The major indexes finished mixed in what turned out to be quite a volatile week of trading.  Once again, it was Fed comments that saved the equities markets when they appeared to be headed towards a severe correction.  For the first 3 sessions of the week, equities traded with a negative bias, as every rally was used as an opportunity to sell.  On Thursday morning, stocks were under heavy pressure because of an unexpected rate hike by the Chinese central bank.  This weakness reversed, however, when Fed Chair Bernanke issued comments in front of Congress that the Fed might pause on further rate hikes as they wait to see further data.  In the past, these sort of comments would have likely triggered significant gains, but the upside was limited again late Thursday and Friday.  Financial and Precious Metal shares were the upside leaders, while Tech continued to underperform over the past 5 sessions.

It's hard to believe stocks have held up as well as they have recently, given that oil prices are now hovering around $75 per barrel (which has driven gas prices up over $3.00 per gallon nationally).  Additionally, the housing market has started to slow and the 10-year note has risen above 5.00%.  Even more concerning is the fact that the Fed remains in a tightening mode.  Despite the lackluster behavior of the big cap averages recently, the major indexes are still up for the year.  Even more impressive has been the Russell 2000, which is up roughly 14%.  The Investor’s Intelligence Sentiment Survey that was released last week showed that more than 28% of respondents were uncertain about future direction, the highest in almost 2 years.  The bulls will tell you that uncertainty while equities are trading at new highs is slam-dunk bullish, but history will tell you something else.  The last 5 times the S&P 500 traded at a new high and at least this many folks were neutral, a month later the index was positive only 1 of those 5 times, with an average return of –2%.  The time before that was July, 1987.

Without question, the equities markets have climbed a proverbial “wall of worry.”  The only problem is that much of the recent gains have likely been driven by hopes of the Fed pausing.  This, in turn, could very well steal some of the gains if and when the Fed actually does stop raising rates.  Nonetheless, this possibility will likely limit the downside for the market, at least to some degree.  The million dollar question is, if the Fed does pause, will the markets be able to withstand the remaining head winds it faces? 

Daily Pivot Points for 5-1-06

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

Chris Curran