The Most Frustrating Thing About This Year…

It was a rough week for the equity markets
as the combination of higher interest rates and Crude Oil prices proved to be
too much to overcome.  The weakness came despite a number of upbeat earnings
updates from the Chip sector, and, for the most part, solid economic data. 
Instead, the focus was on the increase in the yield of the 10-yr Note, which
likely stemmed from worries over inflation.  In addition, there were worries all
week long about foreign central banks selling their U.S. dollar holdings.  The
declines were fairly broad-based in nature, and even the market leaders of 2005,
Energy and Industrial shares, were included in the sell-off. 

The June
SP 500 futures closed out the week with a loss of -18.75 points, while the Dow
tumbled -143 points, with both finishing just off the lows of the week.  Looking
at the weekly charts, the ES and YM both posted a bearish engulfing line and
market structure high, and are testing the lower trend line of their rising
wedge patterns.  On a daily basis, the ES posted a bearish engulfing line and
was able to crack its 20-day MA, while the YM posted a bearish engulfing line,
but was again able to hold its 20-day MA.  For you daily 3-Line Break followers,
the ES and YM remain long with wide Break Prices of 1201 and 10618 respectively.





As of
Friday’s close, the major indexes are all down again for 2005.  The Dow and SP
500 are only down fractionally, while the Tech-heavy NASDAQ Composite is off
more than 6% for the year.  But, without a doubt, the most frustrating thing
about this year has been the trendless action, with fairly narrow ranges and
head-fakes in both directions.  Clearly, the technicals haven’t worked well in
the traditional sense.  The January breakdown proved to be a “bear trap”, while
last week’s breakout was a “bull trap.”

Even when
looking to fundamentals and economics for guidance, it’s also a very mixed
picture.  Overall, things look decent at the moment, and there are very few
signs of an imminent economic slowdown.  At the same time, higher interest rates
should serve to lessen the liquidity in the system.  In other words, inflation
is clearly accelerating, which also possesses many risks to the economy.  I’m
not overly concerned about a recession in the next several months, but slower
growth could hurt corporate earnings down the road.


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