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Thursday, March 31, 2005
Market Recap
A fairly neutral day in the markets today compared to yesterday's full day explosion to the upside. Outside of a blip at the open, the markets stayed in the red the entire day. The NASDAQ finished lower by –6 points, the DOW closed lower by –37 points and the S&P gave up less than –1 point. I had mentioned yesterday to expect some profit taking and that is exactly what happened today. Anytime the markets rally in the fashion they did yesterday, it should be no surprise that some profits are locked in the following day. The important thing is that the indexes closed above key support levels. The NASDAQ closed just below the price and psychological level of 2000 but it did stay above its 200SMA. The DOW, despite being down –34 points, did manage to close above 10500. The S&P was the strongest of the three, managing to close above its 9EMA.
After taking a break from the headlines, crude oil was back in the spotlight today closing back above the $55 a barrel level. A report released by Goldman Sachs predicts that we could see a “super spike” in oil that send prices to $100/barrel. This, in my opinion, was a very irresponsible report to release. While the price target may not be too far fetched over time, the report makes it sound like it could happen next week. A report like this does nothing but spook investors and cause confusion in the oil market as to how they should react to the report. Meanwhile, the retail investor hears this report and does some quick math in his head and figures they can buy oil futures today for a nice 100% gain. What I want to know is how deep Goldman Sachs is invested in oil and also how many of the oil companies do they “analyze”? It is funny that this is not mentioned in the report. Thank you Mr. Analyst! To no surprise, the rise in oil brought out the buyers in the energy sector sending many of the stocks in the sector back up towards their highs from a couple weeks ago. You can be sure that as long as oil prices continue to rise, the buyers will continue to flock to this sector.
Looking Ahead
Lately it seems as if the next day in the markets is going to be the big decision day that should tell us all the short-term commitment of the market. Whether it is oil, earnings or the markets falling to long-term support, we seem to have something to look to each day that gives both bulls and bears a reason to argue their case. On Tuesday, the markets looked like they were ready to fall off a cliff. Then on Wednesday, they stage one of the biggest rallies of the year. Then today, oil spikes up over $1.50 a barrel. It is no secret why gains on stocks have not been holding, it is too easy to find a reason to sell. Daily doses of good and bad news, coupled with the markets trading in a very tight range in between support and resistance, results in a recipe for a directionless and trigger-happy market for both the bulls and the bears. Bears certainly have the upper hand right now as the fear level is rising as confirmed by the VIX closing just below its 200SMA. Also, short interest in the NASDAQ and NYSE is at record levels. Either the smart money is loaded up short and preparing for a big fall, or the retail investors have been led to believe that the market is toast and have invested accordingly. The fact that the VIX is high at the same time short interest is high, tells me that we could see a serious short squeeze in the markets soon. If we use the talking heads as a contrarian's indicator, we are setup to rally because it has been awhile since I have heard someone on TV talk bullish about the markets.
I hate to say this but tomorrow is another key day in the markets. The non-farm payrolls and unemployment numbers will be released before the bell tomorrow at 8:30am EST. The market is expecting 220 thousand new jobs to have been created in March and an unemployment rate of 5.3%. Any surprises to the upside or downside, you can be sure will be reflected in the action of the futures and later in the markets. The futures typically will swing quite a bit right after the numbers are announced. The key will be where they settle at around 9:00am EST. As I have said before, the futures do not typically reflect the how the markets will end the day. We should get a very good indication from them tomorrow, whether this bounce is going to hold or if we are likely headed back down to long-term support levels.
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