A New Week and a New Blog Begins

April 6, 2009

A New Bull or a Bear Market Rally?

Hello and welcome to Market Pulse - a new feature on Physician's Money Digest. I've been involved in the markets professionally for over 20 years. I currently am Managing Director of Emerald Bay Partners, a long /short equity Hedge Fund, and I am the Founder of Sierra Capital Investors, a Registered Investment Advisory service.

Markets are a big part of my life and I look forward to using this blog as a platform to share insights and opinions about the markets, US and Global economics, and other business and finance related topics.

The Week that Was:

After trading lower on Monday, the market rallied for the 4th consecutive week while reaching 7-week highs. The Nasdaq closed to its best level in three months and is positive for the year. The Dow Jones Industrial Average kicked off April with a gain last week of 241 points, or 3.1%, to 8018. The Standard & Poor's 500 rallied 27 points, or 3.3%, to 843. Technology stocks crossed into positive territory for 2009 as the Nasdaq Composite Index added 77, or 5%, to 1622; the 25.4% gain is the Nasdaq's best four-week run ever. The Russell 2000 index rose 27, or 6.3%, to 456 and is up 30% in four weeks. The Dow, S&P 500 and Russell 2000 are still in the red YTD.

The S&P lost 3.5% on Monday with the forced resignation of GM CEO Rick Wagoner and President Obama’s threat of withholding more bailout funds for GM and Chrysler. The administration said it would provide GM sufficient working capital for 60 more days, during which top management must deliver a viable restructuring plan. Shares of GM plunged 25% on the session.

Tuesday lived up to its reputation as a turnaround day. The markets rallied into the last day of the month/quarter, despite weaker-than-expected economic data. The Case-Shiller Home Price Index declined 19.0% year/year in January, Consumer Confidence was 26.0 and the Chicago PMI came in at 31.4 in March, below the 34.3 consensus. This news was mostly discounted as “backward looking” data.

Wednesday, as investors shrugged off a weaker-than-expected ADP Employment Change of -742,000 and the major averages began surging higher at 10:00ET following a batch of “not as bad as expected” data. The ISM Manufacturing Index came in at 36.3, and Pending Home Sales grew 2.1% month/month in February. Mortgage rates dropping below 5.00% and the continued fall in home prices are attracting first-time home buyers to the housing market. Construction Spending declined 0.9% month/month in February as well.

Thursday proved to be the biggest day of the week. All ten major sectors in the S&P closed higher, led by Industrials (+5.5%) and Consumer Discretionary (+5.2%). The major averages opened higher, helped by a strong showing in the overseas markets — Hang Seng +7.4%, DAX +6.1%, Nikkei +4.4%, FTSE +4.3%.

Coordinated actions from the G-20 meetings in London helped spur those gains. World leaders pledged another $1.1 trillion to stimulate the global economy

Whether the gains in U.S. markets were a result of the Financial Accounting Standards Board easing mark-to-market accounting rules for banks, or whether the rally was simply the result of beginning of the quarter buying is debatable, but unimportant. The FASB decision was largely expected and probably priced in. Nevertheless, the S&P gained another 2.9% on the day.

Friday was mostly a consolidation session until a late session rally led by the financial sector. The employment report was basically in line, as nonfarm payrolls declined 663,000 in March (consensus -660,000) and the unemployment rate rose to 8.5%, as expected. The stock market is rallying on any news at this point.

This week is a holiday-shortened week - markets are closed on Good Friday. Alcoa (AA) pens Q1 earnings season on Tuesday (4/7) after the close. Economic data and the Fed/Treasury calendar is thin. FOMC Minutes from the March 17-18 meeting will be released on Wednesday.

A New Bull or a Bear Market Rally?

With stocks 25% above their March lows, this is the longest advancing streak of this bear market. While it may feel the “Bull” is back if you look at the last six months, you will see we are trading within a pretty well defined range between 740-940 in the S&P 500.

The prices outside of this 200 point range I’ve labeled as unfair highs (trading was not being facilitated at these prices) and unfair lows (bargain hunting buyers stepped in and moved prices higher from these prices).

The S&P is in a very interesting spot right now close to the resistance line (labeled R1) around 880. The S&P has tested this resistance area in the past, and based on those attempts, that level is the ceiling until proven otherwise. Will this level continue to cap rallies the next time it’s tested? Above that level is the YTD high area of around 940-950 (labeled R2). Support levels to keep an eye on include the 50-day moving average (the yellow line labeled S1 around 780) and the bottom part of the range 740ish (labeled R2).

Are we overbought?

Have we come too far too fast? Here’s a potential fly in the ointment: the percentage of NYSE stocks above their 50 day moving average is approaching levels seen at the beginning of the year (we then proceeded to lose 270+ S&P points).

We will have to keep our eyes on volume, internal money flows, and market breadth at these important support and resistance areas to reveal signs of weakness or continued strength in the weeks to come. In a range bound market my strategy is to sell into strength and buy weakness, always with defined risk. Good traders know when to take a profit — great traders know when to take a loss.

According to historical data, stocks reach a bottom four or five months before a recession ends, and corporate profits turn higher four or five months after. This gives the U.S. economy an August deadline for shaping up - if March 9 is to remain the low point for this bear market. Keep in mind the economy and the stock market are not the same thing.

Here’s to a profitable four day week!

Michael Doran is Managing Director of the long/short equity fund, Emerald Bay Partners LP. Mr. Doran can be reached at (530) 677-1635 or mdoran@sierrainvestor.com

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