U.S. equities moved higher on Friday thanks to another rally in crude oil and some dovish comments from New York Federal Reserve President Bill Dudley, who said that the balance of risks to the economy is tilted slightly to the downside.
But it wasn’t enough to reverse a weekly decline for large-caps, only the second negative performance out of the last eight weeks. Investors are nervously awaiting the start of the first-quarter earnings season on April 11 when Alcoa Inc (NYSE:AA) reports.
In the end, the Dow Jones Industrial Average gained 0.2%, the S&P 500 added 0.3%, the Nasdaq Composite wafted up 0.1% and the Russell 2000 ended the day with 0.2% gain.
Treasury bonds moved higher, pushing the ProShares Ultra 20+Year Tsury ETF (NYSEARCA:UBT) recommended to Edge subscribers to a gain of 3.5% since recommended on March 24.
Energy stocks led the way with a 2% gain after crude oil gained 2.3% thanks to falling inventory levels as refinery output increases, in addition to evidence of falling U.S. shale production. Analysts at Bank of America Merrill Lynch noted that with U.S. output in “freefall,” the global oil glut should soon start to ease.
The recent rally in the Japanese yen — which had been squeezing yen carry trades so popular with hedge fund types — backed off from 18-month highs thanks to some “verbal intervention” by Japan’s finance minister, who said that he could still act to counter “one-sided” moves against the yen.
With Japan hosting the G7 meeting of finance ministers later this month, his ability to act is limited by the common “no currency intervention, ever” mantra that is always spouted at these shindigs — an effort to avoid the overt outbreak of mercantilist currency wars.
Gap Inc (NYSE:GPS) was hit with a 13.8% decline, returning shares to mid-February levels, after reporting a big miss in its March same-store sales numbers. The upscale Banana Republic brand was responsible for much of the disappointment. Management added that inventory levels were high heading into April, which will likely pressure margins.
Stepping back, the fundamental and technical outlook for stocks remains dark and cloudy.
The Dow looks to be on the verge of breaking the post-Feb. 11 uptrend, as it desperately clings to the support offered by its 20-day moving average. On Thursday and again on Friday, it looked like we could get a close under this level for the first time since Feb. 12 before intraday rallies saved the situation.
Measures of market breadth continue to narrow as well, with the percentage of New York Stock Exchange stocks above their 50-day moving average falling below 80% on Thursday for the first time since early March. Fewer and fewer stocks are looking attractive to buyers at these levels.
On the economic front, the Atlanta Fed downgraded its GDPNow Q1 growth forecast to just 0.1% after a weak wholesale trade report this morning. And on earnings, analysts are bracing for what’s set to be the worst reporting season since 2009 — and what could mark the fourth consecutive quarter of falling profitability — with S&P 500 earnings set to decline 9.1% from last year.
For this reason, I continue to recommend defensive positions such as the April $24 puts against Morgan Stanley (NYSE:MS) that Edge Pro subscribers recently trimmed for a near 220% gain since recommended on March 30.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.
