After a flurry of earnings disappointments and several sharp drops the bulls pulled it out at the close to push the indexes to new 52-week highs.

Market Statistics

The selling in Amazon and Microsoft pressured the Nasdaq all day but dip buyers are alive and well and the shorts were forced to cover as the market rallied into the close. All the indexes broke out to new highs on the strength of that short covering. The major indexes have now posted gains for eight consecutive weeks. Bears continue to believe there is a drop in our future but that drop never comes. We have not seen eight consecutive weeks of gains since January 2004.

Helping to overcome some earnings disappointments was news that the New Home Sales in March spiked to an annualized rate of 411,000 compared to the February rate of 308,000. This is a +26.9% jump and the biggest monthly gain since 1963. Obviously this is directly related to the homebuyer tax credit that expires next Friday.

Months of supply fell from 8.6 months to 6.7 months and the lowest in 39 years. Despite the sharp spike in sales the overall pace of sales is still well below the pace in early 2008 with sales over 500,000. The high was set back in Oct 2005 with sales running at a 1.4 million pace. Seeing a spike from 308K to 411K may be encouraging to the struggling home sector today but it is far from healthy. Once the tax credit expires next Friday we are going to see sales implode.

New Home Sales

Builders jumped on the news even though it is a temporary spike. Hovnanian (HOV) gained +33% for the week. Lennar (LEN) +20%, Pulte (PHM) +19%, KB Home (KBH) +13%. KB Homes has a countdown clock on their website showing the exact time remaining on the tax credit to the millisecond.

KB Home Countdown Clock

On Thursday we saw an equivalent spike in Existing Home Sales with a +6.8% rise in March to an annualized rate of 5.35 million homes. That is the fastest pace since the initial tax credit expired in November. Home prices are stagnant and are not rising with the increased sales volume. Sales of repossessed and bank owned properties are keeping the pressure on prices. Nobody wants to have a house that is unsold on May 1st because it will probably still be for sale in April of next year once the tax credit expires. This is pressuring prices as homes for sale are in a continued state of price discounting. These numbers were for March sales so the number for April is probably going to be a lot stronger.

Existing Home Sales

Housing Sector Index

The mass layoff report for March showed the number of layoffs for 50 workers or more climbed to 1,628 from 1,570 in February. The number of workers impacted fell to 150,864 from the 155,718 in the prior month. The long-term trend in mass layoffs is still down but it is moving very slow. The weekly jobless claims refuse to decline under 450,000 with a high of 480,000 on the April 10th report. There is still significant weakness in the job market. They need to decline into the 320,000 range in order for employment to rise.

I warned you a couple months ago that the census hiring was going to give politicians a free gift in the form of positive jobs growth over the next several months. The ATF said last week it was putting a two week hold on various requests from local law enforcement agencies for finger print searches in order to process their backlog of 500,000 census worker applications. That is a clear sign there will be a major jump in jobs for April and May. The next payroll report will be Friday May 7th.

In an effort to never let a press opportunity go to waste VP Joe Biden said he expects the U.S. economy to create more than 250,000 jobs in April and 500,000 in May. Absolutely no mention was made that up to a million of those jobs would be temporary three month census jobs. Politicians know they can get some excellent mileage out of the next two payroll reports and hopefully wash away that healthcare stain with sound bites about their strong jobs creation efforts. Don't be fooled!

The Durable Goods Orders report was negative and responsible for some of the early morning weakness on Friday. Orders declined -1.3% for March compared to a gain of +0.7% in the prior month and expectations for a +0.5% gain. However, the headline number here is almost always not the true picture.

The headline number was penalized for a sharp drop in nondefense aircraft orders after a monster spike of 22% in February. Excluding transportation equipment orders rose +2.8%, shipments +1.2%. Core capital goods and shipments rose +4% and +2.2% respectively.

This was a lagging report but it was also a strong indication the economy is accelerating. The internal components for the durable goods orders report strongly suggest the Q1 GDP could be +3.4% or higher. The first release of the Q1-GDP will be next Friday. Initial predictions several months ago were for something in the +2% range.

The economic calendar for next week is full of regional manufacturing reports plus a two-day Fed meeting. The Fed meeting is the most important event for the market but analysts will still be hoping for a significant increase in activity in the regional reports.

I heard several analysts last week that believe the Fed will change their "extended period" statement next week. There appears to be far fewer analysts that continue to believe the Fed is going to remain on hold for the rest of the year. This is going to be a major stumbling block for the markets if the Fed changes the statement dramatically. I was shocked to see the markets rally into the close with the Fed meeting ahead.

Economic Calendar

The economic calendar, with the exception of the Fed meeting, will be overshadowed by extreme number of earnings reports next week. Since Yahoo's website started including earnings from international exchanges it is pretty hard to tell exactly how many companies are reporting next week. They have over 2,300 earnings reports on the schedule just for next week. There are probably more than 500 U.S. companies but there are very few big names. The exceptions would be those on the list below.

Earnings Calendar

Over all the earnings have been positive but almost every major company other than Apple has seen their stock sold hard because of weak revenue or weak guidance. Amazon lost -6.50 after their earnings on Thursday night. Cheesecake Factory lost -3%, Diamond Offshore lost $5 despite beating estimates by 16-cents. Nokia (NOK) lost -13%, STMicroelectronics (STM) gave back -8%, Horizon Lines (HRZ) -9% and Ingersoll Rand (IR) -5%. Microsoft lost about 50-cents despite posting a huge +35% jump in earnings.

On the positive side of the earnings ledger there were some real winners. Dover Corp (DOV) spiked +8%, Idexx Labs (IDXX) gained +11%, MDC Holdings (MDC) +5%, Patriot Coal (PCX) +6% and Xerox (XRX) +8%.

Honeywell (HON) rose only fractionally but they did offer great guidance. Honeywell said there was clear evidence the economy was improving.

Schlumberger Ltd (SLB) provided a boost to the entire energy sector despite reporting a -28% drop in profits. SLB posted earnings of 67-cents that beat estimates of 62-cents. The earnings were not the pivotal part of the SLB report. SLB said margins had bottomed at the beginning of the year and their optimism they offered with the Q4 earnings had now been confirmed with rising sales and service contracts. SLB said that $80 oil had international and nationally owned oil companies ramping up energy projects again. Profits fell in Q1 due mostly to adverse weather conditions in the North Sea, Russia and Asia. With those weather problems now behind them they expect a strong rebound in earnings.

The SLB news cheered the entire sector and nearly all the drillers and service companies are now trading at or near new highs. The majority of the big oils report next week with XOM, CVX, BP, COP, OXY and TOT. Oil over $80 should have boosted profits for everyone.

Schlumberger Chart

S&P Energy SPDR Chart

The home sales reports, strong durable goods orders and comments by companies like Honeywell raised expectations for crude demand. The new June futures contract appears to have found support at $83 on those rising estimates.

Crude Oil Chart

I am sure everyone has heard about the disaster on the oilrig in the gulf. Transocean Offshore (RIG) and BP Plc (BP) both rebounded after they announced a remotely operated submarine had confirmed that there was no oil leaking from the wellhead on the sea floor. The five mile long oil slick after the Deepwater Horizon sunk appears to have been oil stored on the rig and not a blowout on the ocean floor. This means Transocean will not face a major environmental catastrophe and the associated costs of cleanup. The fire was fed by 336,000 gallons of oil on the rig along with 700,000 gallons of diesel.

The $600 million Deepwater Horizon rig may have sunk but its loss will be mostly covered by insurance. Transocean will be out the $15 million a month in lease rentals on the 42 months left on the BP contracts. RIG does not have another rig it can use for those contracts. It is unknown if the lost rentals are covered in some form by insurance.

Deepwater Horizon

The rig had just completed drilling an 18,000-foot well in 4,993 feet of water and was cementing the casing and temporarily plugging the well when the blowout occurred. Transocean said they were baffled by the blowout since the drilling work had been completed and they were just doing routine maintenance to plug the hole until it could be completed for production.

A blowout is when the pressures in the well exceed the steps taken to prevent the hydrocarbons from surging up the well pipe and onto the rig floor. At the depths these rigs drill there are enormous pressures as the trapped oil and gas tries to escape the well. A BP representative said oil and gas temperatures and pressures at the bottom of this type of well can be up to 450 degrees and pressures up to 2,000 times atmospheric.

With the $600 million rig "submerged" as Transocean calls it there is always the potential for a salvage operation to refloat it and haul it back to dry-dock for repairs. If they can raise it the cost and time to overhaul it would be less than the time required to build another one. There are order backlogs in every major shipyard where these are built. The backlog of rig orders to be used in the Brazilian Tupi field will take 5-8 years to complete. I am sure Transocean does not want to move to the end of the line and wait five years for a new rig to be started. This rig was built in the Hyundai Shipyard in South Korea.

Deepwater Horizon before it sunk

American Express reported earnings on Thursday and said a big jump in cardholder spending of more than 15% helped their Q1 earnings to more than double. AXP said the biggest turnaround in spending came from corporate cardholders. Consumer and small business charges for travel and entertainment also rose. At the same time AXP said there was a drop in the delinquency rate.

Capital One also reported on Thursday and reported a profit compared to a loss in the year ago quarter. COF said fees and interest grew enough to offset slightly higher loan loss provisions. Both companies are further evidence the economy and more importantly consumers are recovering. Both companies also saw their shares gain on the news.

The Greek debt crisis returned to cause new problems for the markets. This is a problem that just keeps on going even longer than the Energizer bunny. Debt stricken Greece finally appealed to its European partners and the IMF for emergency loans on Friday. Greece yielded to overwhelming market pressure to start the first rescue of a euro zone member.

Prime Minister George Papandreou formally asked to borrow from the 45 billion euro package that the EU put together a couple weeks back. The reason Greece had to bite the euro bullet was a sharply rising interest rate and the lack of any bidders on its various efforts to sell additional debt. The last straw came in the form of the EU auditor revealing that the 2009 Greek budget deficit was even higher than feared at 13.6% and that drove Greek bond yields to 12-year highs making borrowing in the public markets prohibitive. The deficit is twice previous estimates and four times the EU ceiling. Papandreou won an election in 2009 by pledging to tax the rich to help the poor. Looks like the rich are going to become poor.

The euro and the European markets fell on the news of the formal request. Investors in Europe believe that the 45 billion will be just the first of several bailouts needed to keep Greece afloat over the next few years.

Greece has an 8.5 billion euro bond that matures on May 19th. In order to avoid a default the actual funding from the EU and IMF must occur prior to that date. There is still disagreement between EU countries on the loan. Many want far harsher austerity measures by Greece despite the daily riots and strikes that are already crippling the Greek economy.

The timing is tough for German Chancellor Angela Merkel. As the strongest economy in the EU the Germans are violently opposed to the bailout and Merkel is facing a key election on May 9th that could cost her the majority in the upper house. I am sure she was hoping to get past the election before Greece imploded.

There is increasing worry that other weak EU nations are going to be lining up for bailouts of their own. Portugal has been the next suspect in the default lineup. They have 5.6 billion euro in bonds that come due in May and their cost of borrowing has been rising rapidly thanks to the spotlight on Greece. Moody's has warned that Portugal is facing a slow death from rapidly rising rates as it tries to cycle its debt. EuroStat reported last week that Portugal had also "misstated" its deficit at 8% when it is really 9.4%.

Back in the U.S. the Treasury is going to auction $118 billion in various types of debt next week. There will be $44 billion in 2-year, $42B in 5-year, $32B in 7-year and $11B in 5-year TIPS. Thanks to the weakness in the euro our auctions have been going relatively smoothly. That will eventually change.

The FDIC reported it closed Chicago's Broadway Bank, which happens to have been owned by Alexi Giannoulias. He is the Illinois state treasurer and running for President Obama's vacated Senate seat. Alexi blamed his bank failure on lending to convicted felons. This guy is the state treasurer? The $1.2 billion bank closure will cost the FDIC $394.3 million. The FDIC closed seven banks on Friday, all in Illinois, bringing the 2010 total to 140.

The Rodney Dangerfield rally continues to get no respect. All the indexes broke out to new highs at the close with shorts afraid to hold over the weekend. I watched in amazement as the dips were bought on Monday and Thursday and I felt sure we would not retest the 1214 high from last week on the S&P.

That 1214 level was broken in the last hour of trading as everyone who shorted the opening dip was forced to cover at the close. The eight-week rally is very overdone but we did see a couple decent declines over the last week bought very quickly.

While I don't buy into the continued rally thesis this is something we don't want to fight. The economics are getting better and despite some weak earnings guidance by some companies the overall guidance has been good.

Retail investors are still not buying the breakout but funds are buying the dips in greater volume. Eventually there will be a dip that lasts more than two days and hopefully is corrective enough to attract those retail investors that are still sitting in cash.

The FOMC meeting next week "should" have been serious pothole on the horizon that should have slowed down the bulls. I am starting to believe that a statement change could actually be bullish in the eyes of investors as a positive outlook by the Fed that the economy is accelerating.

The Dow rallied to close at 11,202 and a new 52-week high. The resistance at 11,150 that held the market back for a week was busted right at the close. However, the 11,200 level is also strong uptrend resistance of its own. For the coming week we are looking at support at 11,000 and resistance at the closing high of 11,200.

Dow Chart

The S&P broke over the resistance high at 1214 and over uptrend resistance to close at a new 52-week high. This is bullish but there is still a resistance hurdle to cross at 1222, which is the 61.8% Fib retracement level from bear market lows in March 2009.

If you look at the rebound from 1044 back in February to the 1217 close that is a +17% rally with only two days of significant decline on Feb-23rd and Apr-16th. Nobody in their right mind would claim this rally is not due for a significant 5%-10% decline. Markets simply do not rally nonstop without a pause for profit taking. Yes, I know the economic recovery is accelerating but that is already priced into this chart. If we do correct next week the initial support is 1190.

S&P-500 Chart

The breakout on the Nasdaq is very bullish. It is especially bullish when you realize that several Nasdaq big caps are not participating. AMZN, ISRG, CME, CYMI, BUCY, GOOG, MSFT, APOL, BWLD, QCOM, CREE and others closed sharply negative on Friday. Despite those losses the winners in DECK, SHLD, IDXX, BIDU, AAPL, SNDK, and PCLN tacked on more than enough gains to offset the decliners.

The breakout over resistance highs and the Fib line suggests there is more to come. I know as soon as I start looking for additional gains I will be flushed for a loss but this is bullish at least on the surface. The Nasdaq did not rally quite as continuous as the S&P. There was a period in late March where the index went nowhere for over two weeks. This consolidation in place gave it the support necessary to spring higher in April. Initial support should be 2475.

Nasdaq Chart

The Russell is the clear leader on the breakout. After a brief pullback to uptrend support the Russell launched itself to close at 742 and nearly a +4% gain for the week. This is clearly a sign that fund managers are not afraid of the market. They are buying the small caps on any dip and with reckless abandon.

However, the Russell has significant resistance at 760. This level was tested three times in 2008 and failed on each test. I do not expect the Russell just to blow past this level without a least acknowledging the prior battles.

As long as the Russell remains in rocket mode the rest of the market is not going to decline far.

Russell Chart

Russell Chart - Weekly

In summary, I am surprised at the continued gains and don't believe we can continue much higher without a rest. I am surprised the Fed meeting next Tuesday did not get more play on Friday. The lack of apparent concern over the Fed suggests there are still plenty of bulls in the market and maybe we are not done going up.

If in fact the market sentiment has turned from fear of the Fed to who cares about the Fed then the "sell in May" crowd may be in for an unpleasant surprise. After all we are recovering from the "Great Recession" and who is to say we can't have a "Great Rally" that breaks all the rules? Actually I think it has already broken all the rules with the current +83% rally in the S&P since the March lows. That kind of rally is generational as in once a generation but there is no limit when records are being broken. For months I wrote about the low volume rally and over the last nine days the volume has averaged more than 10 billion shares a day. The internals have changed and they are growing increasingly bullish. Yes, I know volume increases at market tops but internals are normally negative when that occurs.

I don't want everyone to think I have been pilfering the drug cabinet and I am writing in a state of blissful stupor. The Rodney Dangerfield rally may not be able to get any respect but until it ends I am not going to stand in its way.

We recently spent three months interviewing dozens of traders to replace James. He has been writing the OI/PI plays for nearly 10 years and decided he wanted to change his daily routine. He will continue to write the LEAPS newsletter and I hope to get him to do a market wrap once a week.

I want to take this opportunity to formally introduce our new play writer Scott Hawes. Scott got his start in the early 90s as a registered representative working on a trading desk for Fidelity Investments. He started a financial services business in the late 90s before transitioning into a managing director position for a boutique investment banking firm in Denver. He spent five years raising venture capital and managing mergers and acquisitions. He became an active trader after attending several seminars, studying and testing various methods of trading. Since 2005 he has been a full time trader managing a sizeable portfolio. Scott trades long/short options, option spreads, equities and equity futures. Scott's preferred strategy on long calls and puts is to capture quick profits and exit the trade. Please join me in welcoming Scott to the team. He will be doing the OI/PI plays, intraday updates and posting in the Market Monitor.

Jim Brown