for next week is light with a couple of manufacturing surveys and the third revision of the GDP as the only high points. The 800 pound gorilla is still the Non-Farm Payrolls the following Friday. That report is getting so much press you would think it was due out on Monday. We are setting up for a really big letdown if it does not come in as expected.

Economic Calendar

In stock news PALM was crushed for a 38% decline after posting ugly earnings Thursday night. The stock has fallen from $7 after their latest earnings warning on Feb 24th to close at $4 on Friday. The company is under severe pressure with 1.15 million unsold phones and roughly 12 months of cash with an accelerating burn rate. Two analysts downgraded Palm on Friday giving it a price target of ZERO.

Palm projected sales in Q2 to be less than $150 million compared to $349 million last quarter and analyst estimates of $306 million. Total units in inventory rose by 55% from the end of 2009. I have written negative outlooks on Palm several times in the last couple of months and on March 6th I warned it could be a terminal decline.

With the Pre smartphones now dead inventory there may not be anything at Palm worth an acquisition effort. In a recent survey of over 4,000 adults by ChangeWave Research they found that only 4% of respondents would consider looking at a Palm phone as their next purchase. That compares to 37% for the Blackberry and 30% for the iPhone. With analysts starting to slap a zero price target on Palm the outlook is grim.

Palm Chart

There are rumors circulating that Google will close its Chinese website on April 10th and the closing will be announced on Monday. A top Chinese minister warned Google on Friday that it "will have to bear the consequences" if it stops filtering search results in China. Google announced in January it would no longer filter search results after it's website was targeted by Chinese hackers trying to get information on activists inside China.

Google routinely filters results for dozens of other countries according to the laws in those countries. For example in Turkey it is a crime to ridicule "Turkishness" so Google restricts access to videos that the Turkish government deems illegal. In Germany, France and Poland it is illegal to publish pro-Nazi material or content that denies the Holocaust.

Google supplies two thirds of the world's searches so it is the gateway to the Internet for the majority of the world. At one time or another Google has been blocked in 25 different countries for refusing to censor something that the country deemed offensive.

In the case of China the country does not provide specific guidelines and has no specific laws about search content. It is a daily battle with the Chinese government about what content or link is illegal today. Google has probably decided it is not worth the effort to put up with the constant changes from the communist country and cut their losses. This will be a benefit to Baidu, Bing and Yahoo.

Google Chart

Boeing (BA) rallied at the open after it announced it was ramping up production of the 777 and 747 models because of greater demand from commercial airlines. Both wide body planes carry more than 300 passengers. Production on the 777 will increase from 5 planes a month to 7 per month.

The 747-8, the newest version of the decades old plane, carries more than 400 passengers. The new model has been delayed by production problems and is now expected to be delivered in Q2-2011. Boeing will produce two per month and has 108 outstanding orders.

Late Friday Boeing learned it had two new competitors to the lucrative bid for the Air Force tanker project. Boeing found itself as the only bidder recently after Northrop/Airbus dropped out. Late Friday Airbus requested three more months to present a possible bid. Even more strange was a request from Russia to let them bid on supplying our military tankers.

I find it hard to believe that the U.S. Air Force would want to depend on an Ilyushin II-96 tanker that was built by the Russians. We may not be at war with them today but that is always a possibility in the future. For instance they support Iran and should the U.S. decide to attack Iran the Russians would side with Iran. A couple years ago the Russians also signed a joint defense agreement with China AGAINST the United States. If we go to war with China we get Russia as well. I don't know what the Vegas odds would be over the U.S. accepting a tanker bid from Russia but I would definitely bet against it.

Boeing Chart

The FDIC closed seven banks on Friday across five states. That brings the total to 37 so far in 2010 after closing 140 in 2009. The 2009 rate was the largest number since 1992. The banks closed included:

First Lowndes Bank, Fort Deposit, Alabama
Appalachian Community Bank, Ellijay, Georgia
Bank of Hiawasseee, Hiawassee, Georgia
Century Security Bank, Duluth, Georgia
State Bank of Aurora, Aurora, Minnesota
Advanta Bank Corp, Draper, Utah
American National Bank, Parma, Ohio

Of the closed banks Advanta was the only one the FDIC could not find a buyer to assume the $1.6 billion in assets. The FDIC said checks to depositors for insured funds up to $250,000 per account would be mailed on Monday. This will cost the FDIC $635.6 million. The FDIC expects bank closings to cost $100 billion over the next four years.

The FDIC said the pace of closures would increase in the coming months as losses mount on commercial property and development loans.

The first stage of the healthcare battle is coming to a close. In theory there could be a vote on Sunday night and both sides are still unsure if they have enough votes. However, President Obama has now cancelled two overseas trips to stay home to campaign for votes. He has been inviting undecided house members to the oval office for one on one talks. The push is on and the betting sites are now showing an 80% chance of passage.

The current bill and its fixes being pushed by the house will create a new 3.8% Medicare tax on investment income including dividends, interest, rents, annuities, royalties and capital gains. The Medicare tax on regular wages will rise 0.9% to 2.35% on high-income earners.

The Congressional Budget Office had to say that the plan would only cost $940 billion and could save $138 billion in 2020 because the democrats stripped out all the spending sections and put them in another bill. For instance the $250 billion fix for Medicare reimbursements to doctors was taken out and put in another bill that will be submitted to the Senate next week. This meant the CBO could only quote on the skeleton bill and its financial impact. This budgeting trick allowed fence sitters to vote for the bill as a deficit reduction bill.

Anyone with a brain knows there is no possible way that taking over 17% of the U.S. economy and providing healthcare to 32 million uninsured Americans and providing subsidies to anyone making less than $88,000 is going to cut the deficit. No entitlement program has ever come in under budget. Unfunded liabilities for Medicare and Social Security now total $107 trillion. This bill, according to the President and Nancy Pelosi is only the first chapter in recreating the healthcare sector. They both say that future revisions will include ALL of the things they could not get done this time around.

In order to make the bill deficit neutral the taxes begin immediately but the medical benefits don't start for up to four years. So get ready to write those checks but be sure to keep making those insurance payments as well. Medicare will see its funding cut by $500 billion and Medicare Advantage is as good as dead.

Walgreens in Washington State announced this week it was not accepting any new Medicaid patients because they were losing money on filling the prescriptions. Several other pharmacies have voiced concerns over the future of Medicaid but have not taken the step to stop offering the prescription service.

Multiple states have already passed laws canceling the insurance mandate for citizens in their states. Thirty-seven states are planning on forcing their attorney general to sue Congress and the Federal Government to stop the mandate that requires health insurance or financial penalties for not having insurance.

The bill includes a $695 per person annual penalty for failing to buy health insurance but that is sure to go up in years to come. Employers will face a $2,000 per worker penalty for not providing health insurance to their employees.

Caterpillar (CAT) sent a letter to House Speaker Nancy Pelosi saying the bill will increase its health care expenses by $100 million a year. CAT's VP of human resources said in the letter, "In our fragile economy, we can ill-afford cost increases that place us at a disadvantage versus global competitors that are not similarly burdened." CAT was just one of dozens of major firms and industry organizations pleading with Congress not to support the bill.

The problem for those who don't want the plan is simple. Once the initial bill is passed and signed into law it can't be canceled, revoked or voided as long as President Obama is in office. Even though the democrats stand to lose dozens of seats in the November elections there will not be enough votes in both houses to override a presidential veto on any attempt to void the bill. President Obama's next big project is immigration reform and he wants to get a vote on that before he loses his majority in the November elections.

We are living in really interesting times and the next three years are going to be a pivotal point in the future of America not only because of the healthcare bill but the trillions in debt and deficit spending will finally reach a point of unsustainability.

The equity markets suffered late last week after the Greek debt crisis suddenly reappeared. Greece sold some debt a couple weeks ago and the problem was thought to be off the table until the next round of debt sales in late April, early May. The EU had verbally supported Greece but offered no financial support although there were plenty of discussions. When the EU continually failed to follow through on any of their debt guarantee discussions Greece popped up again on Thursday saying it may have to go to the IMF for a bailout if the EU was not prepared to help.

EU countries see calling on the IMF for help as a sign of Eurozone weakness. The Euro crumbled and the dollar spiked significantly over the last two days. The spiking dollar crushed oil and commodities and prevented the U.S. equity markets from continuing their gains. This problem is not over until the EU provides guarantees for future Greek debt.

Natural gas prices fell to nearly $4 after inventory draws for last week were much less than expected. Storage levels fell only 11 BCF last week compared to -111 BCF the prior week. The cause is the warmer weather and traders are facing two months of weak demand before summer electric usage spikes.

The problem is the surge in production. Baker Hughes reported this week that the rig count rose for the 12th straight week. Gas rigs reached 939 and the highest level since Feb-27th 2009. There are 474 rigs drilling for oil. Gas rigs have rebounded by 41% since bottoming at 665 on July 17th. That was the lowest level since May 3rd, 2002 when there were 640 active gas rigs. Total rigs in operation at 1,427 is still below the peak of 1,600 in September 2008. The all time high was 4,530 in 1981 during the height of the oil boom and the low of 488 in 1999.

Natural Gas Chart

Oil prices dropped sharply on the sharp rise in the dollar but the current futures contract expires at the close on Monday. After spending two weeks trying to break above resistance at $82.50 traders probably just decided to take profits ahead of the weekend and the expiration.

Dollar Index Chart

Crude Oil Chart

Friday was a quadruple witching and the drop in the markets had a lot to do with stocks returning to their max pain strikes. The rally over the last week had exceeded most max pain points and this was a return to some of those levels.

However, with the pending health care vote there was some caution in stocks as well. The energy sector was down on the double whammy of the strong dollar and the bearish natural gas inventories. That took another large sector of support away from the market. The banking sector lost ground because of pending financial reforms and the battle of words among lawmakers and regulators. The rebalance of the S&P could not provide enough support to financials to keep them positive.

The S&P quarterly rebalance is done to bring the various ratios back into balance after new stock offerings and major buybacks. Many of the major financial stocks including Citigroup, JP Morgan, Goldman Sachs and Wells Fargo issued stock during the quarter and index fund managers had to buy more of those stocks at the close and sell part of the other 475+ S&P stocks to bring their ratios back into balance.

I am not going to attach too much importance to Friday's minor losses. I believe after an eight-day gain the Dow should have lost ground ahead of the weekend. I don't see any material change in the market from last week and I am still expecting a positive trend ahead of month end. Now that the expiration pressures are over we may need a couple days to find traction again but the dip buyers are probably still there for another eight days.

The Dow actually hit 10,819 Friday morning before losing traction. The intraday decline to below 10,700 rebounded back over the 10,725 resistance at the close. This is very bullish. It appears 10,725 has now become support and baring some bizarre health care event over the weekend or a sell the news event on Monday I think the easy path is still up. The Dow has finally joined the other indexes in breakout mode and we still have eight trading days left in the quarter. Once into April it will be a different story but for next week I am still positive.

Dow Chart

The S&P is following the game plan perfectly. We got the break above resistance at 1150 and a nice sprint to 1170 before Friday's expiration let the air out of the tires. I mentioned last week that I expected resistance at 1150 to be broken and after several days above that level it would be tested as support. A decent profit-taking day on Monday could test that support and I believe it will hold and provide a springboard for the month end run.

S&P-500 Chart

The Nasdaq scares me. The Nasdaq hit round number resistance on Wednesday at exactly 2400 and then failed to touch that level on the next two days. I doubt anyone expected the Nasdaq to just blow through 2400 without a second look so we are still in rally mode. However, the next test needs to punch through by several points or we risk sending a signal that the Nasdaq rally is done. There are dozens of scenarios that see the rally continuing including a return to support at 2350 or even 2325 BUT few of those conform to the quarter end mutual fund window dressing scenario. If fund managers are going to polish those windows they need to keep the Nasdaq from backsliding early next week.

This may be difficult with the Oracle earnings on Thursday. I hope that most tech traders could care less about Larry Ellison's ego or his company but an earnings miss there could blunt any tech gains. I would like to think that the Oracle earnings would be like a tree falling in the forest that nobody hears. To keep the EOM/EOQ party alive we need the Nasdaq to find traction early next week.

Nasdaq Chart

I really like the Russell chart. After being extremely over extended from several weeks of leading the other markets higher the Russell underperformed for the week and was the only major index to post a loss for the week. The range bound trade the prior week followed by the two-day spike to new highs and return to strong support is a perfect setup for next week.

The big two-candle drop at the open was clearly option expiration pressures. The ski jump lift into the close looks like a perfect setup for managers to buy on Monday. We had the big gain, a week of consolidation and abortive new high and then sharp decline to support. This chart is telegraphing a buy signal that any fund manager should drool over.

Russell 2000 Chart

In summary I believe we could wander on Monday depending on the health care vote and the cleanup from options being exercised at the close. A lot of traders are going to wake up on Monday with unexpected changes in their accounts and that always produces some strange eddies in the Monday market.

Assuming there is no sell the news event on health care I still expect to close the month higher. The lure of 300,000-400,000 jobs in the April payroll report is too strong for traders to ignore.

There is a strange scheduling conflict for that jobs report on Friday April 2nd. That is Good Friday and the equity markets will be closed. That means Thursday could be volatile but fortunately that is two weeks away. Once we close the quarter we should be in profit taking mode anyway and the holiday jobs report is going to be an added incentive to take profits on April 1st.

For the coming week I am not anticipating any major change in the markets. The bulls are in charge but still lack conviction. The bears are smart enough to avoid shorting the highs until month end. Until then the melt up should continue.

Jim Brown