Friday, April 18, 2008

Resistance Is Futile

...and also nonexistent. With solid corporate earnings in hand, investors broke through the Dow Jones' 12,700-12,750 resistance right at the open, gapping nearly higher than the previous close. Within 5 minutes, the Dow was soaring past 12,800 and into the voided area between, 12,800 and 13,500.

If corporate earnings continue as strong as they've been - and there's no reason to suggest they shouldn't - stocks should continue their march higher. The Dow and other indices have exploded through two separate resistance levels in the past week with no real end in sight.

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Rather than facing the desperation of an extended recession, Wall Street may be right that one of the features of globalization is a real disconnect between corporations and the US economy. While those at the very bottom are struggling to find jobs, pay rising utility, fuel and food costs, corporations have gleefully passed those costs on to the consumer without missing a beat.

While there are a couple of sectors that have been harder hit than the general market - financials, home builders, retailers and some discretionary goods and services (notably alcoholic beverages and gambling) - the rest of the market seems poised to get past this period and move to higher ground.

Dow 12,849.36 +228.87; NASDAQ 2,402.97 +61.14; S&P 500 1,390.33 +24.77; NYSE Composite 9,310.24 Up 136.43

The open questions are whether the US (and to a larger extent, the world) economy can cope with higher prices for just about everything without some substantive changes. Gas at $3.00 - and soon $3.50 - a gallon, food costs spiraling out of control and credit strains have put Americans to the test, but they've neither stopped driving nor eating. Defaults on everything from mortgages to credit cards are dramatically higher, however, so the costs of everyday life cannot be sustained much longer, especially if jobs become scarce, which they haven't, yet.

With all the distortions caused by the subprime mortgage implosion and the related global credit crunch, it's difficult to predict direction over the long term, but for the past month, that direction has largely been straight up. There doesn't seem to be much more ground to gain before the markets become severely overbought and correct themselves through profit-taking.

Having the profit on trades in mind (and noting that today was an options expiration day) a cooling off period could come shortly, though we've just barely touched down into earnings season.

Of companies reporting better-than-expected first quarter results, Google (GOOG), Honeywell (HON) and Caterpillar (CAT) and Schlumberger (SLB) were notable standouts. Citigroup (C) posted a 1.02 per share loss and wrote down another $12 billion in bad loans, but was boosted by investors with a 4.5% gain. Other banks and financial services were also ridden higher. They really do take care of their own.

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For the week, the major indices posted their best gains of they year, up anywhere from 4 to 5%. On the day, advancers outnumbered decliners, 4764-1552, and new highs finally supplanted new lows, 216-152.

Of course, the oil barons couldn't resist the euphoria and closed at another all-time high of $117.00, up $1.83. The metals, however, were decimated, with gold down $27.70 to $915.20 and silver off 49 cents to $17.82.

Earnings will be a huge factor to next week's trading, and if the companies reporting come through with reports as robust as this week's early batch, the rally could be monumental. Shorts and puts players should keep abreast of developments and especially note how their individual positions compare to the general market.

I'm still not convinced that the economy won't eventually drag stocks down, but the corporate results appear to have overcome the worst-case scenarios.

NYSE Volume 4,193,403,000
NASDAQ Volume 2,221,355,750

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