The Week Ahead: No Budget and $112 Crude Oil, But Who Cares?

04/08/2011 5:01 pm EST

Focus: MARKETS

Thomas Aspray

, Professional Trader & Analyst

Crude oil has surpassed $112 per barrel and the US government is bracing for a shutdown, but who cares?

Apparently not investors, as stocks kept moving higher last week as late day selling was met the following day by strong buying.

Those who were cautious on the market pointed to the lagging action of the S&P 500 (Spyder Trust (SPY)) and the Nasdaq-100 (PowerShares QQQ Trust (QQQQ)), which both failed to surpass their February highs.

Given the strength of the advance/decline lines for these two indices, I think they will catch up. (See my Friday column "SPY Lags: Cause for Concern?" for more on this.)

Investors focused on the S&P 500 or the tech sector might have missed the new all-time highs in the Russell 2000 and the impressive action of many of the emerging-market ETFs. From the March 16 lows to Thursday's close, the iShares MSCI Emerging Market Index (EEM) is up 12.7%, and country funds like iShares MSCI Thailand Investable Market ETF (THD) are up closer to 24%.

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There are some positive factors that are putting the emerging markets back in focus. Several countries have seen some improvement in their inflation rates, and their currencies are soaring against the dollar. This has caused several Asian central bankers to intervene and buy dollars in an attempt to stem the sharp gains in their currencies.

As the chart above indicates, the relative performance of the iShares MSCI Emerging Market Index versus the Spyder Trust reveals that EEM started to outperform SPY late last month. It had been weaker than SPY since November 12.

Recently, these periods of emerging market outperformance have lasted six to 12 months. (For more, see my Thursday column.)
 
The problems in Europe still have not been resolved,as weaker than expected data in the UK kept that country from raising rates-and the expected rate hike by the ECB did not dampen rallies in Europe's equity markets. The strong euro apparently offset the worsening budget woes in Portugal and Ireland.

The calendar is crowded next week with economic reports, starting with international-trade data on Tuesday, followed by retail-sales data on Wednesday. We already know that several retailers reported impressive year-over-year gains in sales, which boosted stocks of Costco (COST), Limited Brands (LTD), and Macy's (M) late in the week.

On Thursday, we will get the monthly report on the Producer Price Index and jobless claims, followed by the Consumer Price Index and industrial production numbers on Friday.

NEXT: WHAT TO WATCH

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WHAT TO WATCH

S&P 500
The Spyder Trust (SPY) made little upward progress for the week, and needs to move above $134 to signal a test of the February highs of $134.69. Near-term support for SPY sits at $132.30 to $131.90, with more important levels around $130.

Dow Industrials
The Diamonds Trust (DIA) made further new highs last week at $124.36, and got close to the next resistance at $124.80. Initial support is now at $123 to $122.60, then much stronger in the $120.50 to $121 area.

Nasdaq 100
The PowerShares QQQ Trust (QQQQ) has stalled below resistance at $57.90 to $58.37, with the first good support at $56.40 to $55.80. The A/D line on the Nasdaq-100 has already moved above its February highs, so I would look for tech to hold up better when the market corrects.

Sector Focus

  • Some of the top-performing industries last week-other than the metals-were on the consumer side, with furniture, electronics, and apparel stores all up more than 3%.
  • I continue to like health care, and even though biotechnology as a group was flat for the week there were quite a few stocks that had double-digit gains. Many of these stocks have just turned up from good support, which makes the risk more favorable than buying a stock that is up 15% in the past two weeks.
  • The Energy Select Spyder (XLE) and the Industrial Select Spyder (XLI), the best performers from the first quarter, were able to make new highs for the year this week-and, while overextended, still look positive longer term.
  • The Dow Transportation Average, after a 3.1% gain last week, turned lower this week. It should find support between 5,180 and 5,220, which should set up a good buying opportunity. Transports are generally strong seasonally into May.

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  • The action of the Financial Select SPDR (XLF) has made me nervous for the past month. Last week, it just rallied to the resistance in the $16.75 area before closing below its uptrend on Friday. The chart suggested that the rally from the March lows was just a continuation pattern that, when completed, would indicate a renewed decline. If the support at $16.20 to $16 is broken, XLF could decline to the $15.40 area.
  • The gold miners turned positive last week, as the Market Vectors Gold Miners ETF (GDX) moved through resistance in the $61 area (line c). This suggests that miners may finally catch up with gold prices. Strong support for GDX is now in the $58 to $60 area. There are upside targets in the $68 area, and quite a few of the gold miners have bullish charts, as I wrote earlier this week.

Oil
The action in crude oil noted in last week's article did favor higher prices, and June crude oil closed above $112 on Friday-up almost $4 per barrel for the week.

The next targets are at $115, with further chart projections in the $118 area. Technically, crude still looks very strong despite the impressive gains, and the June contract's first good support sits in the $108 to $110 area. It would take two daily closes under $104.70 in the June contract to weaken the outlook.

Dollar Index
The dollar index plunged to new reaction lows Friday, as the previously mentioned intervention had little impact on the dollar index. It is now very close to the November 2010 lows-and not far above the November 2009 lows of 74.20.

The Euro was sharply higher for the week, and closed above the long-term downtrend in the area of $1.44 per euro. This is very negative for the dollar. The next resistance is in the $1.46 to $1.48 range, which means European vacations this summer are going to be even more costly.

Gold
The SPDR Gold Trust (GLD) had two consecutive closes above $140.70 last week, indicating that the three-month trading range had been resolved to the upside.

My initial retracement target of $143.20 for GLD was exceeded Friday, and there are subsequent targets in the $147-$148 area. The recent trading range has targets between $153 and $155. It would now take a close below $137.50 to reverse the positive momentum.

Interest Rates
The yield on ten-year Treasuries rose this week to 3.55% from last week's close at 3.45%. This just reinforces the overall uptrend, with next resistance at 3.60%. A weekly close above 3.74% would indicate that yields could rise to 4%.

Conclusions
Even though the overall market failed to correct last week, there were plenty of opportunities in individual stocks. They are still the best bet until we get the inevitable market pullback that should allow for more favorable entries into broad-based market ETFs.

The start of the correction should be signaled by one sharply lower daily close, accompanied by at least a 2 to 1 negative Advance/Decline ratio.

Not all stocks will correct as much as the market when it does pull back from the highs. The groups I like for individual stock picks are biotech, consumer sectors, gold miners, and the so far unloved tech sector.

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