All Good Things Must End
With that cliché in mind, you knew the market's recent winning streak would eventually end, which it did on Friday when all three major indices finished in the red. This marked the first time since April 6th that the Nasdaq Composite Index (COMPX), the Dow Jones Industrial Average (INDU) and the S&P 500 Index (SPX) had made a weekly sojourn to the nether regions.
Traders were sent shuffling towards the exits on Friday after a triumvirate of economic releases warned that the halcyon days of interest rate cuts might be over.
First, it was reported that American consumers haven't lost their lust for spending, despite rising layoffs and stock portfolio losses. According to the Commerce Department, retail sales gained 0.8 percent in April, which easily trumped the consensus forecast for a slim increase of 0.1 percent. Much of the gain could be attributable to the every-rising price of gasoline, which, on average, is fetching $1.70 a gallon these days.
Then, the University of Michigan reported that its preliminary gauge of consumer sentiment rose to 92.6 in May from 88.4, which topped forecasts and brought the index to its highest levels since January.
Finally, another government report showed that the Producer Price Index (PPI), which measures prices at the wholesale level, gained 0.3 percent in April. However, the core PPI (PPI sans food and energy) advanced a modest 0.2 percent, which effectively means that prices at the producer level are standing pat.
At first glance, this latest slate of economic data releases would appear bullish. However, the market is still concerned about a recession. What's more, it's counting on the Federal Reserve to continue cutting interest rates to prevent one. Friday's reports raised fears that the Fed might not be so aggressive when it meets next Tuesday, which prompted the selling.
For the day, the COMPX was nicked for 21.43 points, or 1.01 percent, to close at 2,107.43, its lowest finish since April 27. The tech-laden index was pressured by two of its heaviest hitters: chip giant Intel (Nasdaq:INTC) finished off $1.07 at $27.94, and software king Microsoft (Nasdaq:MSFT) eased $0.60 to $69.40.
As for the Old-Economy, the INDU fell 89.13 points, or 0.82 percent, to end at 10,821.31. Among the hardest hit were the INDU's cyclical shares: Alcoa (NYSE:AA), J.P. Morgan Chase (JPM), International Paper (NYSE:IP), General Motors (NYSE:GM) and DuPont (NYSE:DD) were all victims of profit takers on Friday.
As for the broader market, the SPX lost 9.51 points, or 0.76 percent, to finish at 1,245.67, its lowest close since April 26.
Traders could take some solace knowing few of them were sprinting towards the exit. Only 894 million shares traded on the NSYE, which is the fewest since December 26, while only 1.40 billion shares changed hands on the Nasdaq, its lightest day of the year. Light volume is consider a positive sign when market breadth negative.
For the week, the COMPX declined 3.8 percent, the SPX 1.7 percent and the Dow 1.2 percent. But let's keep our perspective. Since hitting its recent low of 1638.8 on April 4, the COMPX is up 30 percent. The INDU has climbed 16 percent since its recent trough on March 22, while the SPX has advanced 14 percent from its April 4 low.
In stock news on Friday, Vince McMahon's bad-taste and nepotism ridden World Wrestling Federation Entertainment (NYSE:WWF) gained $1.04 to $14.19 after it folded the XFL football league less than a month after its first season ended. The WWF said the league, which it co-owned with NBC television, will post a loss of about $35 million. (I can only wonder what my favorite XFL player, He Hate Me, will do for employment since his skills aren't quite up to NFL standards.)
In Splittrader.com stock news, our Current Play list bucked the selling trend once again by advancing 6.7 percent for the week. We posted strong gains in Cross Timbers Oil (NYSE:XTO), Allegheny Energy (NYSE:AYE) and H&R Block (NYSE:HRB). Advances in these three stocks were more than enough to offset losses in Williams Sonoma (NYSE:WSM) and Lear Corp. (NYSE:LEA).
Cross Timbers Oil, in particular, might be of interest to traders. We've also been enamored of stocks displaying chart patterns showing higher lows while following a longer-term positive trend. One caveat on Cross Timbers, though, it looks like it might run into near-term resistance at $28.00, which is one reason we raised our stop this weekend to $27.00. (Like most traders, we hate to give back gains, which is why the stop is so tight.)
Switching to the credit markets, government bond issues were again hard hit Friday, as investors were spooked by the stronger- than-expected retail sales report and higher consumer confidence figures. The 10-year Treasury note tumbled 1 13/32 to yield 5.49 percent while the 30-year government bond slumped 1 18/32 to yield 5.88 percent. The long bond now is at its highest yield in six months.
Looking ahead, the Federal Reserve's FOMC meeting set for Tuesday will undoubtedly be the main attraction this week. Traders generally anticipate another half-percentage point cut at Tuesday's meeting, which means a reduction in the fed funds rate to 4 percent.
As of Friday, the fed funds futures rate was priced to average 4.08 percent in June, which implies a 60 percent chance of a 50 basis point interest rate cut coming from Tuesday's FOMC meeting. However, this is down significantly from a 90 percent chance only two weeks. In other words, a half-point cut isn't a slam-dunk.
In addition to the Fed, traders will have to sort through a new set of economic date releases. Business inventories, industrial production and capacity utilization commence the week's major economic data on Monday. The market consensus is calling for business inventories to have fallen 0.2 percent in March, following February's 0.2 percent decline. Industrial production is also expected to have declined 0.2 percent, off that amount for the month of April, and off sharply from a 0.4 percent increase in March. Capacity utilization, a measure of plant usage, is expected to have increased 79.1 percent in April, from 79.4 percent in March.
On Wednesday, the Consumer Price Index (CPI) and core CPI is scheduled for release. The CPI is expected to have risen 0.4 percent in April, up from a 0.1 percent increase in the previous month. Meanwhile, core CPI is expected to have climbed 0.2 percent for the month, unchanged from its gain in March.
On Thursday, the Leading Economic Indicators are scheduled for release. The LEI is forecasted to have advanced 0.1 percent in April, up sharply from a 0.3 decline in the prior month.
Closing out the week on Friday are the U.S. trade balance of goods and services and the U.S. monthly budget statement. The U.S. trade gap is expected to have widened to a deficit of $29.0 billion in March, up from a $27.0 billion deficit in February, while the U.S. budget for the month of April is forecasted to show a surplus of $180 billion.
On the earnings docket, retailers, many of whom rallied on April's unexpectedly strong sales figures, will take center stage. K-Mart (NYSE:KM), the Gap (NYSE:GPS) and Home Depot (NYSE:HD) are all scheduled to announce quarterly results. In technology, Dell (NYSE:DELL), Hewlett-Packard (NYSE:HWP) and Ciena (Nasdaq:CIEN) will post their earnings.
As for trading this week, don't expect much action ahead of Tuesday's FOMC meeting. After the meeting, though, it's a different story. I expect the markets to experience mild selling pressure should the Fed announce a 50 basis point cut and severe selling pressure should it announce a 25 basis point cut. However, once the initial reaction wears off, I think the markets will stabilize, which could mean more range-bound trading.
To that end, the COMPX is bound between 2000 support and 2250 resistance. For the INDU, the range is 10,600 to 11,000. A close above 11,000 would be extremely bullish for the INDU because it has tried numerous times over the past eight months to breach 11,000. On the flipside, a close below 10,600 would be bearish because that would mean we are looking at 10,300 again.
Over the past month, traders have gone from worrying about a weakening economy to a strengthening economy. The new outlook was apparent in the bullish reaction to the sharp rise in the April jobless rate reported recently and the bearish response to the seemingly encouraging economic news on Friday.
This schizophrenic behavior is downright silly; a growing economy is good, particularly a growing economy with little inflationary pressures outside of energy. The fact is, retailers are improving, the number of jobless claims is shrinking and the Fed is meeting next week to most likely cut rates.
When the Fed ends its damage control mode, that could mean that the economy is indeed strengthening, which means corporate profits will soon be expanding. So you might think twice about unloading the portfolio if the Fed cuts rates by only 25 basis points. That could be the signal the Fed's job is over and that the economy will soon be hitting on all cylinders again.
Investors have gotten used to aggressive easing actions by the Fed, which has taken down short rates by two full percentage points so far this year, and don't like the prospect of an end to the rate cuts.