Exciting Week for the Stock Market: Part 2

My headline for last week’s report was “An Exciting Week Ahead.” It certainly turned out to be full of thrills and this week’s headline is “An Exciting Week Ahead: Part 2” because this week promises to be equally stimulating.

Looking at My Screens

We remain in the “Red Flag” mode, expecting lower prices ahead. This week the S&P crossed the important resistance level of 1200 but almost immediately gave it back with Friday’s shakeout while the Dow managed to hold on to the psychologically important 11,000 level.

Our primary indicators show more weakness ahead and we remain in two inverse positions in the Standard Portfolio with the other three hedged in cash. In the 2X we have one inverse position and one hedged cash position, and in the options portfolio that currently is going to Standard and Pro members only, we have one S&P 500 put option and will maintain all of those going into Monday’s trade.

Friday’s action saw an early decline as the market didn’t like Bank of America’s earnings and then things accelerated on heavy 8 billion share volume with the Goldman Sachs news.

The View from 35,000 Feet

This week’s action was far reaching across the board and around the world. Conflicting developments seemed to come at us from all quadrants but here are a few of the most significant developments.

• Goldman Sachs: obviously the big news on Friday with the SEC lawsuit against them. The main effect of this for the major markets is the uncertainty it creates and that it inserts “headline risk” into the market, that is, how many more shoes might there be left to drop? I suspect there could be a few because as the old saying goes, “if you see one cockroach, there are always more.”

• China boosted its lending requirements on property to require higher interest rates and higher down payments to cool its overheated real estate market in an attempt to cut “the last madness” and this tightening caused the bellwether Shanghai composite to decline 1.1% on Friday which was before the Goldman news hit. Tightening in China tends to be negative for equities across the Pacific region and even here at home as their economy continues to grow at 11.9%/year in the first quarter and gains increasing prominence worldwide.

• Crude oil declined 2.3% for the week as risk assets were shunned due to new uncertainties and the Euro declined again as the Greece drama/tragedy/comedy continues.

• Eight banks failed on Friday to bring the yearly total to 50.

• In economic news, positive reports were found in retail sales, the Empire State Manufacturing Index and Philly Fed Reports while negative reports came from declining U.S. exports, small business confidence hitting eight month lows, the second straight weekly rise in jobless claims and a negative reading on consumer sentiment on Friday.

• The market liked Intel’s and JP Morgan’s earnings reports but punished Google, General electric, Bank of America and Advanced Micro Devices for not performing up to expectations.

• A Bloomberg survey shows 2/3rds of Americans believe there will be a recession next year while more than half say the economy is poor.

• Insider selling is 5:1 over buying, about the same ratio as at the January high while AAII bullish sentiment remains at extreme levels of bullishness and at levels that generally precede significant pullbacks.

• Greece is moving closer to asking the IMF and Eurozone help, which as I reported mid-week, could be in doubt as many of the Euro countries will have to go to their Parliaments for final approval of this bailout package and lawsuits are underway in Switzerland and Germany to stop this package. There are even some rumblings that the Greece situation could lead to a breakup of the European Union which would be dramatic, indeed.

• Interest rate spreads in Portugal continue to climb as they are increasingly looking like they could be up next in the sovereign default and countries too big to fail sweepstakes.

What It All Means

Adding it all up, from a technical standpoint, we see a market that is still vastly overbought with extreme bullish sentiment that point to a high risk environment. Fundamentally we see uncertainty over the Goldman Sachs issue, a mixed set of economic and earnings numbers, and problems around the world from Chinese tightening to problems in Europe to the volcano in Iceland that is disrupting political and economic activity across the continent. Overall this leads to a high risk, potentially combustible environment.

The Week Ahead

Not much economic news this week but lots of earnings numbers and Greece will likely take center stage again as the IMF and EU Finance Ministers respond to Greece’s situation and the country will try to float a huge bond on Tuesday at what they describe as “unsustainable” interest rates.”

At home we’ll get a flurry of earnings reports, the most important of which are highlighted below, and I’m sure the Goldman Sachs news will continue making headlines.

Economic Reports:

Monday: March Leading Economic Indicators

Thursday: Initial Unemployment Claims, Continuing Unemployment Claims, March Industrial Production, April Philly Fed

Friday: March Durable Goods Orders, March New Home Sales

Earnings Reports:

Monday: CitiGroup, IBM

Tuesday: Goldman Sachs, Johnson and Johnson, Apple Computer, Yahoo

Wednesday: Boeing, Microsoft, Wells Fargo

Thursday: Advanced Micro Devices, Google

Friday: Ford Motor, Amazon, Microsoft

Sector Spotlight:

Leaders: Microcaps, Semicondustors

Laggards: Thailand, China, Gold

Wishing you a great weekend wherever you may be.

All the best,
John
John Nyaradi
Publisher
Wall Street Sector Selector