This could dictate market direction for the weeks ahead…
The major indexes finished modestly lower in what was a
fairly quiet week of trading. Overall, the weakness seemed to be
nothing more than normal profit-taking after the recent rally. Despite bearish
conditions mid-week, we ended the week with a strong rally on Friday. Technology
and Retail shares underperformed, mainly due to an earnings miss and profit
warning by Best Buy and lackluster results from CDW. On the other end, Oil
Service and Gold names displayed solid relative strength. It was interesting to
note that crude oil finished more than 3% lower for the week, while the price of
gold closed at a fresh 17-year high. The run-up in gold also stifled the talking
heads who were speculating that Greenspan and Co. would take a break from the
rate hikes, since Greenspan still closely follows gold as an inflation gauge.
The
December SP 500 futures finished the week with a loss of -6.25 points, while the
Dow futures posted a slightly smaller relative loss of -49 points. On a weekly
basis, the ES posted a small hanging man and a market structure high, and failed
once again at the 1250 area. The YM also posted a hanging man and market
structure high and failed its test of the July highs. Looking at the daily
charts, both the ES and YM reversed off of Thursday’s dojis, with the ES posting
a market structure low, and are trying to break the bull flag/handles on their
cups. For you daily 3-Line Break followers, the ES remains long with a new Break
Price of 1229.75, while the YM is long with a Break Price of 10480.
                   
Friday’s
rally without a doubt changed the mood of the equity markets. Just as market
players were starting to become concerned over the state of economic and
earnings growth, something changed Friday. That something was likely President
Bush’s speech on Thursday night, which highlighted a possible aggressive
spending plan to rebuild the damage from Hurricane Katrina.
While many
are likely quite concerned about increasing the country’s debt load at a time
when the budget deficit remains firmly in the red, history has suggested that
deficit spending has been good for both the economy and stock market. It has
also become clear that the threat of this spending has caused the price of gold
to surge (i.e. the price of gold is saying the spending is fiscally
irresponsible). Not only would more spending likely weaken the U.S. Dollar, but
it would probably trigger an inflationary threat down the road. This could mean
that after a possible pause later this year, the Fed would have to become
hawkish again in 2006. The focus for this week will be to listen closely to
what the Fed says after their meeting on Tuesday, as a few words could dictate
market direction in the weeks ahead.Â
             
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Please feel free to email me with any questions
you might have, and have a great trading week!
Chris Curran
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