A Recap of Last Week and a Look Ahead

The major indices ended the week mixed following volatile trading that was dominated by earnings reports and news regarding the government's "stress-test" on financial institutions.

The major indices ended the week mixed following volatile trading that was dominated by earnings reports and news regarding the government's "stress-test" on financial institutions.

The Dow had losses of .7% (-55.04), the S&P 500 was down .4% (-3.37) and the Nasdaq outperformed with a 1.3% (21.22) gain. Five of the ten sectors advanced, led by materials (+2.2%) and tech (+2.0%). Defensive sectors healthcare (-3.7%), consumer staples (-2.8%), telecom (-2.4%), and utilities (-2.0%) underperformed.

For the week, 143 S&P 500 companies reported earnings with roughly 80 companies reporting better-than-expected earnings and 40 faring worse-than-expected.

Some of the companies that beat or met earnings estimates include IBM (IBM), DuPont (DD), Caterpillar (CAT), AT&T (T), McDonald's (MCD), Microsoft (MSFT), American Express (AXP), Apple (AAPL), eBay (EBAY), Amazon.com (AMZN), and Ford (F).

Companies that missed include Amgen (AMGN), 3M (MMM), Boeing (BA), Capital One (COF), Merck (MRK), and Morgan Stanley (MS).

Financials (+-1.3%) saw of the largest movements in reaction to earnings. Bank of America (BAC) reported better-than-expected first quarter earnings, but investors showed concern after the company's first quarter credit loss provisions totaled $13.4 billion, up almost $5 billion from the fourth quarter. Meanwhile, Morgan Stanley (MS) reported a larger-than-expected loss and cut its dividend.

Also driving volatility within the financial sector and the broader market was the Treasury's stress test of financial institutions. The preliminary results of the Fed's first stress test states that most U.S. banking organizations have capital levels well in excess of the amounts necessary to be well capitalized. Details were lacking with no indication if any banks failed the stress test. The release on Friday sparked some volatility, but financials settled the session largely unchanged from pre-report levels. The results will reportedly be made public May 4.

In the coming week earnings will remain in focus, along with a FOMC announcement and Q1 GDP set for release Wednesday. The NYT is reporting The Treasury Department is preparing a Chapter 11 bankruptcy filing for Chrysler that could come as early as this week as well. The Treasury has an agreement in principle with the United Automobile Workers union, whose members’ pensions and retiree health care benefits would be protected (by taxpayers) as a condition of the bankruptcy filing. The only major question that remains unresolved is what happens to Chrysler’s bondholders, who hold $6.9 billion in company debt. The government’s most recent offer, would give the company’s lenders about 22 cents on the dollar, or $1.5 billion, and a 5 percent equity stake in a reorganized Chrysler.

Something to note: while the Standard & Poor’s 500 Index climbed 28 percent from a 12-year low on March 9, CEOs, directors, and senior officers at U.S. companies sold $353 million of equities this month, or 8.3 times more than they bought, data compiled by Washington Service, a Bethesda, Maryland-based research firm, show. That’s a warning sign because insiders usually have more information about their companies’ prospects than anyone else. The S&P 500 has jumped 28 percent in 33 trading days, the sharpest rally since the 1930s, on speculation that the longest recession since World War II will soon end.

The eight S&P sectors that I track weekly remain bullish overall though their ascent seems to be slowing.

Although action was quite choppy at times, we did see continued strength in materials, metals and mining, and financials. New highs in these sectors appear to be at resistance.

Five of the eight sectors actually lost Technical Strength. We saw generally higher prices over the week. Much of the movement was focused in Materials and Industrial stocks. Three of the eight sectors are in a non-trending mode, with the two consumer-related sectors (Consumer Discretionary and Consumer Staples) showing particular drops in strength. The defensive Consumer Staples and Health Care sectors continue to lag in strength. As a rule, markets tend to continue their climb when the great majority of their components are participating. As bull moves age, weaker sectors begin to drop out and the market moves higher from a narrower base. We're seeing a narrowing of that base at present and that leads me to believe that we're more vulnerable to a correction than we've been in the prior several weeks.

Both volume and breadth must immediately expand or the stock indices are likely to sharply sell off. This would not necessarily signal an end to an intermediate rally but the stock indices are in a position from a market development/market structure standpoint where a correction could likely move sharply to 790 to 800 on the S&P 500.