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InvestmentHouse Weekend Update:

http://www.investmenthouse.com/1weekendmarketsummary.htm

- Earnings and expiration power stocks higher leaving NASDAQ a bit of the odd man out.
- Some say market top, some say part of a continued run higher: economic climate and P/E ratios give nod to the latter.
- Earnings overall lower but beating expectations and pushing that liquidity into the market.

Renewed earnings excitement drive the NYSE to new highs, NASDAQ to new post-2002 closing high.

Thursday night we noted the NASDAQ chart looked poised for a run at the February and a new post-2002 high, just needing a wave of earnings. Well, the earnings came, but outside of GOOG the earnings were mostly on the NYSE side of the ledger, e.g. CAT, HON, MCD, and AXP all reporting results that easily exceeded expectations. Indeed, that is the upside surprise potential we said was there just before the season started given the glum views of the economy and the precipitous decline in expectations over the prior three months. The tech earnings got off to a rough start, and they are still a big question mark heading into the next two weeks, but while they struggled the NYSE earnings filled in the void and pushed stocks higher.

Indeed, even with SP500 showing some churn the prior two sessions, the news was good enough to whisk that index and the other indices higher with ease and with stronger volume. DJ30 and SP400 (mid-caps) hit new all-time highs. SP600 just missed out. SP500 posted a new post-2002 high. NASDAQ posted a new post-2002 high . . . then gave it up though it did manage to log a new post-2002 closing high.

It was a somewhat volatile expiration session, but most of the up and down action was on NASDAQ; the NYSE indices were pretty much locked on target and moved higher all session. Volume ran substantially higher on NYSE, suggesting that expiration had a bit to do with the trade that far outpaced anything NYSE threw up during the week. Overall it was a very solid session with the only real complaint being NASDAQ’s failure to hit an unequivocal post-2002 high by taking out the February intraday high. Outside of that things were quite solid.

Technically it was a solid session on just about all fours. Volume surged on NYSE and was again solidly above average on NASDAQ. Sure expiration had its impact on the volume, but impressive breadth (3.4:1 NYSE, 2.2:1 NASDAQ) indicates there was widespread movement and not just rolling over positions on the large caps. Indeed, large cap tech underperformed overall NASDAQ. As for leadership, it emerged in the industrials once more and financials started to run as well (C, WFC, JPM, AXP). Friday energy started to rebound some from its quick pullback, adding further leadership support. Remember, the market moved higher, albeit it sputtered a bit, as energy took its 3-day breather last week. With energy returning to the leadership fold as it bounces off its pullback to near support there will be more upside strength.

Of course, now everyone is bullish. Bulls rose and bears fell two weeks back and they will be up again after this past week. It is very hard to deny the strength of the move as global liquidity once more drives energy, materials, metals, industrials (e.g. CAT) higher. Just as soon as everyone is convinced the path is higher, however, there is a hitch in the move. Earnings will likely provide more fireworks as tech stocks continue to disappoint. However, given the strength demonstrated and the money behind it, outside of those inevitable hiccups the market is driving to new highs. Be it buybacks and private equity lowering the amount of available stock, expectations about future US and global expansion, better than expected earnings, a lower dollar making US stocks a better value to foreign investors, the earth opening up and swallowing Congress, or any combination of same, money is flowing into US and world markets once more and with a vengeance.

THE ECONOMY

Economic and market top?

With the recent run to new highs on DJ30, SP600 and SP500, Thursday and Friday the financial shows highlighted arguments between the bulls and the bears about the market’s future. Nothing unusual about that; ever since the sub-prime issues the clamor has been about the meltdown of the US economy. The basic premise is the US consumer has been on a consumption binge for years and now that the housing run is over consumers feel a pinch as their ‘piggy bank’ is running dry. Add on top of that the idea that the housing market will bring down the rest of the economy and you have a rather bleak scenario.

Or perhaps things are not so bleak. Housing is important but in every expansion, every one, housing gains do not last through the expansion. This last one was unusual because housing never really slowed during the recession thanks to 9-11. People stayed home and bought houses or added on versus traveling. As interest rates stayed low boomers bought second homes. There are lots of boomers, and they kept prices higher and the market hot with their acquisitions. As is the usual case eventually that turned to speculation and things did overheat. The housing market topped in May 2005 and has been declining since, the pace picking up the most the past 9 months or so. Housing was a hot market and it was hot for longer than normal. There are some places where it is now a cold market. There are a lot of places where it is simply a cooler hot market. It is not a collapse a la the 1980’s; nowhere near that yet.

This scenario is very similar to the mid-1990’s after the US came out of the 1991 recession and ran for a few years. The Fed put a lid on things for a year and the economy went flat along with the market. The Fed backed off and the market started to rally again. It was anticipating the economy returning to expansion. The economy recovered and followed the market higher. A mid-cycle slow down gratis of the Fed and then a resumption when the Fed backed off. Very similar situation this time around with the market bottoming in late 2002, the economy coming out of recession in 2003 and running into 2005, the Fed starting rate hikes, the market staggering, the economy slowing, the Fed backing off, the market starting a new rally within a month. It is not an exact match, but the scenario is a familiar one over the past 50 years.

A look at fundamentals.

Earnings are coming in lower this quarter, no longer growing at the double digit levels of the past few years. Another reason this market and economy are going under, right? Well, this happened in the 1990’s as well; earnings growth slowed as the economy slowed in a mid-cycle downturn, but they were able to pick up the pace again after the Fed was finished and the economy could resume the move.

But let’s forget the 1990’s. The market has rallied since the October 2002 bottom, on and off of course, but it has moved back up. Witness the new highs on DJ30, SP400, SP600 and soon to be the SP500. With those indices reaching new highs that has some bears saying the market is overpriced.

When you look at P/E ratios, however, they are basically the same as they were at the bottom of the market in 2002. That is because earnings have risen so smartly along with the price that the ratio has held. This current slowdown raises the worry that P/E ratios will expand. That remains to be seen, but as we feel this is a mid-cycle slowdown in the economy, the earnings will not continue to lag. Corporate investment will need to rise again, but it too is going through a mid-cycle slowdown after a strong showing for two years.

Indeed, the market is hitting new highs in anticipation of something, and that ‘something’ is usually further economic expansion down the road. That is another indication, though many don’t like to acknowledge the market as an indicator, of an expansion returning. Even the bond yield curve has reverted. It inverted again quickly last week, but it came right back to close the week at 4.65% on the 2 year and 4.67% on the 10 year. That is no mean curve, but the action shows it is in the recovery mode as well.

THE MARKET

MARKET SENTIMENT

VIX: 12.07; -0.47
VXN: 15.71; -0.59
VXO: 11.67; -0.59

Put/Call Ratio (CBOE): 0.75; -0.19

Bulls versus Bears:

Bulls: 52.7%. Well this is hardly good news with the bulls spiking back up over 50 and well on the way to 55% that is considered bearish. Up from 49.5% and 45.5% just a month back. It hit 50.5% level a couple of months back though below 53.3% on the recent high. Bulls bottomed last summer near 36%. That is the lowest level since September 2006.

Bears: 25.3%. Heading the wrong direction as well, falling from 27.5%. Fairly volatile of late as it bounced from 25.8% the week before but down from 28.4% and 28.9% immediately before that. Still above the 20% where it held to start the year. It hit a post-2002 high in that late June 2006 move (hit near 36%), eclipsing the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005).

NASDAQ

Stats: +21.04 points (+0.84%) to close at 2526.39
Volume: 2.161B (+0.14%). Volume edged higher on the session, adding an equal amount of accumulation as distribution Thursday. Expiration week so you cannot put a whole lot of weight on the volume action.

Up Volume: 1.518B (+547M). Not bad with nearly a 3:1 ratio.
Down Volume: 581M (-581M)

A/D and Hi/Lo: Advancers led 2.21 to 1. Breadth improved as NASDAQ continued higher as the overall NASDAQ topped the NASDAQ 100 performance (+0.73%).
Previous Session: Decliners led 1.77 to 1

New Highs: 166 (+56)
New Lows: 52 (-8)

NASDAQ CHART: http://www.investmenthouse.com/ihmedia/NASDAQ.jpeg

NASDAQ managed a close at a new post-2002 high. It did hit a new high since that bottom early on in the session, but it could not hold that momentum and the rebound in the last half of the session could not recapture it. That was the one negative for the session from our perspective: NASDAQ is following along, not making the wake. NASDAQ earnings have not lived up to the NYSE earnings parade and investors are still a bit skeptical as to whether they will be able to do so. Thus NASDAQ is moving higher, it is just not leading the way. Again, kind of ironic as it was NASDAQ that provided the follow through and the renewed breakout off of the March double bottom, yet it cannot take the lead after that.

SOX (+0.18%) tapped the top of its 6 month range but as with NASDAQ, it could not go ahead and clearly punch. It faded back, holding just below the breakout point. SMH, however, did make the move, gapping higher and adding onto the Thursday gains though it could not do much with the gap after it did open. Obviously some chips are looking better, but overall they are still laggards.

SP500/NYSE

Stats: +13.62 points (+0.93%) to close at 1474.35
NYSE Volume: 1.955B (+19.52%). Volume blasted higher as the large caps pushed further to a new high, SP400 did the same, and SP600 matched its prior new high. Volume was up due to expiration but there is also some serious buying ongoing.

Up Volume: 1.566B (+908.49M). Even better than NASDAQ, near 5:1.
Down Volume: 375.837M (-582.942M)

A/D and Hi/Lo: Advancers led 3.45 to 1. Outstanding breadth as the large, mid, and small caps all rallied together. With energy starting to move back up that is only helping the action.
Previous Session: Decliners led 1.75 to 1

New Highs: 341 (+164)
New Lows: 13 (-11)

SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg

SP500 crashed back into the channel, blowing through the November/February up trendline on some impressive trade and breadth. With financials pitching in (and do financials pitch in if the economy and market is tanking?) along with industrials, machinery, metals, etc., SP500 was is showing a lot of pop as money works back in.

SP600 (+1.15%) was edged by the Dow as far as percentage gain. A bit more from the small caps and they would be at a new high as well. Russell 2000 is just a bit back of the SP. Small caps were once more dead and buried but they managed to emerge as a leader in this rally, fading some the prior three sessions as energy took a breather, but when energy was back in the game Friday, they were back in it as well. Looks as if they are going to stay in the game because energy is indicating it is ready to rebound.

DJ30

DJ30 rallied right back up to the November/February up trendline, just missing out on moving back into its channel. Huge volume as stocks such as CAT, HON and AXP posted big upside volume. DJ30 and its stocks are primarily economics driven, and this action suggests a renewed confidence in the economic future of the US and the world as many of these stocks know no borders. Indeed, this is one reason they are performing better than techs as they are not impacted as much by the dollar’s ups and downs (many more downs than ups over the past year).

DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg

MONDAY

A big expiration Friday with breaks to new highs, lots of volume, lots of euphoria. The market, however, tends to be a ‘what have you done for me lately’ mistress, and thus investors will still be looking toward what earnings say, particularly technology earnings. Tech is the laggard, the lone sector yet to take out that February high. It is following along, but for this market to really take off it has to join in. Thus the importance of the tech earnings coming out this week.

The market has overcome a lot of obstacles to break to these highs. The correction base that was just 5 weeks long fails to provide a sufficient foundation for a rally 4 out of 5 times. This has the look of being that fifth time what with the new highs and the strength of leadership and breadth. As we noted all last week, the market despite its obstacles overcame each one and made key breaks when it had to do so. Then when it reached the necessary point it made the key breakouts. NASDAQ, as noted, is the remaining index to make the move and with earnings over the next two weeks it will have the chance as more tech earnings come forth.

We say two weeks because this was quite a move the past week. It started strong, paused, and then finished strong, those two big days putting together a really impressive tally for the week. After such a move it may need to take a rest; the market tends to swing the opposite way of how expiration closed, and a bit of a pause wouldn’t hurt. With the money moving in, however, and if NASDAQ earnings come around, there may not be much of a pause.

The market cannot continue higher without money, and that worldwide liquidity we saw that kept things running through the end of the year has returned. Again, it will help if NASDAQ can get with the program as well. It won’t hurt if durable goods orders, Q1 GDP, and the Fed Beige Book start to improve; at some point this market rally will look for economics to pick up, and the market has been rallying, with the February and March hiatus, since late summer 2006. Investors will eventually expect some results.

We like what we see with energy after this pullback to near support. Many broke out, rallied again, and tested near support and are setting up to rebound again. In addition to those we still see many stocks from many sectors still setting up to move despite the rally; as we have said before, stocks break higher in waves. The most recent example is with energy: those stocks lead the move higher, and then as they tested this past week other stocks came to the fore and led the market to new highs.

Support and Resistance

NASDAQ: Closed at 2526.39
Resistance:
2531 is the February high (post-2002 high)
2533 is the December/January up trendline

Support:
2523 is price resistance November 2000
2509 is the January 2007 high
The July/August trendline at 2505
The 10 day EMA at 2497
2471 is the December 2006 high
2468.42 is the November 2006 high
2460 is the March high
The 50 day EMA at 2453
2405 is the ‘hump’ high
2400ish from the late November and late December 2006 lows.
2379 is the October high.
2376 is the April high, the former post-2002 high.
2368 is the early October handle high.
2340 is the March low
2331 is the March intraday low

S&P 500: Closed at 1484.35
Resistance:
1496 is a peak from July 2000
1500 from April 2000 peak
1520 from the September 2000 peak
1528 close, 1553 intraday from March 2000 all-time index peak

Support:
1476 is the late November to February up trendline
1475 from peaks in December 1999 and January 2000
1461.57 is the February 2007 high.
The 10 day EMA at 1462
The 18 day EMA at 1451
1440 is the mid-January high
1439 is the March high
1432 is the December 2006 high
The 50 day EMA at 1434
1425 is an interim high from November 1999
1410 is the ‘hump’ high
1408 is the November high

Dow: Closed at 12,961.98
Resistance:
At a new high so not a lot standing in its way other than its own weight after it gets higher.

Support:
12,796 at the February 2007 and all-time high
The 10 day EMA at 12,718
12,700 is the early February peak intraday high
12,623 is the mid-January high
12,511 is the March intraday high.
12,499 is the December intraday high.
The 50 day EMA at 12,498
12,361 is the November 2006 high
12,350 is the March ‘hump’ high
12,039 is the early March low.
October high is 12,167
11,986 is price support from mid-October and the early November low.
11,940 is the March low

Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the ‘Economy’ section.

April 24
- Consumer Confidence, April (10:00): 105.0 expected, 107.2 prior
- Existing home sales, March (10:00): 6.50M expected, 6.69M prior

April 25
- Durable goods orders, March (8:30): 2.5% expected, 1.7% prior
- New home sales, March (10:00): 885K expected, 848K prior
- Crude oil inventories (10:30): -994K prior
- Fed Beige Book (2:00)

April 27
- GDP, Q1 advance (8:30): 2.0% expected, 2.5% prior
- Chain deflator (8:30): 3.0% expected, 1.7% prior
- Employment Cost Index, Q1 (8:30): 0.9% expected, 0.8% prior
- Michigan sentiment, revised, April (10:00): 85.3 expected, 85.3 prior