Market Commentary - 5.04.2008

May 4, 2008

The major indexes continued to rally last week as the theme was “not as bad as it could have been”. Non-financial earnings were for the most part better than expected and economic growth was tepid but was still marginally positive, with jobs numbers still negative but better than forecast. While all the indexes have now broken through the resistance levels we discussed last week and have been in a strong uptrend since mid-March, we are still viewing this as another bear market rally for several reasons:

A 5 year bull market has never been followed by anything less than an 8 month bear market averaging a 30% peak to trough – we are only now roughly 5 month into this decline and at its lows the indexes were barely off 20%;
This rally has displayed very weak volume, a lot of cash is still on the sidelines waiting for the “all clear” signal, and technical indicators are displaying negative divergence suggesting we are near the top of this rally, and all of the indexes are still sitting below their long term moving averages;
Fundamentally nothing much has changed – between dismal housing and construction data, weakening consumer spending and earnings, and a weakening job market, we are not in the camp that believes the worst is behind us. Although the S&P 500 broke through the 50% retracement level from the October top to the February bottom, it closed just below this level (1416.54):

Although we are about 2/3rds of the way through earnings season, this week is still active on that front, while the economic calendar is fairly light. The news that Microsoft is abandoning its Yahoo bid will probably not bode well for the tech sector, and all eyes will most certainly be on Cisco’s earning on Tuesday. We are focusing a lot these days on sectors in strong uptrends – energy, agriculture, commodities – while they have recently pulled back, we still see these sectors in long term bull markets and there will be a lot of earnings reports this week to watch.

Earnings

Most of the majors have reported, but still a heavy dose of earnings this week:

Monday – Alpha Natural Resources (ANR), Anadarko Petroleum (APC), Cleveland-Cliffs (CLF), Goldcorp (GG), McKesson Corp (MCK), Principal Financial Group (PFG), Tidewater (TDW), Vulcan Materials (VMC), Weight Watchers (WTW)

Friday – Allianz (AZ), Clear Channel (CCU), Gold Fields Ltd (GFI), Huntsman (HUN), Sotheby’s (BID), Southern Union (SUG)

Tuesday – Barrick Gold (ABX), Blue Nile (NILE), Cisco (CSCO), Fannie Mae (FNM), Kinross Gold (KGC), Legg Mason (LM), MGM Mirage (MGM), Molson Coors Brewing (TAP), NYSE Euronext (NYX), PG&E Co (PCG), PSEG (PEG), Walt Disney (DIS)

Wednesday – British American Tobacco (BTI), CompuCredit (CCRT), Devon Energy (DVN), Foster Wheeler (FWLT), Marsh & McLennan (MMC), Nationwide (NFS), Pioneer Natural Resources (PXD), Quicksilver Resources (KWK), DirectTV (DTV), Total S.A. (TOT), Transocean (RIG), Yamana Gold (AUY)

Thursday – Activision (ATVI), Agnico-Eagle Mines (AEM), AIG, Assured Guarantee (AGO), Atwood Oceanics (ATW), Celgene (CELG), Dawson Geophysical (DWSN), Edison International (EIX), El Paso Corp (EP), Mirant (MIR), Nvidia Corp (NVDA), Priceline (PCLN), Public Storage (PSA), Toyota Motor (TM), Unilever (UN), VeriSign (VRSN)

Economic Data

Light economic week, peppered with a few speeches by Fed governors

Monday – ISM Services

Wednesday – Non-Farm Productivity, Pending Home Sales, Crude Inventories, Consumer Credit

Thursday – Initial Unemployment Claims, Wholesale Inventories

Friday – Trade Balance

Strategy/Outlook

We are looking for strong sectors to buy which have supporting fundamentals, such as energy, agriculture, and commodities, while we would look to sell sectors which have had a huge run up in the last month and a half which we don’t believe have fundamentals to back up the rally, such as investment banks and retail/consumer service companies. Like we said, we still believe this bear market rally is near a top, and are looking for attractive entries to the downside.