Correction in the weeks ahead?

"It may not feel like it, but stocks put in their best first-quarter performance in years. Despite rising interest rates and oil prices near $70 a barrel, the Dow Jones Industrial Average gained 391.82 points, or 3.66%, to 11109.32 in the quarter, its biggest first-quarter gain since 2002, though it slid 41.38 points Friday. The Dow industrials started the year off on fire, rising five straight days and pushing through the 11000 level for the first time since June 2001." -- The Wall Street Journal, March 31, 2006

The major indexes finished mixed last week as the equities markets responded to the ramp in bond yields.  The NASDAQ Composite (COMP | Quote | Chart | News | PowerRating), which has underperformed for weeks, finally resumed its leadership role. Internet and Chip shares were extremely strong, as market players finally flocked back growth names.  The Russell 2000 index (RUT | Quote | Chart | News | PowerRating) also continued its winning ways, as the index posted another new all-time high.  Meanwhile, interest rate-sensitive shares lagged, largely due to somewhat hawkish comments by the Fed on Tuesday.  In particular, Housing shares continue to struggle because of the lethal combination of both rising rates and inventories. 

On Tuesday, the much anticipated Fed announcement ended up being a lot of hoopla about nothing as the bias policy was very similar to the previous announcements.  This seemed to be a bit of a disappointment to the equities markets, due to all the recent talking head hype about the Fed being done with interest rates.  Mr. Bernanke and Co. made it clear that further tightening may be necessary to maintain price stability (i.e. crimp inflation).  This, in turn, leaves the equities markets in a position where uncertainty over monetary policy remains an obstacle.  Only now, both short-term and long-term rates are reaching levels where they threaten economic growth.  Also, higher rates also provide formidable competition for investment dollars.  If someone can receive 5% risk-free, it likely makes them question whether it's worth the extra risk from investing in equities.  This is a far different situation from when the Fed started its tightening cycle and short rates were at just 1.25%.  With that said, it would not surprise me to see a correction in the weeks ahead, as equities begin to price in higher rates moving forward.

Daily Pivots for 4-3-06

Please feel free to email me with any questions you might have, and have a great trading week!

Chris Curran

chris@tradewindsonline.net