Wow, the market is hard to predict. From the summer of 2011 to mid-April, buying almost any pullback in the S&P 500 and its tracking exchange traded fund, SPY, was a good strategy, as the market failed repeatedly to rally from levels that many traders and investors thought were oversold.
I had a mixed call last week, suggesting the market would likely move sideways, since the S&P 500 and other major indexes seemed oversold. While the market rallied very little, most of the broader indexes rallied hard on Monday, and finished the week positive with some of the index's most heavily weighted names, such GE (GE), finishing the week up around 1%.
The first reason I think we will see markets move higher next weak is a short-term peak in negative news affecting the leadership sectors in the market.
While, obviously, most sectors have rallied during the S&P 500's rally of over 20% off of the summer 2011 lows, technology and financial stocks have been the strongest leaders, with stocks such as Apple (AAPL), Microsoft (MSFT), Citigroup (C), and JPMorgan (JPM), being the top performers in these stocks' respective sectors.
The financials obviously sold off hard last week on the news of JPMorgan's massive trading loss. With the latest reports that JPMorgan's loss from its trade may have risen to nearly $6-7 billion, and nearly all financial stocks selling off 10%, it is hard to imagine a near-term story that would be any worse for the financials.
Technology stocks were also hit by a very poor earnings report from Dell (DELL). In addition to showing a 10% drop in PC sales, Dell also reported a significant drop in enterprise spending. While obviously Dell has had many company specific problems as new leadership has tried to rebuild the company's business model, the Dell earnings reports was a huge disappointment, and caused stocks such as Microsoft and Intel (INTC) to sell-off over 3%.
The Dell earnings report, while obviously disappointing, has also set the bar fairly low for tech companies when they report next, and companies such as Intel have made bullish comments about the PC business in Europe. It is also likely that if other companies were seeing such a big drop-off in PC sales and enterprise spending, these companies would have warned ahead of earnings as well. Dell has also had mixed results for several years, even when the growth outlook was stronger.
The second reason the market looks ready to move higher at least in the short term is the overbought condition of the dollar. While oil, copper, and other commodities have sold-off hard over the past month, oil held the critical $90 dollar level, and the Euro failed to break to new fifty week lows. Stocks such as Exxon-Mobil (XOM) and Chevron (CVX) held these stocks' support levels as well.
While, obviously, the dollar may continue to rally, the dollar index is today around the 82 level, and the dollar never broke 89 at the height of the credit crisis in 2008. The dollar has also risen for nearly four straight weeks, although it failed to break convincingly break to new highs this week on strong volume.
Oil and other major commodities such as copper have risen on geopolitical events and other news stories in the past, but these commodities have generally traded in-line with the currency markets over the past couple weeks.
The third, and final, reason the market will rally at least modestly next week, is that volume has been modest. While the worst performing stocks such as J Morgan and Citigroup traded nearly three times the average amount of shares these companies trade on a daily basis after news of JPMorgan's massive trading loss broke, the volume in the financial sector this weeks was below average.
Also, while volume spiked in the technology sector after Dell missed earnings badly, volume levels in leading technology stocks such as Microsoft and Intel were fairly low on Thursday and Friday, suggesting these stocks may be at a short-term bottom.
While obviously the fact the market was unable to rally on strong volume is likely discouraging to those expecting a sustainable rally, the low volume levels also likely suggest that most of the selling pressure has abated for the short-term.
To conclude, while the market will likely make another leg down before we get a sustainable rally, JPMorgan's massive trading loss and Dell's miserable earnings report likely mark a bottom in short-term negative news stories affecting the market's two most important leadership sectors. The dollar may continue to rally, but longs will not likely find today's levels appealing for entering new positions with the dollar less than 6% off its three-year highs. While the Market may need to move lower to find long-term buyers, short-term, the market still looks fairly healthy to enter for a short-term rally.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
