Weekly Financial Market Recap and Outlook

by Jeffrey Friedman

Last week we had limited economic news, but the stock market felt the sting of a stream of weak quarterly earnings reports, ending the week with declines. A flight-to-quality bid boosted Treasury prices amid concerns of continued economic weakness. Expectations the Federal Reserve will continue lowering near-term interest rates has kept the short end of the yield curve low, while inflation expectations have created a floor for the longer rates.

Meanwhile, we had another all-time high in crude oil last week. NYMEX crude oil futures saw a big surge Wednesday due to a surprisingly large drop in crude supplies, leading to an intraday high of $112.21 per barrel and settling at a record high of $110.87 per barrel. Prices eased a little on Thursday and Friday on comments by Saudi officials that they would not be cutting back on production and on the IEA lowering its forecast for global oil demand. Let’s take a more detailed look for some of the markets as we start the trading week.

Stock Indexes

Early earnings reports for the first quarter point to continued weakness in consumer and financial sectors. While the worst of the credit crunch is likely over, its effects on the markets and the economy are likely to linger more than we had been expecting.

Last week, technology stocks led decline in the equity market. Major stock indexes were down substantially. The Dow Jones Industrial Average fell 2.3 percent; the S&P 500, was down 2.7 percent; the Nasdaq was down 3.4 percent; and the Russell 2000 was down 3.6 percent. The one broadly positive day for the week was Thursday, April 10, with technology stocks leading the way on news that Yahoo! and AOL could merge. An upgrade of Cisco by Morgan Stanley also helped the sector.

Friday brought more sobering news on earnings as heavy-weight GE reported weaker-than-expected earnings. GE is seen as even more of a bellwether than UPS, and some consider GE stock to be like a mutual fund because of the diversity of businesses within GE. Also, dragging stocks down was the University of Michigan’s consumer sentiment index which fell to the lowest level since March 1982. Overall for the week, the earnings and warnings news point to continued weakness in the consumer and financial sectors.

For the year-to-date, major stock indexes remain negative as follows: the Dow, down 7.1 percent; the S&P 500, down 9.2 percent; the Nasdaq, down 13.7 percent; and the Russell 2000, down 10.2 percent.

As a new week of trading gets underway, more earnings are coming in, creating a slightly negative tone. Wachovia reported a first-quarter net loss of $350 million and announced it cut its dividend 41 percent.

In other fundamental reports, March retail sales were not quite as bad as many forecasters had predicted, rising 0.2 percent. Sales fell a revised 0.4 percent in February, according to the Commerce Department.

Looking at S&P futures from a technical standpoint, the June contract was sharply lower on Friday and below the 20-day moving average at 1342, suggesting that a short-term top has been posted. Momentum indicators, stochastics and the relative strength index (RSI) remain bearish, hinting that sideways to lower prices are possible near-term. Friday’s close below the 20-day moving average opens the door for a possible test of the reaction low at 1310 as the next downside target. Closes above Friday’s high at 1369 could temper the near-term bearish outlook in the market.

For day traders, I see the market force as neutral to bearish. Watch for lower, early prices to catch support above 1324 and rebound for the day. Caution: if the market cannot hold 1324, then watch for run toward 1316.

Interest Rate Policy

The minutes of the March 18 FOMC meeting, released April 8, could best be described as the gloomiest in some time, and place the Fed squarely between a rock and a hard place. Economic growth has been downgraded in the Fed’s view, while inflation is not cooperating. Even though two voting members of the FOMC voted against lowering the Fed funds target rate at the March meeting, some members saw the economy as possibly being headed toward a very contracted recession. There were several themes behind the lowering of the forecast for economic growth. These included a continuing credit crunch, depressed housing and with its effect on the consumer, a weaker labor sector, and higher energy costs weighing on the consumer.

Across the pond, the Bank of England lowered its key interest rate by 25 basis points to 5.0 percent last week, as expected by the financial markets. The Bank previously had lowered rates at its February 2008 meeting. The European Central Bank governing council once again left its key interest rate at 4 percent. ECB President Jean Claude Trichet remains unswervingly committed to fighting inflation, in spite of expectations that eurozone growth will slow along with the rest of the global economy. Bank of Japan kept its key interest rate at 0.5 percent amid concern that the economy is vulnerable to a recession.

The euro currency soared to record highs last week against both the pound sterling and the U.S. dollar. The euro currency touched a record high of $1.5910 against the dollar in intraday trading. However, the euro pared its gains Thursday after ECB President Trichet said he deplored the recent “excess volatility” in exchange rates. The pound fell to a record low against the euro Tuesday after a report said house prices dropped 2.5 percent last month, which added to the case for Thursday’s interest rate cut, while the dollar’s move came as crude oil prices climbed above $110 at mid-week. Watch action in the dollar and euro if you trade crude oil or other commodities this week.

Turning to futures, the ICE June Dollar Index futures contract closed lower on Friday as it consolidated below the 20-day moving average at 72.45. Stochastics and the RSI remain bearish, signaling that sideways to lower prices are possible near-term. Closes below last Monday’s low at 71.70 could open the door for a possible test of March’s low at 71.20. Closes above the reaction high at 73.70 are needed to suggest that a short-term low has been posted.

Financial Fundamental Reports: Week of April 14 – April 18, 2008

Please feel free to contact me for further information about the markets, or more specific trading strategies. Good luck and good trading!

Jeff Friedman is a Senior Market Strategist with Lind Plus. He can be reached at 866-231-7811 or via email at jfriedman@lind-waldock.com. Join Jeff for his monthly webinar, Friedman’s Futures Forecast, by visiting Lind-Waldock’s events page.

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