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Market Commentary - 4.13.2008

April 13, 2008

Well, it looks like buyers have exhausted their strength as the major indexes were unable to push through the resistance levels we discussed last week. After holding firm against the backdrop of continued negative headlines and deteriorating economic data for several weeks, the markets finally crumbled on the heels of an earnings miss and downward revision from GE. The next few weeks will be the most action packed in quite awhile, as the majority of Dow 30/S&P 500 members will report earnings, a slew of economic reports are scheduled to come out, and finally the market awaits the Fed meeting and rate cut announcements on April 29th/30th. Last week we highlighted the fact that market volatility had trickled down near its lows for the year, and this week it started to tick back up but still sits well below the spikes seen in January and March. We expect the rest of the month to be extremely volatile, and if the remaining earnings reports and outlooks are anything like we saw this week from UPS, Alcoa, and GE…well the things won’t look so good for the bull argument.

This week should start off with a bang – we wouldn’t be surprised to see a “dead cat bounce” rally on Monday as the major indices are short-term oversold, but we are looking to sell into any strength as we believe the next leg down is now underway. This week will bring some much needed clarity regarding 1) the health of the financial institutions and credit markets, 2) the state of the economy and how well corporate earnings held up in the first quarter, and 3) how much inflation the US is already experiencing – and of course this will all play a big role in what action the Fed decides to take – currently the market is pricing in a 25 bps rate cut, with about a 46% chance of 50 bps.

Earnings

Nothing exciting on Monday, but Tuesday and the rest of the week more than make up for it as we’ll see a little bit of everything. The highlight will be the financial institutions including Washington Mutual (WM), JP Morgan Chase (JPM), Wachovia (WB), Merrill Lynch (MER), Citigroup (C), Sallie Mae (SLM), and Wells Fargo (WFC) just to name a few. For those who think the troubles in the credit markets are almost over, we think the next few weeks will prove otherwise. Some other big names we will be watching include Johnson & Johnson, Google, eBay, IBM, United Technologies, and Coca Cola. If all of that doesn’t get you excited, you shouldn’t be trading. Keep in mind, this is just a sampling of the earnings reports to come out this week – investors will be much more concerned with forward guidance than 1st quarter earnings results, and we will be much more focused on the market’s reaction than the actual results.

Economic Data

This week we have retail sales data on Monday, manufacturing data – NY Empire Index on Monday and Philly Fed on Thursday, inflation data – producer prices on Tuesday and consumer prices on Wednesday, some housing data on Wednesday, and we’ll also be watching for the Fed’s Beige Book on Wednesday, and unemployment claims and leading indicators on Thursday. The market has been trending up on hope that things will start to get better on the economic front after the 2nd quarter, but the reality is the data continues to show deterioration and none of the actions by the Fed/administration has flowed through to the real economy yet. Equity analysts have now lowered their earnings estimates every single week this year.

Strategy/Outlook

Since the indexes weren’t able to break resistance and we believe the next few weeks will show that recessionary pressure has spread far beyond Wall Street, we are looking to sell into any strength and believe the best opportunities in the near term to be on the short side.

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Posted by admin | Filed Under Free Market Commentary 

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