Fed thoughts

• May 1, 2006
• Chris Curran

The major indexes finished mixed in what turned out to
be quite a volatile week of trading.  Once again, it was Fed comments
that saved the equities markets when they appeared to be headed towards a severe
correction.  For the first 3 sessions of the week, equities traded with a
negative bias, as every rally was used as an opportunity to sell.  On Thursday
morning, stocks were under heavy pressure because of an unexpected rate hike by
the Chinese central bank.  This weakness reversed, however, when Fed Chair
Bernanke issued comments in front of Congress that the Fed might pause on
further rate hikes as they wait to see further data.  In the past, these sort of
comments would have likely triggered significant gains, but the upside was
limited again late Thursday and Friday.  Financial and Precious Metal shares
were the upside leaders, while Tech continued to underperform over the past 5
sessions.

It’s hard
to believe stocks have held up as well as they have recently, given that oil
prices are now hovering around $75 per barrel (which has driven gas prices up
over $3.00 per gallon nationally).  Additionally, the housing market has started
to slow and the 10-year note has risen above 5.00%.  Even more concerning is the
fact that the Fed remains in a tightening mode.  Despite the lackluster behavior
of the big cap averages recently, the major indexes are still up for the year. 
Even more impressive has been the Russell 2000, which is up roughly 14%.  The
Investor’s Intelligence Sentiment Survey that was released last week showed that
more than 28% of respondents were uncertain about future direction, the highest
in almost 2 years.  The bulls will tell you that uncertainty while equities are
trading at new highs is slam-dunk bullish, but history will tell you something
else.  The last 5 times the S&P 500 traded at a new high and at least this many
folks were neutral, a month later the index was positive only 1 of those 5
times, with an average return of —2%.  The time before that was July, 1987.

Without
question, the equities markets have climbed a proverbial “wall of worry.”  The
only problem is that much of the recent gains have likely been driven by hopes
of the Fed pausing.  This, in turn, could very well steal some of the gains if
and when the Fed actually does stop raising rates.  Nonetheless, this
possibility will likely limit the downside for the market, at least to some
degree.  The million dollar question is, if the Fed does pause, will the markets
be able to withstand the remaining head winds it faces? 

                   

 

Daily
Pivot Points for 5-1-06

Symbol	Pivot	      R1	R2	R3	S1	S2	S3
INDU	11377.34	11407.46	11447.79	11477.91	11337.01	11306.89	11266.56
SPX	1310.94	1315.71	1320.82	1325.59	1305.83	1301.06	1295.95
ES M6	1316.25	1321.75	1327.50	1333.00	1310.50	1305.00	1299.25
SP M6	1316.53	1321.37	1326.83	1331.67	1311.07	1306.23	1300.77
YM M6	11418.00	11459.00	11491.00	11532.00	11386.00	11345.00	11313.00
BKX	112.16	113.58	114.37	115.79	111.37	109.95	109.16
SOX	518.78	521.88	526.86	529.96	513.80	510.70	505.72

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

Chris Curran