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Weekly market recap: S&P retreats from new highs

DIA - April 5, 2014
DIA - April 5, 2014
OptionsAnnex.com

For the week ending April 5, 2014

Overview

The markets ended mixed this past week with only the Nasdaq down due to rotation out of technical stocks and into less risky (low beta) blue chips (S&P and Dow). The S&P made new highs this week after a weaker than expected Jobs report, but then dropped 23.68 points (-1.25 percent) by the close on Friday; by comparison, the Dow dropped 159.84 points (-0.96 percent) and the Nasdaq Composite dropped 110.01 points (-2.60 percent).

Most of the economic reports were positive: Motor Vehicle Sales rose dramatically to 13.0 million (12.2 million prior month); ISM Mfg Index rose to 53.7 (vs. 53.2 prior month); Factory Orders rose to 1.6 percent (vs. -1.0 percent prior month); and the ISM Non-Mfg Index dramatically rose to 53.1 (vs. 51.6 prior month). Negative economic news included: Average Hourly Earnings flat at 0.0 percent (vs. 0.4 percent prior month); and Chicago Purchasing Index dropped to 55.9 (vs. 59.8 prior month).

Globally, international markets outperformed U.S. markets: MSCI EAFE gained 1.5 percent, led higher by the rally in the Nikkei 225 which rose 2.0 percent; Europe's SXXP 600 and Britain's FTSE 100 also rose as the situation in the Ukraine has eased. The U.S. Dollar gained between 3 and 4 percent over the Yen, Euro, and Pound.

China has instituted a mini-stimulus program in an attempt to improve its lagging GDP. Some of this spending is simply moving forward planned infrastructure projects (rail, social housing); additionally, there will be new spending of $48 billion on new rails and $161 billion on new social housing. Part of this spending will be financed by issuing $24 billion in bonds. There is a rumor that China faces a massive cash crunch which could cause conditions to deteriorate quickly.

In The News

Rumor has it that the FBI has launched a probe into high speed trading (HST) to determine if there is any insider trading. The FBI will also determine if HST is falsely creating the appearance of market activity by placing and immediately cancelling orders. See FBI Probe.

Peace talks in the Middle East came close to a collapse on Tuesday when Palestinian Authority President Mahmoud Abbas took steps to join 15 international agencies in an attempt to gain statehood outside the negotiation process (in defiance of Israel and the U.S.). See Palestinian Statehood Bid.

Five-year bond yields in Spain are currently lower than equivalent five-year U.S. Treasury yields; an extraordinary event considering Spanish bond yields in 2011 and 2012 averaged nearly 5 percent. This indicates the following: first, faith in Spain's ability to service its debt; second, expectations that the ECB will further monetary easing; and third, expectations the Fed eventually tightening monetary policy. See Spain's 5-year Yields.

Next Week

With little economic news, the focus next week will be on the Fed's FOMC Minutes on Wednesday. Market expectation is for tapering to continue with the Fed reducing its purchase pace of mortgage-backed securities to $30 billion monthly, and to $35 billion monthly for longer-term Treasuries. The pace of reduction will " remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.”

The Fed's forward guidance will no longer rely on a 6.5 percent Unemployment Rate threshold, but will rely on a wide range of other factors: “Including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.” In the last statement, the Fed forecast that the Federal Funds Rate will increase 1 percent by the end of 2015. In Fed Chair Yellen's last press statement, she said: “we know we’re not close to full employment… and unless inflation were a significant concern, we wouldn’t dream of raising the federal funds rate target.” See FOMC Expectations.

We are expecting increased volatility early next week in front of the FOMC Minutes on Wednesday. Given the large drop on Friday, it is possible that Monday will see a continuation downward. Earnings season starts Tuesday, with JPMorgan and Wells Fargo posting on Friday. The expectation is profits will be flat year-over-year with revenues increasing around 3.5 percent. The forward P/E Ratio is 16 as stocks increase in price. Pundits are now anticipating a correction in May if the economy falters.

Market Gauge

Year-to-date the markets are mixed: Dow -0.39%; S&P500 1.45%; Nasdaq -0.86%.

The Markets for the past week were: DJIA up 0.58%; S&P500 up 0.44%; Nasdaq COMP down -0.65%.

Commodities (ETFs) for the past week were: Gold (GLD) up 0.81%; Silver (SLV) up 0.52%; Oil (OIH) up 0.56%; Dollar (UUP) up 0.28%; 30-yr Bonds (TYX) rose 4 basis points to 3.59%.

The VIX this past week (a measure of market sentiment and volatility) dropped to 13.96% due to improving economic news and China's new mini-stimulus program.

Top Headlines

To view details of headlines, go online to CNBC.

In the U.S.: Jobs report right mix for stocks; How is monthly jobs report compiled?; What’s the real unemployment rate?; Fisher: Guidance shouldn't be binding; Jobs market bounces back as weather effects wane; Why I'm bearish on Friday's jobs report: Pro; Spring thaw? Private sector ramps up job creation; US factories shrug off winter freeze in Feb. surge; US manufacturing continues steady march: Surveys; US mortgage applications slip on weak refi demand; Ryan's budget proposes deep cuts in domestic programs; Capitalism risks becoming 'not fit for purpose'; Is the minimum wage fair?; Yellen: Fed's in it for long haul with cheap money; Why Democrats need a stellar jobs report Friday; US Midwest business activity lowest since August; Economic growth slowing? We’re about to find out; US consumers step up spending, but sentiment slips; Minimum wage hike's unexpected drawback for the poor; Fed's Evans: No rate rise until second half of 2015; Spring is sprung! US income, spending rise in Feb.; 3 reasons the US manufacturing comeback is no myth; and $1 trillion student loan debt widens US wealth gap.

In Europe: Europe’s greenest and cleanest cities; ECB ‘really concerned’ about inflation; ECB action coming soon: Ex-member; BoE says funds can be 'too big to fail'; Bidding war tests France’s free market thinking; Russia raises gas prices for Ukraine by 80%; EU lawmakers vote to end mobile roaming fees; How real is the euro zone recovery?; Draghi hits back at IMF as ECB holds fire; Satellite set to launch huge earth data collection; Miley twerks her way into Russian sanctions row; For rich Russians, UK schools in class of their own; Ukraine and bad weather push up food prices: UN; Euro zone businesses see strongest quarter in 3 years; UK service sector expands steadily in March: PMI; IPO-hungry investors take bite out of Just Eat; Russia sanctions: Companies may not face backlash; IMF calls on ECB to act amid 'low-flation'; El-Erian: The ECB's policy dilemma—to act or punt?; Can Russia come back from the cold?; France: Hollande’s ‘best friend’ becomes finance minister; Harassment at work: These sectors are the worst; How many European banks would pass US stress tests?; and How many European banks would pass US stress tests?.

In Asia: China regulator to run stress tests on banks; Picking out the high flyers in Asia; This is how much China's economy is shrinking; Meet the man tipped as India’s next leader; Have investors been too harsh on Japan?; First K-Pop and shops, now this lures Chinese to Korea; China stimulus: Is Beijing going back to its old ways?; China 'panicking' in face of sluggish growth: Chanos; Muddy tract is China's answer to Wall Street; China central bank repeats pledge on liquidity; China mulls relaxing housing curbs: How far will it go?; Rupee overvalued? RBI's Rajan isn’t worried yet; Asia shopping malls: The 'must-have' investment?; Australia mining: Where's the smart money going?; China’s shadow lenders: Here’s how one is thriving; China takes first step to steady economic growth; Last 'BRIC' standing: Why analysts like India now; Apple again seeks decisive ruling against Samsung; Asos eyes China’s 20-somethings as profits slide; Are markets rigged? Asia experts weigh in on debate; Aussie dollar strength: Why it's here to stay; and Will Goldman be right on China this year?.

Weekly Review

To see the week in review, go to the Econoday calendar.

On Monday, with Fed Chair Yellon publicly stating the economy will need support for quite some time, the Dow rose 8% to 16,457.

On Tuesday, with good economic news (especially vehicle sales), the Dow rose 0.5% to 16,532.

On Wednesday, with mixed economic news and factory orders showing solid strength, the Dow rose 0.2% to 16,573.

On Thursday, with mixed economic news and ISM Non-Mfg Employment Index rebounding strongly, the Dow was flat at 16,572.

On Friday, despite a decent jobs report (up 192,000) and an unchanged unemployment rate, the Dow dropped -1.0% to 16,412.

Next Week's Calendar

To see what's on the calendar for next week, go to the Econoday calendar.

The economic calendar for next week is light: on Monday – FedSpeak; on Tuesday – FedSpeak; on Wednesday – Weekly EIA Petroleum Status Report, FOMC Minutes, FedSpeak; on Thursday – Weekly Jobless Claims, Import and Export Prices, Treasury Budget, FedSpeak; and Friday – PPI-FD, Consumer Sentiment.

If the Markets move down, stay on the side lines or consider Contra ETFs. For Option players, selling premium is advised. To learn more about options and earning consistent weekly income, go to optionsannex.com.

To the Charts

The following ETFs (DIA, SPY, QQQ) provide a technical review of the Market (and are also excellent Option trading vehicles). Represented are the Dow Industrials (DIA), S&P500 (SPY), and Nasdaq 100 (QQQ).

The Charts for each include views for Monthly, Weekly (including Price Channels), and Daily (including monthly Pivot Points) with MACD and Stochastic indicators. The Pivots are: white for central pivot point; yellow for R1 and S1; magenta for R2 and S2; red for R3 and S3.

DIA

The Dow Industrials (DIA) closed up at 163.88. If the DIA drops, then the next level of support will be at 153.12 (weekly chart); the next level of major resistance is 165.06 (weekly chart).

The monthly chart indicates a bullish posture (up Arrow) with the MACD positive but weakening, and the Stochastic moving up above the overbought area.

The weekly chart indicates a bullish posture (up Arrow) with the MACD positive and strengthening, and the Stochastic moving up at the overbought area.

The daily chart indicates a bearish posture (down Arrow) with the MACD positive but weakening, and the Stochastic moving down at the overbought area.

SPY

The S&P500 (SPY) closed up at 186.40. If the SPY drops, then the next level of support will be at 173.71 (weekly chart); the next level of major resistance is 189.70 (weekly chart).

The monthly chart indicates a bullish posture (up Arrow) with the MACD positive but weakening, and the Stochastic moving up above the overbought area.

The weekly chart indicates a bullish posture (up Arrow) with the MACD positive but weakening, and the Stochastic moving down at the overbought area.

The daily chart indicates a bearish posture (down Arrow) with the MACD positive but weakening, and the Stochastic moving up at the overbought area.

QQQ

The Nasdaq 100 (QQQ) closed down at 86.37. If the QQQ drops, then the next level of support will be at 83.74 (weekly chart); the next level of major resistance is 91.36 (weekly chart).

The monthly chart indicates a bullish posture (up Arrow) with the MACD positive but weakening, and the Stochastic moving down above the overbought area.

The weekly chart indicates a bearish posture (down Arrow) with the MACD positive but weakening, and the Stochastic moving down toward the midpoint.

The daily chart indicates a bearish posture (down Arrow) with the MACD negative and weakening, and the Stochastic moving up above the midpoint.