Monday Morning Outlook: When Technical Resistance and Bullish Seasonality Collide...
The DJIA, SPX, MID, and RUT are docked just below technical sticking points
by Todd Salamone 4/2/2011 2:00 PM
schaeffersresearch.com
Traders breathed a sigh of relief last week, after an endless gauntlet of employment data came in better than expected. The major market indexes wrapped up their best first quarter in more than a decade, and closed the week comfortably higher -- all in all, more than making up for a flattish month of March. However, it was impossible to ignore the fact that stocks finished Friday on a rather timid note, with bulls tapping the brakes just shy of key technical hurdles.
With the second quarter off to an impressive start, Todd Salamone highlights the critical technical levels to watch for the next five days -- including a first-ever run at quadruple-digit territory for the S&P 400 MidCap Index (MID). Meanwhile, Rocky White takes a look at bullish April seasonality, and discovers the potential implications of a solidly positive first quarter. Finally, we wrap up with a look at the week ahead, as well as a few sectors of note.
Notes from the Trading Desk: Key Technical Tests for the Major Market Indexes
By Todd Salamone, Senior Vice President of Research
"A few indicators caught our attention this past week which could align nicely for the bulls. For instance, evidence in the options market suggests some hedge funds may be in the early stages of accumulation again.... fear among equity option players hit a six-month high... the VIX is trading at a very small premium relative to SPX historical volatility... when the VIX reading and SPX historical volatility converge following a period of weakness, such situations usually mark bottoms and precede a period of bullish price action."
Monday Morning Outlook, March 26, 2011
Investors last week opted to ignore overseas uncertainty and instead focused on positive domestic news, bidding equities sharply higher for the second consecutive week. Stronger-than-expected employment numbers, a Fed survey indicating easing credit conditions for hedge funds, pension funds and private equity firms; plus continued merger-and-acquisition activity and impressive March auto sales all acted as catalysts to close out March in an impressive fashion and begin the seasonally strong month of April on a positive note.
But by Friday afternoon, equities ran out of steam, as technical-related selling appeared to cap an initially promising day. For example, we have discussed the importance of the 1,333 level on the S&P 500 Index (SPX - 1,332.41), which marks double the March 2009 low. After trading above this level on Friday morning, the index retreated back below it by later that afternoon.
Moreover, the SPX wasn't the only index contending with a major resistance area. The Russell 2000 Index (RUT - 846.77) climbed to its June-July 2007 peak in the 850 area on Friday morning -- but sellers quickly emerged, dampening hopes for this index to log a new all-time high. As a side note, the 850 area is about 150% above the March 2009 low.
Finally, the Dow Jones Industrial Average (DJIA - 12,376.72) had a battle of its own to fight, as it attempted to break through its 2011 closing high at 12,391, made on Feb. 18. The DJIA actually climbed above 12,400 in late-morning trading on Friday, but quickly retreated back below 12,400 and its 2011 closing high by the close. A move to Dow 13,000 would double the 2009 low.
One major index that did rise to new all-time highs is the S&P 400 MidCap Index (MID - 996.43). Whereas double lows or previous resistance areas made themselves known to the SPX, RUT and DJIA, it was an important round-number level on the MID that came into play last week, as the index made its first-ever run at 1,000 on Friday.
Looking back in history, are there any particular technical implications attached to 1,000 -- beyond its round-number significance? In 1995, the Nasdaq Composite (COMP - 2,789.60) was able to burst through 1,000 relatively quickly, but endured several pullbacks to this millennium mark for about a six-month period.
For the DJIA, it was a completely different story. Its first-ever attempt to climb above 1,000 in 1966 was rejected violently, and there were multiple runs at 1,000 in the years following that ended badly. It wasn't until November 1982 that the DJIA finally cleared 1,000 and never looked back. Gold futures, meanwhile, made their first run at $1,000 per ounce in March 2008, but it wasn't until October 2009 that gold finally rallied above $1,000 in an impressive, powerful breakout.
For the Dow and other major market indexes, important resistance levels lie just overhead that could impact short-term trading patterns. The good news for bulls -- as we have discussed in previous weeks -- is that the sentiment backdrop is one that suggests there is still firepower on the sidelines to drive equities through these critical overhead levels, as selling power may not be as great in reality as it looks in theory on a chart.
Indicator of the Week: April and Second-Quarter Seasonality
By Rocky White, Senior Quantitative Analyst
Foreword: Last Thursday was the final day of March, which ended the first quarter. In March, the S&P 500 Index (SPX) was down more than 5% halfway through month, just after the Japan disaster. Then it rallied strongly during the second half of the month to finish about even. To see if this recent bout of strength can continue, below I look at some historical data for the upcoming month and quarter.
April Returns: Looking at the SPX over the last five- or 20-year periods, there is no better month than April. Below are tables showing the average returns per month, as well as the percentage of positive monthly returns. As it turns out, April has the highest average return over both time frames. Also, note that it's the only month that has been positive in each of the last five years.
Quarterly Returns: April is also the start of the second quarter. Below is a table showing quarterly returns over the last 20 years. The second quarter is not nearly as bullish as the fourth quarter, but it's better than the first and third. One bearish point is that the second quarter has been negative more than any of the other quarters.
If you read the headlines -- which seem to be fairly glum on this market -- you may not realize it, but the SPX just had the best first quarter in over 10 years. The index was up 5.4% through the first three months of 2011, despite March being flat. The table below lists each year since 1975 that the market was up 5% or more in the first quarter. There's nothing too noteworthy about April's average return of 1.55%, because -- as we saw earlier -- April tends to show pretty good returns, anyway.
However, look at the SPX's returns for the rest of the year following a 5% first-quarter gain. They are very bullish. The last four times this occurred, the market saw double-digit percent gains the rest of the year. In the 11 previous occurrences when the first quarter was up 5% or more, there was only one time the market lost ground over the rest of the year. That year, of course, was 1987, in which the market crashed by over 20% in a single day.
This Week's Key Events: Bernanke Speech, Fed Minutes on the Docket
Schaeffer's Editorial Staff
Here is a brief list of some of the key events this week. All earnings dates listed below are tentative and subject to change. Please check with each company's respective website for official reporting dates.
Monday
*
Federal Reserve Chairman Ben Bernanke is scheduled to deliver a speech at the Atlanta Fed conference today. Schnitzer Steel (SCHN) will headline a relatively quiet day of earnings reports.
Tuesday
*
The economic calendar includes the Institute for Supply Management's (ISM) non-manufacturing index for March, as well as the minutes from the latest meeting of the Federal Open Market Committee (FOMC). KB Home (KBH), Layne Christensen (LAYN), and AngioDynamics (ANGO) are expected to report earnings.
Wednesday
*
Mid-week brings us the usual update on crude inventories, as well as the Chicago Fed's manufacturing index for February. On the earnings front, we'll hear from Monsanto (MON), Immucor (BLUD), and Ruby Tuesday (RT).
Thursday
*
The day's economic docket includes weekly jobless claims and February's consumer credit report. Quarterly earnings are due out from Constellation Brands (STZ), Pier 1 Imports (PIR), and Rite Aid (RAD).
Friday
*
The sole economic announcement of note is the government's wholesale inventories report for February, and Blyth Industries (BTH) is the only company on the earnings calendar.
And now a few sectors of note...
Dissecting The Sectors
Sector
Automotive
Bullish
Outlook: The earthquake and tsunami in Japan have cast doubts over automakers and auto parts issues, as supply disruptions and shortages are now points of concern. By now, we feel these concerns have been factored into the shares. In fact, pullbacks can be viewed as buying opportunities for select stocks. BorgWarner (BWA) continues to impress, with the stock finding its way to a new all-time high of $81.84 on Friday. With more than 12% of BWA's float sold short, there's plenty of cash left on the sidelines to fuel future gains. Meanwhile, Navistar International (NAV) is also holding up well, rising to a multi-year peak of $70.82 last week. However, we remain skeptical of domestic manufacturers such as General Motors (GM) and Ford (F). Both stocks rallied Friday after reporting solid March sales data, but ended the week just beneath familiar technical resistance levels.
Sector
Leisure
Bullish
Outlook: A recent Fortune article claimed the "U.S. consumer is under attack," even as the Commerce Department reported that retail sales rose to a four-month high in February. And during the past three months, investors have withdrawn cash from the Fidelity Leisure fund, despite a strong one-year return. This continuing skepticism in the face of solid fundamentals creates appealing contrarian opportunities for select leisure stocks. Within the group, we continue to find Wynn Resorts (WYNN), Netflix (NFLX), and Chipotle Mexican Grill (CMG) particularly appealing. All three stocks combine positive price action with healthy short-to-float ratios and skeptically skewed analyst ratings, suggesting that there's still plenty of cash that could still flow into these outperforming equities. In fact, WYNN rose to its highest price since November 2007 on Friday, thanks to record-high gambling revenues in Macau. CMG, meanwhile, wrapped up the week by finding a fresh peak on the charts, while NFLX is hovering within striking distance of an all-time best.
Sector
Coal & Natural Gas
Bullish
Outlook: We continue to favor coal, particularly as investors rediscover the sector in the wake of Japan's nuclear crisis. The Market Vectors Coal (KOL) exchange-traded fund (ETF) made a decisive breakout beyond short-term pressure in the $50 region last week, notching a Friday close above this round-number level for the first time since July 2008. Within the group, we still favor International Coal (ICO). The stock is stair-stepping steadily higher, hitting a new high of $11.62 as recently as Friday -- yet nearly 10% of ICO's float is sold short, raising the possibility of short-covering support. Patriot Coal (PCX) is another stock to watch in the sector, after collecting its highest weekly close since September 2008. Going forward, upgrades could help the stock extend its rebound. Currently, Zacks reports just five "buys" out of 16 total analyst ratings. Meanwhile, despite an 18% increase in the Fidelity Natural Gas fund in the three months ending February, investors have withdrawn cash. Moreover, the $989 million in total assets pales in comparison to the $2.6 billion in total assets this fund achieved in mid-2008. Strong price action and a lack of euphoria about the natural gas sector make it a compelling long play, particularly in the wake of President Obama's vow to reduce the country's dependence on foreign oil imports. EOG Resources (EOG) has established a solid foothold above former resistance at $115, with the stock up nearly 30% year-to-date. However, there are only 14 "buy" ratings among the 34 analysts following the shares -- leaving plenty of room for upgrades.
Beautifully written Sun Tzu if somewhat off point.
Keep in mind that all I was really saying is you want to buy the component manufacturers rather than the box makers. No matter how cheap it gets to buy a communication device many chip manufacturers and chip equipment stocks with high betas will have cyclical lows that offer tremendous buying opportunities. As cycles unfold investors get to sell much higher.
I don't care what kind of technology sells the best in the future. I don't care if they implant chips in our heads so we can communicate without a device by merely thinking who we want to contact. Bottom line though is that there will opportunities to make money in the stocks we discuss here.
Arguing over whether notepads, smart phones, PC's and laptops will be winners, or losers, is silly.
I still don't care.
RtS |
