Saturday, April 23, 2005

Weekly commentary

Stocks went on a wild ride this week: five of the past eight trading sessions have seen 100 plus point swings in the Dow. The biggest move was a 206-point leap to the upside on Thursday. This was also the biggest one-day gain in years.

I did some nibbling into last week's rally, but I'm still maintaining very cautious stance. I suspect that that big rally on Thursday was just a technical bounce from an extremely oversold condition, and not a reversal of trend.

Now the question is whether it was the low of the year or just a pause before more downside ahead. Fundamentally, the bulls can argue that operating earnings for the first quarter of 2005 (for the S&P 500) are on track for 12% growth. Just a few weeks ago, the expectation was for 7% growth. Also, guidance for the second quarter has been mostly upbeat. But the bears can respond with following argument.

1. Rising inflation. The March CPI report came out last week, and the core number was +0.4%, twice as bad as expected.
2. An aggressive Fed. They've been raising rates at every meeting for some time now, and more hikes are expected.
3. A falling stock market. In spite of Thursday's rally, the trend is still down.
4. Oil prices are once again on the rise. Last week, crude oil futures jumped from $50.49 to $55.39, a 9.7% gain.
5. About that big stock rally on Thursday: The volume that day was not consistent with a major change of market direction.

In my view, the negatives outweigh the positives here. I remain bearish. However, I am also very much on the lookout for technical signs of an important market bottom.

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