Friday, March 27, 2009

Reality, Resistance Force Profit-Taking at Week's End

After becoming absurdly overbought, US equity markets finally produced an intelligent about-face on Friday, though there remain a large number of holdouts who believe that the current condition is something other than an abnormally-large bear market rally.

The major indices gave back most of Thursday's ridiculous gains but still finished the week very much on the positive side. There was little in the way of economic reports or company earnings filings, so investors were mostly on their own, playing the momentum trade, and the momentum had clearly run its course to the upside, as the NASDAQ ended in positive territory for the year on Thursday, but came back to earth on Friday and the Dow broke dangerously close to upside resistance at 8000 before backing well away today.

The week was the third straight that stocks had finished with gains, and, in case you're keeping score, was the 4th time this year that stocks ended a week higher, against 8 which closed on a negative note. For some perspective, the Dow is down exactly 1000 points for the year, while the NASDAQ is off only 34 and the S&P down 88, more in line with the Dow.

Obviously, the NASDAQ contains far fewer financial stocks and is overweighted with tech stocks and smaller corporations, so we may be about to witness the stock market equivalent of Revenge of the Nerds as new-age technology companies outperform older, more established (and with heavier debt burdens and legacy costs) companies on the Dow and NYSE. Speaking of the NYSE Composite, it has performed the on line with the Dow, down 660 points for the year.

Dow 7,776.18, -148.38 (1.87%)
NASDAQ 1,545.20, -41.80 (2.63%)
S&P 500 815.94, -16.92 (2.03%)
NYSE Composite 5,096.64, -133.89 (2.56%)

Internals were decidedly negative, with advancing issues being outnumbered by declining ones, 4896-1612, a 3-1 ratio. New lows continued to pour in ahead of new highs, though at a moderate pace, 110-25. That metric, despite the huge recent rally, has yet to roll over. When it does, it is likely to be short-lived, as stocks should return to some more normal range (between 6900 and 7500 on the Dow). After that, it's anybody's guess where they will go, though a retest of the low (Dow 6550) is more than likely in the offing, though the exact timing of that move is as yet unclear. It could be merely weeks away or many months. Consult your own crystal ball if you desire a more accurate reading.

Volume was down slightly from levels seen during the run-up, indicating that there are still stubborn types holding recent gains. Those should be eviscerated over the coming 5 weeks, as the next round of corporate earnings takes center stage.

NYSE Volume 1,443,266,000
NASDAQ Volume 2,102,247,000

Over in the commodity pits, life was equally downbeat as oil slipped another $1.98, to $52.38, a bit of a relief for drivers as gas prices have recently edged back above the $2 mark. Gold fell $16.90, to $925.30. Silver was down 36 cents to $13.26. The precious metals continue to languish in a trading range, with gold hanging between $880 and $990 and silver trading iroughly between $12 and $13.75. Investors seem to be torn between buying the assets as inflation hedges and selling them on upticks in price during a deflationary trend. Both have been right at different times.

Just after the market closed (one can only wonder in amazement at the timing of these things) the FDIC took over Georgia's Omni National Bank, and it's nearly $1 billion in assets - pocket change in today's environment.

The coming week should be highly entertaining and instructional. On Tuesday, the S&P/Case Shiller Home Price Index numbers and Consumer Confidence for March are released prior to the market's open. Wednesday offers a bonanza of economic reports, including the ADP employment report for March, Construction Spending and Pending Home Sales for February, Crude Inventories and March Auto and Truck Sales. If the market can absorb that, Friday comes the government's official figures for March Non-farm Payrolls.

Traders will likely be hard-pressed to hold onto recent gains. Enjoy some great college hoops this weekend and get ready for a wild ride next week.

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