U.S. Stock Market - April 5th Week In Review

The Dow Jones Industrial Average and the S&P 500 Index posted their best intra-day levels of the week on Tuesday, April 2^nd at 14,684.49 and 1,573.66, respectively. For the DJIA, Tuesday’s intra-day high was an all-time record high, but for the S&P 500 Index the 1,576.10 record intra-day high from October 2007 still stands. In the table immediately below, dates for the intra-day highs on this advance are listed for all the major indexes.

Here are Friday’s closing marks, with changes from Thursday’s close, and also with changes on the week, respectively:

                                    High                   Friday’s Change                             Weekly Change

DJ Industrial Average (4/2)      14,565.25        - 40.86     - 0.28%           -   13.29          - 0.09%

S&P 500 Index            (4/2)       1,553.30        -   6.70      -0.43%           -   15.90          - 1.01%

NASDAQ Comp.        (3/28)      3,203.85        - 21.12       -0.65%          -   63.67          - 1.96%

Russell 2000 Index       (3/15)       923.30       -   2.38       -0.26%          -   28.25          - 2.97%

DJ Trans. Average        (3/19)    6,037.36       + 27.70      +0.46%         - 217.97          - 3.48%

While there is almost always a broad spectrum of financial news that impacts stock prices week-to-week, I think the latest batch of comments from Fed officials, which were mostly unfriendly, and the news from Japan regarding the size of their own “quantitative easing” program were most noteworthy this past week. On Wednesday, April 3^rd, one day after record closing highs were posted in both the DJIA and S&P 500 Index, Fed Governor Williams from San Francisco and Fed Bank President Bullard from St. Louis, hinted that maybe the Fed will begin to reduce its monthly bond purchases as soon as this summer. And Williams actually said that if everything went right [with the economy], the Fed could actually end the purchase program completely sometime later this year. Even though there is NO chance that the Federal Reserve will end its bond purchase program this year (or even early next year), these relatively “unfriendly” comments from Williams and Bullard unsettled stock market investors and set the stage for fairly significant losses in most U.S. stocks on Wednesday, Thursday, and Friday.

Since comments from Williams and Bullard have almost no credibility to any rational stock market investor, it is easy to classify the impact of these comments as very short term oriented. However, on Thursday, April 4^th, much more important news broke that the Bank of Japan would be effectively doubling its monthly purchases of JGB’s (to $75 billion/month) and also expanding its purchases of real estate investment trusts (to about $6 billion/month). Since Japan’s GDP is about 38% the size of the U.S. GDP, this must be considered a staggering amount of central bank monetization (and would be equivalent to about $212 billion/month here in the U.S. as compared to actual U.S. QE3 purchases now of $85 billion/month).

What does it all mean? I probably wouldn’t be alone in thinking that the current pattern of global central bank monetization of debt, especially in the U.S. and Japan, will end badly for stock and bond investors. However, timing is everything, and the “collapse of the system” is not immediately upon us, and maybe we can even profit from the current state of affairs as we know it.

Gold and silver futures both rallied sharply this past Friday (+1.89% and +1.92%, respectively). Precious metals prices benefited from the QE news out of Japan and also the relatively weak U.S. monthly employment report. Since the U.S. Federal Reserve has made it clear that QE3 bond purchases will be tied to the U.S. employment situation, Friday’s weak employment report was quickly translated to mean that the Fed will be reticent to take away the “easy money punch bowl” anytime soon.

To me, the most interesting aspect of Friday’s trading here in the U.S. was the dramatic comeback of U.S. equity prices after a major gap-down NY opening. In the first half hour, the Dow-30 traded down 175 points (-1.20%) to 14,434, but then rallied back to end the day down only 41 points at 14,564 (-0.28%). Even more incredible was Friday's action in the Dow Transportation Average (DJ-20) which gapped down 134 points (-2.22%) and then rallied all the way back into plus territory, and actually ended the day up 28 points (+0.46%).

Bottom Line: In my computer system, daily chart buy signals were triggered at Friday’s close in 45 of the 500 U.S. stocks that I follow. And there were also daily chart buy signals triggered in 4 indexes (DJTA, HGX, XNG, and OSX). Despite my bearish inclinations, I simply can not ignore this positive tape action. While I continue to believe that the next 10% swing in the U.S. Stock Market will be to the downside, I have to concede the very strong possibility that there’s more upside immediately ahead. On my list of significant potential “turn” dates, April 15^th and April 29^th jump out at me (for the next major downturn to begin). However, given the extraordinary resilience of U.S. stocks to “bad” news this past Friday, I now believe this coming week will see positive price action, and it’s certainly not a stretch to think that both the DJIA and SPX could post another set of record all-time closing highs over the very near term.

U.S. Dollar Index Weekly Bar Chart with Computer-generated Buy & Sell Signals

U.S. Stock Market - Early In A New Bear Trend

To begin the day this morning, U.S. stock investors ignored lower European share prices and focused instead on sharply higher Japanese stocks. The Bank of Japan will be doubling its monthly purchases of JGB’s (to $75 billion/month) and also expanding its purchases of real estate investment trusts. It could be argued that the Bank of Japan is 24 years late with its attempt to end deflationary forces there, but “better late than never”, I guess.

Here are today’s closing marks, with changes from Wednesday’s close:

                                                                                    Thursday’s Closing Prices                 

Dow Jones Industrial Average                        14,606.11        +55.76             +0.38%

S&P 500 Index                                                  1,559.98        +  6.29             +0.40%

NASDAQ Composite Index                               3,224.98        +  6.38             +0.20%

Russell 2000 Index                                               925.66        +  6.95             +0.76%

Dow Jones Transportation Average                  6,009.66        +  3.71             +0.06%

As I write this column (at 8:35 PM ET), the Nikkei 225 Index is up more than 4% to begin their day on top of a big gain of about 2% yesterday. Thursday evening U.S. stock futures are slightly lower despite big gains in Japan.

I normally try to avoid the tick-by-tick analysis and focus instead on the “bigger picture”, which to me is defined as attempting to forecast “the next 10%” swing. However, seeing the S&P 500 e-mini contract slightly negative right now despite a Herculean performance by the Nikkei (+4%) suggests to me that U.S. stock prices will move on their own tomorrow. Of course, this statement may not be all that earthshaking given the fact that the monthly U.S. employment report is due to be released tomorrow morning by the U.S. Labor Department.

Does tomorrow’s U.S. employment report really matter? If stock market bears like me are right, then a strong non-farm payrolls report will lead investors to react negatively to the increased probability of “unfriendly” rhetoric from Fed officials relating to the timing of the Fed’s exit strategy on QE3. If non-farm payrolls are weak, then investors will react negatively to the “obvious” deterioration in U.S. economic fundamentals which might lead to lower corporate earnings. Bear markets are all about "lose, lose" situations. Of course, if we’re still in a bull market (which I doubt), then appropriate rationalization will be applied to the latest employment numbers to support higher stock prices (i.e. "win, win"). 

In a side note, gold/silver mining stocks finally bounced today after two really nasty down days on Tuesday and Wednesday. The Philadelphia Gold/Silver Stock Index rose 2.65% today, with some silver stocks up more than 4%. What’s really incredible about this sector’s action today was that both Gold and Silver futures and related ETFs were down almost the entire day. I “get it” that the U.S. Dollar is strong relative to other major currencies (i.e. Yen & Euro). And yes, Gold is priced in Dollars here in the U.S., but does anyone have any doubt as to central bank intentions regarding monetary expansion immediately ahead and for the next several quarters at least? The QE path is clear at $85 billion/month here in the U.S. and $75 billion/month in Japan now. Will the European Central Bank be far behind with its own formal QE program? And how about the Bank of England? It’s a race to the bottom, and rhetoric suggesting otherwise is just uninformed, deceptive, or naïve. In my view, the only strong bet here is precious metals (and related mining stocks) as a store of value against ongoing debasement of global paper currencies.

Bottom Line: Despite today’s modest rebound in U.S. stock prices, the peak for this move has already been made (14,684 in the DJIA and 1,574 in the S&P 500 Index on April 2^nd). A major correction is now underway, and stock investors will have very few places to hide to avoid losses over the next 8 to 10 weeks. Cash is King !