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[Excerpted from Bill Cara's Week in Review #18, 2009]

One of the defining features of the US equity market over the past several weeks has been the furious sector rotation, with one sector strongly bid from the opening bell, but with no obvious catalyst to fan the bullish flames. On Wednesday the Financials were all the rage, followed by Semiconductors on Thursday, and on Friday the economic recovery trade appeared, as Basic Materials and Oil & Gas stocks (i.e., the inflation trade ex-gold) were in high demand from the outset.

All one-day wonders, i.e., no follow-through as the market seems to have amnesia from one day to the next. So, what’s going on here?

We have to assume these are black box strategies, designed to capture relative value (and incrementally increase returns) or to game the system. Like a gun can be used for different purposes, we don’t know the answer; however, the accompanying lack of transparency in the financial markets today hinders money managers from buying large stakes in a company over time. The week-to-week risk of holding illiquid positions simply isn't worth the reward, so everyone is forced to essentially be a day trader -- Buy what is hot in the morning, close the trade on the bell, come into the office they next day and do it all over again.

This gets tiring.

If the insiders have a scam going on, they simply gap open their stocks, and the rest of us are frozen out. However, this situation cannot continue for long. Market volume will contract as traders become disillusioned with the seemingly randomness of trends, burned out by the stress of trying to anticipate the next pocket of strength over the next 24 hours. Participants have to feel the risk they take is worth the potential reward, or they will take their capital elsewhere.

Even American pro traders might start looking to London, Hong Kong, Singapore or Toronto if this stuff keeps up. Nobody is forcing us to trade US listed securities. At the end of the day, we could leave the NY market to the likes of Goldman Sachs and JP Morgan. Then they get to control New York as well as Washington.

Seriously. Have you seen the volume? It’s HB&B’s black boxes making as much as 40% of all trades. And few of us want to be long more than a day. That ain’t healthy for the equity market. Bring in a transaction tax now and I’m sure they’ll have the casino to themselves, ie, nobody else playing.

Global Economics Review

Weekly International Economic Report .

I put much time and effort into summarizing Econoday’s informative, concise, and objective reports because they actually teach people something that can be used in trading decisions. I leave the links in because the individual reports contain terrific charts and other information, and after the report is published, the link leads to the updated report.

Here are the key US economic reports on last week’s calendar, which was a very busy one.

US Consumer Confidence for April. After the data was released, Econoday reported, “Pessimism may be easing as consumer confidence posted its biggest one-month jump in four years, to 39.2 in April from 26.9 in March (revised higher from 26.0). Expectations really improved, up nearly 20 points to 49.5 suggesting that consumers see recovery ahead. In an important plus on the psychology front, consumers see stable conditions ahead for prices. On the negative side, the current assessment of the jobs market shows no improvement with 47.9 percent saying jobs are hard to get, a reading that points to no let up in monthly payroll contraction… Confidence doesn't always relate one-to-one with spending but these results will raise talk that the worst may be over for the retail sector and in turn for the whole economy. Stocks bounced higher in immediate reaction to the report while Treasuries bounced lower.”

US 1Q2009 GDP index. Econoday reported: “First quarter GDP contracted more than expected but most of the weakness was in lower inventories. The consumer was stronger-than-expected. Overall, spending is not as weak as broad GDP. The Commerce Department's initial estimate for first quarter GDP dropped an annualized 6.1 percent, and followed a 6.3 percent contraction the prior quarter. The first quarter was worse than the consensus forecast for a 5.0 percent decline… The first quarter decrease was led by a $103.7 billion cutback in inventories, followed by a 3.9 percent annualized drop in government spending. The fall in government purchases was due to declines in both defense spending and state & local government spending. Housing continued to fall sharply along with business fixed investment. On the positive side, consumer spending picked up to a 2.2 percent gain after a 4.3 percent decrease in the fourth quarter. Net exports also improved… But in terms of demand, real final sales of domestic product fell only 3.4 percent in the latest quarter (GDP less change in private inventories) while real final sales to domestic purchasers declined 5.1 percent annualized (purchases by U.S. residents of goods and services wherever produced)… On the inflation front, the GDP price index jumped 2.9 percent, after a 0.5 percent annualized increase the prior quarter. The market had projected a 1.8 percent increase. The headline PCE index slipped 1.0 percent, following a 4.9 percent decline in the fourth quarter. Core PCE inflation firmed with a 1.5 boost, after nudging up 0.9 percent annualized in the fourth quarter… Year-on-year growth for real GDP contracted by 2.6 percent after dropping 0.8 percent in the fourth quarter… The bottom line is that the worse-than-expected decline was due to inventory adjustments. The consumer is doing better than expected. This is good news. If the consumer is holding up, the economy will not fall off a cliff. The report should be favorable to equities and also firm interest rates due to better-than-expected consumption. Foreign exchange markets were mixed on the news.”

FOMC policy meeting decision released April 29. Econoday reported, “The FOMC again kept its target rate unchanged at zero percent to a quarter percent and maintained its plan for quantitative easing as announced in recent FOMC meetings. The Fed left the discount rate unchanged at 0.50 percent. Notably, the FOMC made a modest upgrade for the economy, stating that "the economy has continued to contract, though the pace of contraction appears to be somewhat slower." Nonetheless, the Fed sees a sluggish economy continuing with "economic activity is likely to remain weak for a time." There is an expectation that monetary and fiscal policy will lead to stabilized financial markets and economic recovery but no timetable was given. Also, inflation is expected to be subdued… There was no change in the Fed's announced plan for expanding its balance sheet… "As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is facilitating the extension of credit to households and businesses and supporting the functioning of financial markets through a range of liquidity programs. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of financial and economic developments." … Some may see the Fed as not being aggressive enough in expanding its balance sheet to inject additional liquidity. Although not stated, this may be due to concern by some FOMC participants that the combination of about $2 trillion in expansion of the Fed's balance sheet with additional deficit spending of $2 trillion by the Treasury in coming quarters is going to be very stimulative at some point. However, the vote for today's Fed action was unanimous, 10 to 0. … Markets saw the statement much as expected as equities were little changed immediately after the announcement. ”

US Personal Income and Outlays data for March. After the data was released, Econoday reported, “Personal income in March fell further as consumer spending retreated from recent gains. Yesterday's GDP report apparently gave a misleading picture of relatively healthy consumer spending. Meanwhile PCE inflation came in mixed. Personal income fell 0.3 percent, following a 0.2 percent dip in February. The March decrease was worse than the market forecast for a 0.2 percent decline. Within personal income, the wages and salaries component fell a sharp 0.5 percent, after dropping 0.4 percent in February. Consumer spending turned negative again with a 0.2 percent decrease after gaining 0.4 percent in February. March spending was below than the market projection for no change… PCE inflation was mixed as the headline PCE price index was unchanged, coming off a 0.3 percent jump in February. Meanwhile, the core PCE price index posted another 0.2 percent increase in March – the same as for the prior two months – and matched market expectations… Year on year, personal income growth fell to 0.3 percent from 1.0 percent in February. Headline PCE inflation dipped to 0.6 percent from 0.9 percent the previous month. However, core PCE inflation held steady at 1.8 percent… The March personal income report is more pessimistic about the consumer sector than yesterday's first quarter GDP report in which spending was up for the quarter. Now, the more current personal income report shows consumers having less income to work with and a pullback in outlays at the end of the quarter. This indicates possible erosion of the consumer sector in second quarter GDP… Today's report should be negative for equities and should ease bond yields. Another record high for continuing jobless claims should have the same impact.”

US Employment Cost Index for Q1. Econoday reported, “Labor costs are subsiding significantly, posing no inflationary risks. Readings across the first-quarter employment cost report are at record lows in more than 25 years of data including a 0.3 percent quarter-to-quarter rise in the main index. The year-on-year rate is also at a record low of 2.1 percent. Wages & salaries rose only 0.3 percent with wages & salaries for financial activities down 1.0 percent. Benefit costs were up 0.5 percent reflecting gains in blue collar groups, groups that are protected by contracts.”

US Business Activity report for Chicago region for April. After the release of the data, Econoday reported, “The rate of descent is definitely slowing in the Chicago area where the purchasers' index jumped nearly 10 points to 40.1, still sub-50 to indicate contraction but nevertheless a big gain. There's improvement across the report led importantly by new orders which jumped more than 11 points to 42.1. Backlog orders also showed less month-to-month deterioration, at 36.9 vs. March's 21.3. The Chicago report draws its respondents from across industries whether manufacturing or non-manufacturing. Order readings from the ISM had been mixed to improving in recent months and today's results point to solid improvement for both ISM reports… Other readings out of Chicago include a faster rate of inventory liquidation, showing that businesses are still resetting to a lower level of demand, and also a drop in prices paid which may be a surprise given this month's firmness in many commodity prices including oil. Stocks are extending opening gains in reaction to the report.”

US Jobless Claims for the week of 4/25. Econoday reported, “A huge jump in continuing claims headlines a mostly negative jobless claims report. Continuing claims in the April 18 week jumped 133,000 to 6.271 million, another record level and the 15th straight increase. A month-to-month comparison, useful for a gauge on the April employment report, shows significant deterioration, up 704,000 from 5.567 million at mid-March… Now the good news. Initial claims appear to have peaked in March, pointing to similar relief ahead for continuing claims. Initial claims totaled a lower-than-expected 631,000 in the April 25 week with the four-week average at 637,250, well down from a peak near 660,000 at the beginning of the month… The Labor Department said there are no special factors distorting the data and that the contraction is evenly distributed across jurisdictions. There was no significant reaction to today's 8:30 headlines but today's claims report does point to deeper lows in next week's employment report.”

US Motor Vehicle Sales for April. After the release of the data, Econoday reported, “Vehicle sales show little month-to-month change in April, at a 6.9 million unit adjusted annual sales rate vs. the same rate in March. Sales at now bankrupt Chrysler show severe month-to-month contraction. These numbers are for North American-made vehicles which make up the bulk of total U.S. sales. Imports sold at a 2.5 million pace, sizably down from 2.9 million in March. These numbers won't raise expectations for a rebound in April retail sales. Chain stores will begin posting their individual results for April through next week with the bulk of reports out on Thursday. Optimism on the economic outlook will not improve if the retail sales report, to be posted at mid month, proves as big of a disappointment in April as it did in March.”

US Consumer Sentiment Index for April. After the release of the data, Econoday reported, “Consumer sentiment picked up in the final April reading, confirming a run of positive consumer confidence readings. The Reuters/University of Michigan index rose to 65.1 from a mid-month reading of 61.9 and a March reading of 57.3. Like Tuesday's report from the Conference Board, today's report shows strength in expectations, at 63.1 vs. 58.9 at mid-month. Strength in expectations indicates that consumers may think the worst is now behind. Inflation expectations eased back a bit but remain stable at 2.8 percent for both the 1-year and 5-year outlooks. Stocks rose in reaction to the report.”

US ISM Manufacturing Index for April. After the release of the data, Econoday reported, “The ISM's manufacturing index continues to show slowing rates of contraction, at 40.1 in April vs. 36.3 in March. In an important plus seen in regional reports, new orders really improved, at 47.2 for a 6 point jump from March. Backlog orders also improved, up 5 points to 40.5. Inventories, needed to fill the rise in existing orders, may now be in balance. The customer inventories index fell back 4-1/2 points to 49.5 to indicate that firms think inventories are just right at other firms… Employment even picked up, rising more than 6 points to a still very weak 34.4. Prices paid, despite firmness in energy prices, continues to indicate steep contraction at 32.0… Stocks got a only bit of a lift from this report. One factor that limits its impact is the pending shutdowns in the transportation sector, a factor that will pull on readings in the coming months.”

US Factory Orders for March. After the release of the data, Econoday reported, “Factory orders fell 0.9 percent in March showing an even mix between a 0.8 percent decline in durables and a 1.0 percent decline in nondurables. Inventories fell 0.8 percent to confirm that destocking is deep, a big plus that points to easing strains ahead for the factory sector. Shipments fell 1.2 percent in the month but this component may show life in April given the big improvement seen in new order data in today's ISM report. This report for March is overshadowed by the ISM report which offers a look at April. But it's the look ahead at shutdowns in the transportation sector, which will begin to hit soon, that clouds the whole outlook for the manufacturing sector.”

Sector ETF Summary for International equity markets

The US market boost in the afternoon Friday a week ago gave the international equity markets a boost to begin this week. Same thing occurred in the final 15 minutes of this week. How long can this game go on?

Although this was another strong week in the international markets, there were a few signs of weakness this week. The EWC ETF for Canada gained +3.26% on Friday, which pushed it to a W/W gain of just +2.22%, so it was a loser Monday through Thursday. Russia (RSX) gained +2.96% on Friday, leading to a W/W gain of just +0.28%. Japan (EWJ, -0.12%) and China (GXC, -0.29%) ended the week losers, although it should be noted that May Day is a major holiday in much of the world and this was a very short week in many countries.

The big winner this week was the UK (EWU, +5.52% W/W including a gain of +2.73% on Friday).

US Equity Markets Review

This week the Nasdaq (+1.47% to 1719.20), S&P 500 (+1.30% to 877.52), DJIA (-1.68% to 8212.41), and Russell 2000 (+1.72% to 486.98) closed the week higher with RSI levels headed north for all series (M, W and D). But the Russell small cap 2000 ($RUT -0.12%) did suffer a pull-back in price on Friday.

The public is still clueless regarding Stress Testing of the Big 19 Banks. We ought to discover something this coming Thursday, but the regulators are now in a discussion of semantics, so the whole exercise is probably meaningless. In any case, even though banks will be required to raise capital – Citigroup (C) is rumored to need $10 billion – they apparently have six months to raise it. Give them enough lead-time, and they ought to be able to promote each other’s stock price to inflated levels, although that certainly didn’t happen this week. This week, the Financials were the only losing sector in the US – but maybe REITs had a lot to do with that loss.

This week will see many more speeches from Obama, Bernanke and Geithner, but are they starting to have a negative effect? The Ken Lewis - Henry Paulson - Ben Bernanke dispute will likely be swept under the carpet, so Americans are once again not going to hear the truth about who really runs the country, the US Treasury of Goldman Sachs (GS) and the Fed or JP Morgan (JPM)? Interestingly, President Obama said that he can’t tell banks what to do, but we know he can fire the CEO of the world’s biggest auto manufacturer, or used to be. We know he can push a group of traders from AIG out the door. However, he admitted he can’t do much about the people who run JP Morgan, Bank of America (BAC), Citigroup, Morgan Stanley (MS) or Goldman Sachs.

A week ago in this space, I commented that “I suppose anything can happen. This is after all, The Great Reflation. Give it time and prices (but not values) will lift.” Voila, on Friday, the Great Reflation returned to boost the week again.

Here is the list of the ten highest-weighted non-financial stocks in the NASDAQ Composite. Put them in a watchlist (see Google Finance Portfolio) and watch them like a hawk:

US Equity Markets Review

The RSI-7’s for the Monthly, Weekly and Daily were all upwards pointing this week, which was quite a reversal.

This week, the DJIA +1.68% to 8212.41), S&P 500 (+1.30% to 877.52), NASDAQ Composite (+1.47% to 1719.20) and Russell 2000 small cap index (+1.72% to 486.98) were all higher.

Traders are now firmly in day trading mode, but not committing much funds to the market, at least until they get their heads around the stress tests of the bankers, and how much dilution is close at hand.

Here is a dozen NASDAQ stocks to watch.

Here is the Monthly data chart of the Interactive Chart of Nasdaq Composite, S&P 500, Dow30, and Russell 2000 (small cap) indexes.

Monthly Nasdaq Composite Data

Monthly S&P 500 Data

Monthly Dow 30 Data

Monthly Russell 2000 Data

Here is the Weekly data chart of the Interactive Chart of Nasdaq Composite, S&P 500, Dow30, and Russell 2000 (small cap) indexes.

Weekly Nasdaq Composite Data

Weekly S&P 500 Data

Weekly Dow 30 Data

Weekly Russell 2000 Data

Here is the Daily data chart of the Interactive Chart of Nasdaq Composite, S&P 500, Dow30, and Russell 2000 (small cap) indexes.

Daily Nasdaq Composite Data

Daily S&P 500 Data

Daily Dow 30 Data

Daily Russell 2000 Data

Table 14: Dow 30 List

Sorted by 1-Week Price Performance
Symbol Close 1Day
CAT 37.26 1.68 4.72% 10.79% 15.39% 18.14% -20.57% 20.78% -2.46% -54.75%
DIS 21.94 0.04 0.18% 8.29% 7.65% 8.56% -8.28% 6.09% -15.32% -34.11%
GM 1.8100 -0.1100 -5.73% 7.10% -2.69% -13.40% -50.41% -39.87% -68.74% -92.19%
BA 41.21 1.16 2.90% 6.43% 7.54% 10.78% -8.93% -2.60% -21.38% -51.75%
AA 9.690 0.620 6.84% 6.02% 4.64% 18.46% -19.98% 24.39% -15.74% -72.09%
KFT 23.49 0.09 0.38% 5.53% 3.62% 2.26% -14.08% -16.26% -19.50% -26.48%
GE 12.69 0.04 0.32% 4.79% 2.42% 18.16% -25.66% 4.62% -34.96% -61.68%
WMT 50.05 -0.35 -0.69% 4.55% -0.30% -6.69% -12.47% 6.22% -10.32% -13.81%
IBM 104.61 1.40 1.36% 4.53% 3.30% 3.76% 19.73% 14.14% 12.52% -15.37%
MRK 24.30 0.06 0.25% 3.62% -5.56% -10.00% -21.61% -14.89% -21.49% -37.61%
T 26.01 0.39 1.52% 3.38% 0.23% -2.00% -11.59% 5.65% -2.84% -34.88%
JNJ 52.59 0.23 0.44% 3.28% -0.87% -0.72% -13.29% -8.84% -14.26% -22.45%
PFE 13.58 0.22 1.65% 3.11% -4.10% -1.38% -25.67% -6.86% -23.32% -33.56%
XOM 68.01 1.34 2.01% 2.16% 1.89% -3.19% -16.70% -11.07% -8.24% -24.18%
HPQ 36.52 0.54 1.50% 2.01% 0.61% 8.40% -0.79% 5.09% -4.60% -23.96%
MMM 57.88 0.28 0.49% 1.54% 7.56% 11.03% -2.21% 7.60% -9.98% -25.64%
INTC 15.81 0.03 0.19% 1.22% 1.35% 0.70% 4.01% 22.56% -1.37% -32.12%
CVX 66.87 0.77 1.16% 0.41% 1.30% -4.89% -12.61% -5.18% -10.36% -29.57%
UTX 49.52 0.68 1.39% 0.30% 4.65% 7.79% -9.88% 3.19% -9.90% -33.53%
PG 49.50 0.06 0.12% -0.02% -4.18% 0.16% -21.18% -9.17% -23.30% -26.15%
KO 42.47 -0.58 -1.35% -0.75% -5.66% -6.33% -7.47% -0.59% -3.61% -28.13%
VZ 30.55 0.21 0.69% -1.45% -3.87% -5.88% -11.81% 2.28% 2.97% -22.30%
HD 25.77 -0.55 -2.09% -2.05% -1.26% 4.04% 6.80% 19.69% 9.24% -13.73%
JPM 32.49 -0.51 -1.55% -2.67% -2.32% 15.38% 3.64% 27.36% -21.24% -34.03%
DD 27.87 -0.03 -0.11% -3.16% -1.94% 10.46% 6.46% 21.39% -13.01% -43.05%
MSFT 20.24 -0.02 -0.10% -3.20% 5.42% 4.92% -0.44% 18.36% -9.36% -31.16%
MCD 52.40 -0.89 -1.67% -3.52% -6.58% -7.01% -17.80% -9.69% -9.55% -13.99%
AXP 24.29 -0.93 -3.69% -3.99% 11.37% 62.15% 25.66% 45.19% -11.67% -52.68%
BAC 8.700 -0.230 -2.58% -4.40% -17.92% 20.17% -39.29% 32.22% -64.00% -77.91%
C 2.9700 -0.0800 -2.62% -6.90% -18.63% 8.39% -58.40% -16.34% -78.24% -88.57%

Go to Part II: U.S. Equities Sector Overview >>

Go to Part III: Bonds

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Source: Week in Review, Part I: Global Economics, International and U.S. Equity Markets Overview