Monday, May 11, 2009

Profit Taking or Overdue Correction?

Stocks took a bit of a hit on Monday, though on closer inspection, sellers held onto most of their tech stocks. The Dow, S&P and NYSE Composite each took sizable hits, but the tech-laden NASDAQ was barely touched.

Dow 8,418.77, -155.88 (1.82%)
NASDAQ 1,731.24, -7.76 (0.45%)
S&P 500 909.24, -19.99 (2.15%)
NYSE Composite 5,849.30, -151.09 (2.52%)

There wasn't much in the way of economic news and 1st quarter earnings were scant as well, so investors had little on which to focus except the incredible rise in the indices over the past 9 weeks. Sensing that May and June will offer little in the way of a catalyst to move stocks even higher, profit-taking ruled the day. Many are already saying that this is now a stock-pickers market, and it will be best to focus on individual companies, or, at worst, sectors.

Obviously, the most beaten down are home builders and retailers, with financial stocks a close third, though the banks have had a nice run of late. Tech seems to be the favored place to be, as many smaller - and larger - tech companies are debt-free, a critical condition in the current environment.

The bigger question is whether investors will remain confident as economic figures trickle through the system. If the banks are allowed to continue their charades with mark-to-model (in other words, fantasy) valuations of the toxic MBSs, CDOs and credit derivatives still on their books, the markets could hold up fairly well, though everybody knows that further shocks to the financial system could be devastating. Unemployment numbers and various gauges such as the CPI, capacity utilization and home sales will be crucial going forward.

It also would be wise to keep an eye on the bond and Treasury markets. Bond prices have been hammered down of late, causing yields to rise, nearing a point of attractiveness to investors. 10-year notes recently popped above the 3% mark, along with longer-maturities (30-year) nudging past 4%. If the Fed is unable to keep rates from rising - which will take some doing - all bets on a recovery this year are off.

Also worth noting is how much Treasury debt the Fed has to purchase over coming months. Failure to attract foreign investors to Treasury auctions could prove devastating. The federal government has a record amount of debt to offer this year and the Fed has committed to buying up $300 billion of it. That number may not be enough, and if it isn't, look out for a devaluation of the dollar down the road. There are rumors already afoot that dollar devaluation may be unavoidable. Only time and the markets will tell.

On the day, declining issues overwhelmed advancers, 4318-2203. New lows continued their edge over new highs, 77-50. In recent weeks, the gap has narrowed, but never rolled over to favor new highs. If that occurs, it would signal another leg up in the markets. It's an indicator worth keeping on tab. Volume was down a bit from last week, and it seems like options players are already out of May long positions and looking to go further out, so average daily volume could slow down, as it usually does in warmer weather.

NYSE Volume 1,490,315,000
NASDAQ Volume 2,517,213,000

Commodities spent most of the day treading water in directionless trade. Oil lost 13 cents, to $58.50. Gold was off $1.40, to $913.50. Silver fell 5 cents to $13.91. There's nary a trend in commodities, though most seem to be consolidating after recent gains. The next move up or down will depend largely on supply issues and sentiment and both of those are in a state of flux.

There is a good deal of economic reports coming out this week, including CPI, PPI, inventories, retail sales, capacity utilization and industrial production. some stabilization in each of these indicators is expected, which should serve as good news for markets. However, since stocks have already seen an historic run, any further gains will be hard-earned.

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