This Week's Outlook: Nasdaq Won May, What's Next?

Last week the major stock indices ended higher as oil dipped and the dollar rose. The Dow was up 1.27% for the week, the S&P 500 was up 1.78%, and the biggest gainer, the Nasdaq, was up 3.19%. In May things ended differently, with the Dow falling 1.4% for the month but the S&P finishing up 1.1% and the Nasdaq rising 4.6%. The Nasdaq surged as Dell (DELL) reported better than expected earnings, and as Marvell Technology (MRVL) reported a profit and had its shares upgraded by JP Morgan (JPM). Tiffany (TIF) was also up on higher profits and AIG (AIG) rose as Morgan Stanley (MS) said things weren’t as bad as feared and upgraded the company. All well and good, but in these market conditions, whenever a bank says things aren’t as bad as feared, there is usually a nasty surprise waiting. Let’s hope this isn’t the case for AIG.

Oil ended the week below the $130 mark, which helped relieve investor worries, even as the CFTC investigates possible manipulation of oil in the futures markets. But oil isn’t the only thing under investigation, the CFTC is also investigating cotton-traders as the futures price diverged significantly from the spot price. This isn’t the only commodity with a divergence between its futures and spot prices. In a previous post we wrote how farmers were unhappy as futures prices on grains diverged so far from spot prices. And all this divergence does is drive farmers cost of hedging up, and drive them to losses as margins are increased and they are issued margin calls.

As payroll numbers come up next week, economists are estimating a drop of 60,000 jobs. If that is the case, it would be the fifth straight month of job losses. As the rising cost of commodities continues to stretch people’s spending power, they will buy less of  “non-essential” items. And when consumers spend less, companies will have to retrench workers to keep operating costs down. There are some bright spots, though: The low dollar is helping US exports which boosts the bottom line of US companies with a strong overseas presence, but in most case it does little to alleviate the job situation in the US.

In the past week we saw some weak economic data from the US, but ‘weak’ isn’t a bad thing, putting it in the context of a country (which is the US) that is facing a big crisis in many decades. The more important thing is that last week’s data relating to GDP, durable goods orders and consumer sentiment, wasn’t that terrible, and in many cases, better than what other economists had predicted. The US dollar had its biggest weekly rally against the Euro and Swiss franc in a month in last week’s holiday-shortened week, and even managed to close higher versus these two currencies for the second month in a row.

Some Fed officials said last week that the current monetary policy is “appropriate”, and they also voiced their concerns about inflation in the US. We think the Fed is basically going to keep interest rates on hold for quite some time. There isn’t any urgency to raise rates either. Friday’s US inflation data showed that core inflation measure climbed 2.1% in April year-over-year, and even though that is slightly above the Fed’s upper target of 2%, it isn’t that threatening.

Net Short In Euro Contracts

Large speculators have been shorting the Euro in the currency futures markets, and their actions were vindicated by the weak German retail sales and higher-than-expected Eurozone consumer price inflation. In the latest Commitment of Traders report, large speculators shifted their positioning from long Euro to short Euro in the week ending May 27, resulting in 3390 contracts in the net short territory, while total open interest has increased. For the same week, small traders were net long, and so were proven wrong.

In the coming week look out for ISM manufacturing data and construction spending Monday, Bernanke’s talk on Tuesday, jobless claim Thursday, payroll numbers on Friday, and keep a close eye on the US dollar and oil as their moves will affect the stock markets.