7-Week Rally Under Pressure

Friday, April 16, 2010
Market Commentary:

The major averages rallied during the first half of the week but gave back those gains on Friday’s ugly distribution day. Volume jumped on Friday compared to Thursday’s levels after the SEC charged investment giant Goldman Sachs (GS) with fraud when they sold CDO’s in 2007. Decliners trumped advancers by nearly a 4-to-1 ratio on the Nasdaq exchange and by nearly a 3-to-1 ratio on the NYSE. New 52-week highs easily trumped new lows on both exchanges. There were 37 high-ranked companies from the CANSLIM.net Leaders List that made a new 52-week high and appeared on the CANSLIM.net BreakOuts Page, lower than the 89 issues that appeared on the prior session. A healthy crop of new leaders making new highs bodes well for any market rally. Regular readers know we have repeatedly noted in this commentary –“the recent expansion in leadership has been a welcome improvement.”

Strong Start To The Week But Rally Fizzles:

 Stocks edged higher on Monday after Greece received an international aid pledge to help it get through its worst financial crisis since WWII. After Monday’s close, Alcoa Inc. (AA) kicked off Q1 earnings season and reported a narrower Q1 loss, citing improving demand. Stocks ended higher on Tuesday shrugging off an ominous report that showed small business owners are still pessimistic on the economy. 

Q1 Earnings Send Market Above Important Psychological Resistance Points:

The major averages jumped above important psychological resistance levels after a slew of stronger than expected earnings and economic data were released. Intel Corp (INTC), JP Morgan Chase & Co (JPM) and railroad giant CSX Corp. (CSX) all topped estimates and reported solid Q1 results. All three stocks gapped up on Wednesday which helped the benchmark S&P 500 and the tech-heavy Nasdaq Composite close above their psychologically important resistance levels for the first time since September 2008 (when Lehman failed). By Friday’s close, the Nasdaq (2,500) and S&P 500 (1,200) both closed below their respective resistance levels while the Dow remained above 11,000.

Economy Expands While Inflation Remains Tame:

On the economic front, the Consumer Price Index (CPI) was very mild and below expectations which suggests inflation remains tame as the economy continues to recover. Retail sales jumped in March which helped a slew of retailers hit fresh 52-week highs. Elsewhere, the Fed released its Beige Book which showed the economy continues to improve across much of the nation.

Jobless Claims Edge Higher:

Before Thursday’s open, the Labor Department said weekly jobless claims unexpectedly climbed to 484,000, which is a two month high. The four-week moving average of initial claims, which smooths out the weekly data, rose to 457,750 last week, from 450,250. Elsewhere, the Federal Reserve said factory production rose +0.9% after rising +0.2% in February which topped analyst estimates.

Market Action- Rally Under Pressure:

Stocks tanked on Friday after several high profile companies released their Q1 results and the SEC charged Goldman Sachs with fraud. Our primary concern before the SEC/GS news was released was the ominous action in shares of GOOG, ISRG and BAC after releasing their Q1 results. Longstanding readers of this column know how much we focus on how the market reacts to the news, not just the news itself. That said, the fact that these leaders reacted poorly to bullish quarterly results suggests that the much anticpated pullback may have begun. Then the SEC/GS news broke, which was the proverbial icing on the cake. At this point, the major averages have been steadily rallying since early February and a pullback of some sort should be expected. Since the March 1, 2010 follow-through day there have been 6 distribution days on the S&P 500 which is more than enough to put pressure on this 7-week rally. Trade accordingly.