Monday, April 4, 2011

Equity Week in Review and Preview of the Upcoming Week/Month

I'm going to return to a daily focus on particular markets. Expect the following for the next month: Equities on Monday, Treasuries on Tuesday, Commodities on Wednesday, Oil on Thursday, and Currencies on Friday

Here is what I wrote about stocks last Monday:

The rally over the last week or so has been very weak. Volume has been down and half of the upward moves occurred at the open with no intra-day follow through. The SPYs are still contained by a downward sloping trend line. However, the IWMs (which have led the market higher) have broken through their trend line but also have a declining MACD. While the underlying technical are still OK (for example, the MACD is about to give a buy signal on the SPY) the underlying economic situation (weakening durable goods orders, high gasoline prices, increasing agricultural prices) are concerning.

The weakness of the rally continued last week.

The intra-day, 5-minute chart shows there was only one day (Tuesday) when the market rallied throughout the day. Two days (Monday and Friday) saw an end of the day sell-off and the big upward move (the jump between Tuesday and Wednesday) was followed by two days of sideways movement. Ideally, we'd like to see prices make a consistent move higher, supported by an upward sloping trendline. The above chart shows no consistent move higher.

The daily chart shows very weak candles -- candles with small bodies -- and a very weak volume reading. This is a very weak rally. While the EMAs are giving a bullish reading, they are still very close together indicating some indecision on the part of market participants. In addition,

Notice that prices are below two important resistance areas.

While the IWMs and IYTs (transports) have broken out, the QQQs have not. In addition, the weak volume is very concerning, indicating there is simply a lack of participation in the market.

Going forward (the next approximately one month), I see the market moving sideways for the following reasons:

1.) There are signs of an economic slowdown. Durable goods orders are stalling -- they haven't dropped but also haven't risen as sharply as we would like. Gas prices are at 3.59/gallon nationally, which is very high (also note we're right at the beginning of the summer driving season when gas prices typically increase). Unemployment -- while dropping a full percentage point over the last four months -- is still at 8.8%. The fall out from the Japanese earthquake is disrupting supply schedules in the auto industry. Savings and paying down debt is the order of the day, indicating consumers could start to pull back on spending. Domestically, it seems as though people are in a "show me the money" phase of the recovery.

China is trying to slow inflationary pressures with more severe bank measures and we're still hearing about possible problems in Europe. Brazil -- which still has high interest rateds -- recently raised rates to slow inflation. International economies have led us out of recession -- now there are signs their growth is slowing.

2.) Consider the following longer-term chart:

The A/D and CMF are both showing very weak readings. The last time they showed similar readings was in May of last year when prices moved sideways as Europe dealt with its debt issue. While the MACD has given a but signal, it would be far better if the other indicators confirmed this trend, which they're not. In short, the technical picture is weaker, but not catastrophic. In addition, prices are up 104% from their ultimate low in 2009, so a breather is in order.