The weathervane for the market was spinning in circles all last week as competing headlines pushed the market around. Traders will need a marketvane next week to determine direction in a listless market.
The economic calendar is headlined by the two employment reports. While both are expected to be slightly weaker than in March, the declines of about 5,000 jobs are minimal. However, they will be closely watch for a bigger change and should that happen they could move the market.
The ISM Manufacturing on Monday is expected to decline but remain barely in expansion territory at 51.5. Should the ISM fall below 50 that could also be a market mover. The rest of the reports are simply economic filler and should not be market movers.
The real market moving headlines next week will come from the earnings reports but there is a shortage of high profile companies. The majority of the blue chips and big tech names have already reported and the market reacted to each. The banks beat their lowered estimates and rallied. The majority of tech companies did much worse with tech earnings declining -10.9% so far in Q1. Tech companies struggled to post gains and the Nasdaq declined. Big earnings beats by Amazon, Linkedin, Expedia and others after the close on Thursday failed to lift the markets on Friday despite big gains in the individual stocks.
Starting this week the earnings quality will decline. Smaller companies typically struggle more in a difficult environment and their earnings reflect this challenge. Offsetting that is less impact from the strong dollar. However, this is the week where investors tend to tire of chasing the next earnings beat and the market begins to weaken.
The Dow retreated from the prior week high at 18,167 to trade at 17,651 at the low on Friday. That is a -516 point drop from the prior week's high. The lure of making a new high was not enough to overcome the various headlines that moved the market last week. The BOJ failed to add any stimulus despite expectations. The Fed said the economy had weakened since the March meeting. The mixed earnings provided conflicting signals as to the health of U.S. corporations. Carl Icahn warned of a "day of reckoning" ahead and that prompted the sell in May strategy traders to get an early start as April came to an end.
The Dow has support at 17,500 and again at 17,400. Resistance remains 17,925, 18,110 and 18,165.
The S&P never made it to the upper resistance band and closed well under 2,100 at 2,065 on Friday. The 2,100 level appears to be strong resistance and we saw a lower high at that level last week. Support is now 2,040 and then 2,020.
The Nasdaq 100 closed under support at 4,350 and a six-week low. Remember, this close came on the day Amazon gained 58 points, Priceline +26, Monster +16, Veritas +10, Expedia +9 and Baidu +8 to name a few. Despite those big name games the broader tech sector was weak. Falling PC sales, declining enterprise activity and even lower sales in the cyber security sector were weighing on techs and especially chip stocks. This is not a good sign for the weeks ahead.
The Russell 2000 also declined sharply after two weeks of gains. This may be only profit taking from those gains but it may also be a sign that the small cap rally has run its course. The Russell never made it to resistance at 1,165 and the early failure may be related more to the calendar than to fund manager sentiment.
Crude prices continued to rally thanks to the falling dollar. The dollar index declined to 16 month lows and propelled crude to six-month highs. Multiple OPEC nations said they were increasing production but fundamentals apparently do not matter in a falling dollar environment. We ar also reaching the point on the calendar where U.S. inventories will begin to decline as gasoline production increases ahead of the summer driving season. Prices typically rise when that happens so the speculators are out in force.
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.
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