Utility stocks continued to show weakness on Friday following a lower opening, but in the final minutes, most indices rallied to close unchanged. However, the U.S. stock market suffered its first weekly loss in five weeks when investors were tossed about by mixed signals as to the direction of future Federal Reserve policy.
The Dow industrials closed slightly higher, avoiding the first three-day decline of the year. And light volume contributed to the volatile day with buyers driving the Dow 35 points higher in the last minutes of trading against almost no sellers.
At Friday’s close, the Dow Jones Industrial Average was up 9 points to 15,303, the S&P 500 fell 1 point to 1,650, and the Nasdaq was unchanged at 3,459. The NYSE traded 590 million shares and the Nasdaq crossed 357 million. On the Big Board, decliners exceeded advancers by 1.4-to-1, and on the Nasdaq, advancers edged out decliners by 1.1-to-1.
For the week, the Dow was off 0.3%, the S&P 500 fell 1.1%, and the Nasdaq was off 1.1%.
On Monday, May 13, I said, “What tape action could lead to a short-term pullback?… The following would cause concern: a ‘key reversal day,’ three straight days down in the Dow industrials (has not occurred yet this year), and/or a high-volume break with volume of 5 times down.”
Did the market trigger these concerns?
In order for Wednesday’s KRD to be considered genuine, it had to run to an intraday high that was higher than the previous day and close lower than the previous day’s low on higher-than-average volume.
On Wednesday, the S&P 500 ran to a new all-time high at 1,687 (as a result of Ben Bernanke’s dovish comments in the morning), easily beating Tuesday’s high of 1,675. Then it had to close below Tuesday’s low of 1,663 with volume in excess of 650 million shares, and it accomplished both. The index closed at 1,655 with NYSE volume of 854 million shares (a result of Bernanke’s after lunch hawkish comments).
But another market response was needed in order to confirm its power. And Thursday had to provide high downside follow through. Instead, the U.S. markets did not provide the follow through, falling by just 5 points. And Friday did not confirm the reversal, either, closing flat to higher.
Next, what of the “three days down”? The Dow closed higher on Friday; however, both the S&P 500 and Nasdaq closed fractionally lower on Friday — a run of three days down. But this is not convincing enough in extent or power to cause concern.
Finally, was there a high-volume breakdown? On Thursday, the NYSE traded 852 million shares, and on Friday, volume contracted to just 590 million shares.
Last week, the conditions needed to confirm a high-impact key reversal day down were incomplete. But what of this week, the final four days of May?
Even though this week is short due to Memorial Day, it could be crucial in determining whether institutional investors go bargain hunting or head for the exits. My guess is that Wall Street bonuses, some of which are paid for monthly performance, will invigorate the big boys to go after some of the beaten-down tech and biotech stocks with buying power released from the fall of last week’s emerging markets crash.
But don’t look for a new stock market high because the Fed appears to have concluded that the economy has performed well enough for them to ease back slightly on further stimulus at some time in the near future.
Their power of “moral suasion” or “jawboning” is one of their most-effective tools. Last week, in daily interviews with key Fed officials, they pulled out all of their jawboning stops. This created fear in the bond market of a halt to QE and scared bond holders enough to drop the price of the 10-year Treasury note and raise the yield from 1.66% to 2.01% while still pursuing a policy of purchasing $85 billion of bonds.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.