For the third consecutive week, the major market indices lost ground. Much like the prior week, last week’s losses were mild and occurred on light volume. However, this isn’t to say that there wasn’t quite a bit of volatility on a daily basis. Last Monday, the Dow ($INDU) closed below 10K, but the index was able to recapture this key support level by the end of the week. Overall, the Dow lost 1.03 percent, the S&P 500 ($SPX) gave up 0.27 percent and the Nasdaq ($COMPQ) fell 0.70 percent.
Economic news was abundant last week, following up on the prior week’s key jobs report. With signs of inflation showing up at the producer level, traders are afraid that the Fed will be raising the Fed funds target rate higher at their June meeting. Though this week’s economic schedule is comparatively light, traders still will be focused in on the economy. Below is a list of the economic reports on tap:
Monday: NY Empire State Manufacturing Survey, SEMI Book-to-Bill Ratio
Tuesday: Chain Store Sales Snapshot, New Residential Construction
Wednesday: MBA Mortgage Applications Survey, ISM Non-Mfg. Index
Thursday: Jobless Claims, The Conference Board Leading Indicators, Philadelphia Fed Survey
Friday: None
The manufacturer reports will be closely watched, as these indicators have been showing a sharp rise in producer prices. Though these inflationary pressures haven’t yet shown up at the consumer level, the thought is that the Fed will want to be proactive in stopping consumer inflation. Traders might get some insight to how the Fed is feeling from three separate speeches expected from Fed governors this week. Of the three, the speech by Fed Governor Ben Bernanke on Thursday could provide the most information. Mr. Bernanke will be speaking about gradualism and this could include talk of how the Fed needs to approach an improving economy and rising producer prices.
Earnings have been extremely strong in the first quarter, but it would be difficult to garner this from just the movement of the stock market. Traders expected strong earnings results, so their attention moved to the economy and how higher interest rates will impact earnings in the future. Though earnings season is about over, there are several earnings reports on tap that could influence individual sectors. Set to report this week is Hewlett-Packard (HPQ), Applied Materials (AMAT), Home Depot (HD) and Lowe’s (LOW).
Besides rising interest rates, traders must also factor in concern about oil prices and the political disaster in Iraq. Both of these issues have a negative impact on sentiment, which could lead to a significant decline in consumer spending. A barrel of oil has moved near $41—the highest it’s been since 1990. High oil prices impact everyone, not just airlines and trucking companies. For one, consumers spend a lot of money on fuel to drive to work and to go shopping. When fuel prices are so high, it limits the amount of disposable income available and keeps consumers from making the normal shopping trips and vacations they might normally take. At the same time, firms do need to pass on the higher costs of doing business to the consumer and this could lead to consumer inflation in the future.
The situation in Iraq is also having a negative impact on sentiment. Everyday there are more stories of American soldiers losing their lives… Not to mention the political storm that followed the release of photos from the Abu Ghraib prison, which continues to rock the world. A free Iraq has been much more difficult to establish than the administration gambled and it’s now turning into a huge debate during an important presidential election year.
Technically, the Dow did avoid closing the week below 10K, which would have been viewed extremely bearish. However, even three weeks of declines has not convinced the bulls to step in and buy stocks en masse. Volume has been light for the most part, as traders wait for further data about the economy and interest rates. Overall, rising interest rates won’t have a large negative impact on earnings as long as the rise is not too abrupt. The Fed knows this and they will err on the side of caution in raising rates. However, traders still are not convinced that buying stocks is the best thing to do right now, even though earnings are growing and GDP growth is strong.
Jody Osborne Senior Staff Writer & Options Strategist Optionetics.com ~ Your Options Education Site Visit Jody's Forum
Market Data 
Markets 
AI
