Bill Baruch, president and founder of Blue Line Futures, previews E-mini S&P, Gold, Crude market...
The Week Ahead: Buy Stocks, Not The Market
04/01/2011 4:41 pm EST
The relentless nature of the rally from the March 16 lows has many market veterans scratching their heads.
The market is clearly overdue for the setback I was looking for last week. Attempts by fund managers to goose their quarterly numbers likely played a role in the rally into the end of the month, while the very good jobs numbers boosted stocks even higher on Friday.
One of the more surprising developments last week was the surge in small-cap stocks, as the Russell 2000 moved above the February highs on Thursday. This is very positive if the S&P 500 and Nasdaq Composite can also surpass their February peaks, as the Dow Industrials did on Friday.
The chart of the iShares Russell 2000 (IWM) shows the completion of the trading range (lines a and b) with upside targets at $85.50 and then $87:
The week ahead will be a quiet one in terms of economic reports, with the ISM Non-Manufacturing Index on Tuesday that gives us a reading on the health of the economy, followed by jobless claims Thursday.
The EIA's latest petroleum-inventory report will be released Wednesday, but more important for crude oil will be any new developments in Libya. If Gaddafi were to step down it would dampen the rally in crude oil prices.
WHAT TO WATCH
The monthly chart of the Spyder Trust (SPY) shows that the next major resistance stands at $141 to $145.
The lower monthly close for SPY has caused its momentum, which had been rising since the end of September, to flatten out. Therefore a higher close in April is needed to keep the momentum from turning lower, as it did in May 2010.
The NYSE advance/decline line has surpassed its February highs, which is positive for stocks in general. There is initial support for SPY at $131.50 and then at $130.40. The $128.30 level should hold on a deeper pullback.
The Diamonds Trust (DIA) surpassed the February highs Friday at $123.64, and has next resistance at $124.80 and then $128.50 to $129. Strong action last week leaves first support at $122.50 to $121.60, with much stronger levels in the $120.50 area.
Next: Sector Focus|pagebreak|
It was a tough quarter for stock pickers unless you were in the energy sector.
- As I noted in Friday's article, only the Energy Select Spyder (XLE) and the Industrial Select Spyder (XLI) were able to outperform the S&P 500 in the first quarter. This is quite unusual, as more often there are three or four sectors that outperform the S&P 500. Typically stocks are not as strong in the second quarter, leading to the well-worn phrase "sell in May and go away."
- One sector that looks promising is health care and in particular biotech, as many of those stocks have taken off in the past week.
- As I noted last time, the Dow Transportation Average was entering a strong seasonal period and was up 3.1% for the week.
- The technology sector is still lagging as the PowerShares QQQ Trust (QQQQ), which tracks the Nasdaq-100, closed Friday at 57.50, which is still 2.7% below the February highs.
- The Financial Select SPDR (XLF) closed the week back above its 50-day moving average, which has stabilized the short-term outlook, but it still is underperforming versus the S&P 500. A close below the $16 level would cause heavier selling that could take XLF to the 200-day moving average at $15.26.
- Global ETFs, especially from emerging markets, seem to be out of favor with both money managers and the public. Recent data suggests money is flowing out of emerging-market funds. The timing here appears to be off, as the Market Vectors Indonesia Index (IDX) and the iShares MSCI Thailand ETF (THB) are both up more than 20% from the lows made early in the year.
The Thursday close in May crude oil, at $106.79, was above the $106.50 level I have been watching. Crude oil rallied further Friday with the next resistance around $109. There are additional targets at $111 and then $115.
The monthly chart of crude oil continues to point higher with no signs yet of a top. It would take two daily closes under $102 in the May contract to weaken the outlook for crude oil.
The monthly chart of the dollar index shows that the March lows at 75.50 tested the support going back to 2009 (line b). In 2009 the lows were at 74.20, and a break below this level would suggest a decline to the 71.50 area.
Volume was heavy last month, which could mark a panic low. A move above the 82 level would be the first sign that the dollar had bottomed, with major resistance at 88.50.
For the euro versus the dollar, the long-term downtrend is in the area of $1.44 per euro. A weekly close above this level would be very negative for the dollar.
The failure of volume to confirm the December highs in both gold futures and the SPDR Gold Trust (GLD) has me looking for the gold market to correct down to stronger support before it could breakout to the upside. Now that we have been in a range for three months, it suggests that we may be closer to a sustainable rally.
Also many analysts are also looking for a sharper correction, which makes it less likely. I still would look for two consecutive closes above $140.70 to suggest that the worst of the selling is over. The support at $134.75 needs to hold on a closing basis.
The yield on ten-year Treasuries held firm this week, and the overall uptrend is still intact. A daily close above 3.60% on the ten-year would be a sign that the 3.70% level is likely to be tested.
Though I am still expecting at least a one- to two-day pullback of 10 to 15 points in the S&P over the next week or so, that shouldn’t necessarily keep you from buying individual stocks. However, buying the market averages or most ETFs at these levels still carries too high a risk, in my opinion. There are many individual stocks that have just started to rally from good support—and they do not all move with the market.
A simple strategy that you can follow through with at many Web sites is to wait for a pullback in your target stock toward its rising 20-day exponential moving average before buying. By using a stop under the recent low, you can gauge the risk on the purchase—be sure you always use a stop.
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