Watch These 2 Leading Indicators

• April 26, 2004
• Chris Curran

Stock indexes and futures were able to finish higher
in what was a choppy week of trading.  Despite an abundance of
earnings reports, the main focus was on Fed Chair Greenspan’s speeches Tuesday
and Wednesday.  On Tuesday, the Fed Chairman spooked the markets when he stated
that the banks were in good enough shape to handle higher interest rates.  This
made for a violent sell-off in the bond and equity markets late Tuesday. 
However, Greenspan was much more subdued on Wednesday, as he likely took notice
of what his comments caused the prior day.  His merry band of men and women
attempted to calm the Street in the final 3 days of the week by suggesting that
inflation and rising deficits are currently not major problems. 

The June SP
500 futures closed Friday’s session with a gain of +2.75 points, and finished
the week with a gain of +5.50.  Volume in the ES was estimated at 515,000
contracts, lighter than Thursday’s pace and below the daily average.  On a
weekly basis, the contract posted a market structure low, but continues to trade
in the range of the past 3 weeks.  Looking at the daily chart, the ES
bounced off its 50-day MA
and settled right at its upper channel line.

               

June bonds
(ZB) reversed at 10-day MA resistance to post a market structure high and are
forming a descending triangle.  The U.S. Dollar was able to settle above its
2-year downtrend line and right at its daily 200-day MA.  The Banking Index (BKX)
posted an inside market structure high at 10-day MA resistance and is also
forming a descending triangle.  The Semiconductor Index (SOX) extended
Thursday’s move, but was capped at its 10-day MA and downtrend channel line.

               

In last
weekend’s report, I discussed the trading range the key indexes were mired in. 
Since then, nothing has changed, as the bottom of the range has provided support
while stocks continue to struggle with resistance at the top of the range. 
Despite the small moves for both the SP 500 and the Dow last week, there were
some critical developments in other markets.  Bonds continued to get hit, which
sent yields on various instruments to multi-month highs.  More to the point,
mortgage rates also moved higher because of Greenspan’s comments, as well as
Friday’s robust Durable Goods data.  The recent spike in mortgage rates should
go a long way towards choking off money supply growth.  This suggests that
economic activity could slow when looking a few months out, since it has been
mortgage refinancing which has been behind much of the money supply growth in
the past year. 

Other large
movements took place in the commodities and foreign currencies markets.  Much of
this was due to the U.S. Dollar’s continued rally, since bottoming in February. 
Not only could a stronger currency in the U.S. serve to crimp corporate earnings
growth, but it also could slow the inflationary pressures in the economy.  So,
at this point, it’s anyone’s guess on whether a rising dollar is good or bad. 
Nonetheless, it’s important to keep a close eye on bonds and currencies as lead
indicators for equities moving forward.

 

Please feel free to email me
with any questions you might have, and have a great trading week!

Chris
Curran