Everyone expected a market slide last week on falling oil prices and weak earnings. The Nasdaq was the only casualty. The expected decline in oil prices never occurred. Crude prices fell sharply Sunday night and Monday morning but rebounded to prior levels by Monday's close. The failure of the Doha meeting to reach an agreement did not supply the continued downdraft everyone expected. There were too many shorts in the market and the futures expiration on Wednesday did not give them enough time to capitalize. They were forced to cover before expiration.

There were complications. There was a strike in Kuwait that took 2.0 mbpd offline for a week. There was a comment from an Iraqi official that another meeting was being scheduled in May in Russia to freeze production. Prices soared immediately despite the Russian energy minister claiming almost immediately that there was no meeting being planned.

U.S. gasoline consumption rose to 9.25 mbpd and a historic high for this time of year. Everything was working against the oil bears in the short-term. Net longs in WTI futures rose to an 11-month high. Longs increased 4.8% to 245,987 contracts and short positions declined -19%. The rising crude prices lifted the market and "less bad" earnings helped propel equities to multi-month highs on Wednesday.

That is where the weakness began. At 3:PM on Wednesday afternoon the sellers appeared and it carried into 1:PM on Friday. The Thursday night earnings from Google, Microsoft and Starbucks knocked the markets into an opening slump on Friday. The Dow and Nasdaq both declined about -75 points but the Dow managed to return to positive territory while the Nasdaq did not. Combined, Google and Microsoft lost $52 billion in market cap.

Next week is the busiest week in the earnings cycle with about 750 companies reporting. While most are expected to report earnings that beat lowered expectations, some of them will still disappoint. If Keith Bliss is correct about last week being the strongest week of the quarter then we could see some volatility appear and the markets resume a downward trajectory. It may not happen all at once since the lure of the historic highs is a powerful force. We could see the markets try again to reach those highs before rolling over into the summer.

The calendar has some events that could turn into potholes on the highway to new highs. The Fed meeting on Wednesday, plus the economic data from Japan. If the BOJ stimulus is not working and the economic turned worse that could kill the hopes for a recovery in Asia.

The GDP on Thursday is also a potential roadblock. Moody's expects a negative number or economic contraction. Even if that does not appear, any growth will be miniscule and that could worry investors ahead of the summer doldrums.

The Dow touched the upper edge of its resistance band before rolling over on Wednesday. A successful retest could breakout to test the historic high from last May at 18,351 and closing high of 18,312. If that occurs it is what happens in the days that follow that mean the most. It is not unusual for traders to lose focus once a new high is made. That high is the target for weeks in advance but once it is hit, there is no new target. Traders do not know how much higher the market can go and without a target they tend to take profits.

The S&P never made it to the upper resistance band and closed back under 2,100 and 22 points off the Wednesday high. The S&P has some decent resistance all the way to 2,028. It is not likely to be a sudden multi-day surge straight to the top. If it declines back below 2,075 the next support is 2,042 then 2,020.

There are numerous analysts that believe the events of the summer will push the S&P back to the lows for the year. I am not brave enough to make that prediction but I do believe we will see 2,000 again.

The Russell 2000, S&P-400 and S&P-600 have been outperforming the broader market. Those are the small cap and mid cap indexes. This is bullish for sentiment because it indicates fund managers are not scared about buying illiquid stocks. In a market crash those are the first stocks to get dumped and portfolio managers typically take big losses trying to exit in a hurry. If they are not afraid to buy them then they believe the market is going higher. The Russell has strong resistance at 1,165 and again at 1,200.

Crude prices finished the week near $44 on almost no fundamental improvement. There is no reason for crude to be trading this high. Yes, there are some seasonal trends of rising gasoline demand but the market continues to be over supplied by 1.4 to 2.0 mbpd. Once the headline spam from the Middle East fades I expect crude prices to fade as well. That would be market negative.

The earnings calendar is very busy next week. Apple will be the most critical event on Tuesday after the close. There are some very bearish headlines coming out almost daily and they could miss big. If by chance they do not miss, the expectations are so bad that a major rebound could occur. Apple is the largest company in the Nasdaq and the Dow so the market impact, in either direction could be major.

Facebook on Wednesday and Amazon on Thursday round out the major events. Dow components reporting this week include AAPL, DD, MMM, PG, BA, UTX, CVX and XOM.

I did not add any new stocks to the watch list again this week. I would rather wait for a buying opportunity than continually buy the "top" of this rally. If we got a 100 point decline on the S&P there would be a lot of opportunities.

Jim Brown

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