Monday, May 2, 2011

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

Last week, the market moved higher, which I did not think would happen. As I have stated for the last few weeks (see here, here and here), my underlying concern is the macro environment which is turning neutral (see NDDs Friday high frequency indicators report for more information) which I believe would have prevented the move higher. Obviously, the market did not agree.

So -- the question going forward for this week is the current rally a technical development -- that is, is the market merely acting on technical data -- or, is there a strong fundamental reason for the market to move higher? Currently, we don't have any confirming underlying data for the rally which is my primary criteria to believe the advance is for real. But this week, we get a slew of data which will either provide the requisite confirmation -- or not. The most important for me is Friday's employment report. The last few reports have been encouraging, but we have seen an unwelcome increase in initial unemployment claims over 400,000 for the last few weeks which could indicate the employment situation is weakening (see this link for a good discussion on the topic). We also get both ISMs - with the manufacturing ISM being of particular importance considering the recent drop in three regional manufacturing indexes.

A third possible explanation of the market is that of leading indicator; the market is saying the first quarter is an anomaly and growth will return in the second quarter. As such, traders are getting in on the rally at the earliest possible moment. That is always a possibility; that we are seeing a hiccup in growth and things will get better soon. I'm not completely sold on that idea as of yet, although it is a reasonable explanation. I'd be more comfortable with that analysis if prices at the pump were cheaper and initial claims weren't increasing.

At minimum, I'd wait until the unemployment report before moving into the market. But even then, I'm not thrilled by this advance. Overall, gas prices are high, 1st quarter GDP was low, other commodities' upward moves have stalled, and the bond market is also moving higher. And if we are seeing an advance rally that indicates the economy is experiencing a "hiccup" rather than a stall, there will be other buying opportunities.

That being said, let's look at the technical side of the market, which is clearly bullish:

First, prices have moved to new highs, which is always indicative of a bull market. In addition, this move higher is confirmed by the rising A/D and CMF and MACD -- which has a fair amount of room to run at this point. Also note the bullish orientation of the EMAs -- all are moving higher, the shorter are above the longer and prices are using the EMAs for technical support. Technically, it does not get much more bullish.

The QQQQs have the same analysis, save for the fact prices have not moved through new highs in a meaningful way yet.

Technically, the above charts are fine and indicate a further advance. But, as I've said before, I don't think the fundamental situation warrants it.