With more earnings this coming week and a critical
Fed decision on tap there will be plenty of action—which makes this a
good time to take a hard look at…
WHICH WAY THIS MARKET IS HEADED
The S&P 500 rallied
this past week breaking out to a new 3-month high. A two point breakout
over previous resistance is not major but it is positive. If the two
largest sectors of the SP—the financials and energy--keep breaking
higher we’ll see some serious upside.
The Nasdaq finally
broke out over critical resistance at 2400 and in spite of an early dip
Friday the index hung on closing with a bullish candle—a good omen for
this coming week. Even with Microsoft and RIMM declining on Friday the
Nasdaq still managed to hold close to the highs for the week.
The current
earnings cycle has seen 260 S&P-500 companies report with average
earnings declining -18.6%. However that overall number isn’t as bad as
it appears--take out the financials and the S&P would be up +11% for the
quarter—pretty decent considering most consider the US already in
recession. The key is where earnings are coming from--large
multinationals that derive most of their income from overseas have been
doing very well while domestic market companies have been hurting.
The calendar for
next week is jam packed with major economic news and it’s liable to get
wild—but there’s a decent chance the markets will break into in rally
mode.
We start out with a
look at first quarter GDP with estimates for only 0.2% growth in the
quarter. The general belief is we’re in a recession so the market is not
expecting a very strong number—in fact even if the GDP comes in slightly
negative it shouldn’t affect the markets too much. On the flip side if
growth is anything but flat to negative there is room for a relief rally
here even if the Fed chooses to curb their rate cuts--because traders
would rather see a confirmed economic bottom than further cuts.
Of course the big economic event this week is the FOMC announcement on
Wednesday. Even though the markets and news have been positive most
believe the Fed will still cut rates by 25-points. The various Fed
committee members have not given any signals they are going to move off
their easing bias and they usually like to telegraph changes in policy
so we’re likely still in line for a quarter point.
However Fed
speakers have raised their talk about inflation so they are likely
setting the stage for a bias change at this week's meeting—the outcome
will likely be ‘one-and-done’ rate cut. If that is the case they will
likely remain on the sidelines for the rest of 2008 due to the continued
problems in the housing market. It could be very destructive to raise
rates before the adjustable rate mortgage reset peak passes in
June/July.
A change in policy
to less accommodation would normally hit the markets pretty hard—but if
we see further signs of an economic rebound this week the markets could
actually rally instead—like we’ve said traders would rather see new
growth than further cuts.
The next big report is the national Institute for Supply Management
(ISM) on Thursday. The ISM is expected to have a declining number at
48.0 and that would make the 4th month out of the last five that it’s
remained under 50. Last month saw a very minor gain from the 48.3 low in
February but that gain is expected to be erased in April. Of course if
the ISM did turn higher it would be very bullish.
The last major report for the week is the Non-Farm Payrolls on Friday.
After revisions the report has shown job losses for the last three
months averaging 77,000 per month. The economy is expected to have lost
another 75,000 jobs in April. It would be hard for the report to
negatively surprise investors unless it was really bad. Most economists
are expecting another loss and that is currently priced into the market.
Once again if the number shows any kind of gain we could see a strong
relief rally.
There are plenty of economic reports to watch this week but on the
earnings front it’s all about energy—and with oil at record highs for
the past several weeks the numbers are likely to come in strong. There
are plenty of companies reporting but the biggest are BP on Tuesday,
ExxonMobil (XOM) on Thursday and ChevronTexaco (CVX) on Friday. And with
energy making up a substantial chunk of the SP-500 look for these
positive numbers to have a further bullish affect on the markets.
Crude prices fell
for two days last week hitting $114.25 overnight on Thursday before
another news event sent the futures spiking to $119.55 Friday—and this
seems to be the pattern. Even though many are looking for a big
retracement it hasn’t happened yet—and with the current world scenario
oil may just keep on climbing. There are thousands of oil facilities in
over 100 countries and odds are good something negative will happen in
at least one of those countries every week.
On Friday it was
news from the Persian Gulf that an American merchant ship under contract
to the military had fired on an Iranian boat. The news immediately
spiked crude futures over $5 on fears a shooting war could close the
Straits of Hormuz to oil tankers. More than 30% of the world’s oil
supply transits that passage every day. The shipping lanes are only
6-miles wide through the strait and it is considered an extremely
vulnerable choke point. In addition to Friday’s report there have been 5
or 6 reports of shots fired at U.S. ships in the last 4 months.
Exaggerating the
reaction to the Iranian incident was a report that the US Joint Chiefs
of Staff are preparing "potential military courses of action" against
Iran. Reportedly the U.S. will make public evidence next week that Iran
has stepped up its aid to insurgents in Iraq and that they
funded/supplied the Basra uprising a couple weeks ago.
With oil
consumption right at a level with production any perceived constriction
of supply drives the price of oil even higher. This past week also saw a
strike at the 210,000 bpd Grangemouth Refinery in Scotland and news from
Nigeria of another pipeline attack. Plus Nigerian workers went on strike
against Exxon causing the shut-in of 200,000 bpd of crude.
The problem is no
extra capacity—at this point the world is operating at less than one
million barrels of spare capacity per day so every little event has the
potential to drive prices higher as refiners buy every bit of oil they
can before a potential constriction of supply.
So what we’ve got is a market moving higher, a host
of economic reports, multi-national companies reporting great earnings
and a huge chunk of the energy sector reporting this week with oil at
all time highs—the question is…
HOW DO WE MAKE MONEY ON IT?
We’ve got two high potential trades lined up this
week that are both bullish and both in the energy sector—but very
DIFFERENT areas of the energy sector.
The first is on an international engineering firm
that services both conventional oil and gas production AND solar
projects—in fact this company just won an award to design the largest
photo voltaic production facility in the world. With energy at a never
before seen premium this stock is set to soar.
Our next play is on a company that just vaulted
into the one of the lowest cost producers of solar panels in the world
and they derive over 90% of their revenue from non-US sources creating
an even bigger bang against a relatively weak dollar. Plus the chart
tells us this one is ready to zoom higher after a small retracement—a
rally we’ll be jumping on board with some well-placed calls first thing
Monday morning!
We’ve got a market heating up with two highly
energized plays--so let’s get started…
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