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Sunday, May 3, 2009

Weekly Review - markets avoid the flu as stocks rise again

Even a flu pandemic can't keep this market down. Gains were modest this week and swine flu did cause some worry but, on the whole, stocks rose again.

The flu didn't seem to bother the folks taking surveys. Consumer confidence, Chicago PMI, ISM Manufacturing and Michigan Sentiment all came in better than expected. What wasn't better than expected was the advance reading on 1st quarter GDP which came in at -6.1%. Still, looking into the details of the GDP report, the combination of rising consumer spending and falling inventories was enough for investors to take a positive outlook and push stocks nicely higher.

This week the Fed met and it was non-event while Chrysler declared bankruptcy which took the wind out stock market's sails on Thursday. Still, the market managed a modest gain on Friday despite the government announcing the new date for releasing the results of bank stress tests and putting worries about the financials back on everyone's radar. Nevertheless, the week finished on a positive note.

As always, I want to present our usual two charts to demonstrate the state of the overall stock market.

TradeRadar Alert HQ Stock Market Statistics --

Each week our Alert HQ process scans almost 7300 stocks and ETFs and records their technical characteristics. The following charts are based on daily data and presents the state of some of our technical indicators.

This first chart presents the moving average analysis for the entire market and contrasts it with the performance of the S&P 500 SPDR (SPY). When the number of stocks trading above their 50-day moving average (the yellow line) crosses the line that tracks the number of stocks whose 20-day moving average is above their 50-day moving average (the magenta line) there is an expectation that you will get a change in the trend of the S&P 500.

SPY versus the stock market, Moving Average Analysis, 05-01-2009Again it appears the trend is intact and heading ever upward. After faltering slightly last week the number of stocks above their 50-day MA has resumed its positive trajectory though it has not reached the level attained two weeks ago. The number of stocks whose 20-day MA is above the 50-day MA just continues to steadily advance. The rally may be moderating a bit in terms of its speed but these numbers show that it remains broad-based.

This next chart is based on Aroon Analysis and compares our trending statistics to the performance of SPY. We use Aroon to measure whether stocks are in strong up-trends or down-trends. The number of stocks in down-trends is indicated by the red line and the number of stocks in up-trends is indicated by the yellow line.

SPY versus the stock market, Trend Analysis, 05-01-2009
Here we see the number of stocks in down-trends stagnating at a pretty low level while the number of stocks in up-trends is once again increasing after a couple of weeks of declines. This again speaks to the continued broad-based nature of this rally.

Conclusion --

Our charts show our indicators are both bullish and are at pretty elevated levels. Earnings season has been rather supportive of the bullish tone with a high proportion of stocks beating their earnings expectations. Never mind that the expectations were especially low this quarter; there has been a collective sigh of relief that fewer companies surprised on the downside.

We continue to see a mixed bag in terms of economic reports. The theme now is that the economy is still showing contraction but at least it is contracting more slowly than it had been. This implies that the bottom of this recession may finally be heaving into sight and explains why this rally has been so strong. Needing to throw up another wall of worry, some analysts and pundits are now suggesting a double-dip recession like we saw in the 80's. As long as stocks keep climbing one wall after another, that attitude is OK with me.

Looking forward, the coming week will feature plenty more earnings reports and a good selection of economic reports. The big one on the economic front is the Non-farm Payrolls report which is accompanied by the Unemployment Rate report, both due on Friday. Earlier in the week, kicking off the focus on jobs, is Wednesday's ADP Employment report followed by Thursday's initial jobless claims. We'll also be looking at Average Work Week and hourly earnings. At each step, investors will be looking for confirmation that the worst is over with respect to the labor market. In addition, there will also be Construction Spending and New Home Sales, ISM Services Index, Unit Labor Costs and Wholesale Inventories. Inventories were closely scrutinized in the recent GDP report so investors will look to see that inventories are being cleared out in order to make way for products. Consumer Credit, not usually considered a very important report, will this time be focused on to see if consumers are borrowing and spending again.

I somehow feel that the tone of the market has changed. Whereas economic reports were looked at for clues that the recession might finally be abating, investors now look at reports for confirmation that the economy is slowly gaining strength and managing to hang on to what small gains have already been registered. This may seem like a nuance of wording but I believe it to be significant. Let's hope the numbers continue to support this new attitude as it has been very positive for stock prices.


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UK Investment Guide said...

There'll a delayed reaction if swine flu gets better. Stock markets discounted the flu as they think it's not going to last but if it's still in the headlines for a week we might see a major correction as investors will start to panic.
Any nasty news can send the stocks tumbling around the world and don't be surprised if DJ30 will lose 500 in one week.
I'd recommend to hedge the positions (instead of closing them) with CFDs or financial spread betting.
If you open to currencies flactuations than forex might help.

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