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Market analysis for 4/5/2010

|Includes: AAPL, BB, iShares Russell 2000 ETF (IWM), JPM
Despite a shortened trading week, the major indexes managed to close up for the third straight week, once again making new 52-week highs. The DOW touched its highest levels since September of 2008 when Lehman Brothers filed for bankruptcy. The S&P 500 also tacked on 1% for the week.
With the equity markets closed Friday, the all important unemployment numbers were released. The totals showed that the economy added the most jobs in three years in March. The Labor Department reported that 162,000 jobs were created. While this number was below analysts’ expectations, it did manage to keep the unemployment level steady at 9.7%.

The positive jobs outlook pushed yields on 10-year Treasury notes to their highest level since October 2008. Ultimately, yields rise because of diminishing demand for government debt. As demand slows, yields increase to entice investors to purchase them. However, because the government is the one issuing these bonds, rising yields, such as those on the 10-year Treasuries, make it more expensive to borrow money.

In the past, the fed has raised interest rates to combat the rise in yields. Higher interest rates typically increase demand for government debt. Of course, this has investors wondering what the Tuesday announcement by the fed will bring. The fed is scheduled to meet Monday and make announcement Tuesday afternoon regarding discount window rates. However, the fed funds rate is not expected to be addressed.
It is important for investors to distinguish between the two. The discount window rate applies to financial institutions that need emergency lending. The fed funds rate represents the cost of overnight lending between banks at the fed.

A rise in the discount window rate has little to no impact on the economy (specifically the monetary policy of the fed) unless institutions are actively accessing the funds, which is currently not the case. Therefore, investors expecting a selloff in equities this week due to an increase in discount window rates may be disappointed.  The fed funds rate is the number that directly affects equity markets.

The fed funds rate continues to stand at 0.25%, which indicates that the fed is continuing to promote an expansionary monetary policy. While yields continue to rise, we do not expect the government to raise the fed funds rate anytime soon as the economy is still fragile.
Market Highlights from last week

- The buzz around Apple’s (NASDAQ:AAPL) newest product, the IPad, came to a head on Saturday with the official release of the product. Rumors are swirling that Apple had pre-sold 150,000 units prior to Saturday. Companies such as Netflix (NASDAQ:NFLX), Ebay (NASDAQ:EBAY), and Yahoo (YHOO) are working on deals to create applications specifically for the product. Analysts expect around 1,000 applications to be available for the unit upon release. This compares to 150,000 apps currently available for the IPhone.

- The street was disappointed Wednesday when Research In Motion (RIMM) announced that while revenue was up 18% from last quarter, it still fell short of analysts’ expectations. Gross revenue was $4.08 billion versus estimates of $4.31 billion.

- Tears were flowing on Friday when JPMorgan (NYSE:JPM) CEO Jaime Dimon released a statement complaining of the recent enactment of the credit card reform act. The law now requires credit card lenders to issue a 45-day warning before raising interest rates and also restricts lenders from raising interest rates during the first year. Dimon says that JPMorgan has now eliminated credit lines for up to 15% of its customer base and the new laws will cost the firm up to $750 million annually in profits. For more information on the new laws, visit the Fed web site:

- Crude oil prices are reaching their highest levels in two years as oil futures crossed $85/barrel on Thursday. Crude prices are up 23% since February amid new optimism on future demand. Of course, the flip side is that prices at the pump continue to rise and are expected to top $3 per gallon this summer. Currently, the national average at the pump is $2.80 per gallon.
Russell 2000 Analysis

Like the other indexes last week, volume was light in the Russell. The shortened trading week combined with the anticipation of Friday’s unemployment numbers kept stocks stagnate for the most part. Like the S&P the Russell tacked on 1% last week while remaining above the important 20-day and 50-day moving averages.

The consolidation in the index over the last two weeks makes the Russell attractive as a long entry. We are looking for a pullback to the 670 area to get long. This would put the Russell at about the 20-day moving average and would offer a good risk/reward scenario.

An options position we are analyzing is a bull put spread. If the Russell were to pull back to the 670 area, we would initiate a trade by selling the $RUT April 660 put option for a credit of $4.00 and buy the April 650 put option for $2.60 to protect our downside. If the Russell index finishes April expiration (April 16th) above the 660 level we would keep the credit of $1.40 with a risk of $8.70. This gives us a possible ROE of 16% in 10 days. For more information on bull put spreads, visit our sister site at

Economic Indicators For Upcoming Week
Monday ISM Manufacturing Index
Previous: 50.0
What does this mean? ISM manufacturing data surveys more than 300 manufacturing firms on employment, production, new orders, supplier deliveries, and inventories.

Pending Home Sales
Previous: -7.6%
What does this mean? Pending home sales measure the number of existing home sales in which a contract has been signed but not closed.

FOMC Meeting Announcement
Previous Discount Window Rate: .75%

Wednesday No Major Economic Announcements.

Initial Jobless Claims
What does this mean? New unemployment claims are compiled weekly to show the number of individuals who filed for unemployment insurance for the first time.

Friday No Major Economic Announcements.
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