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Week in Review


The markets held the "line in the sand"...


Market Recap

The markets held the "line in the sand" as mentioned in this week's technical commentary, the Morning Cup of 'Jo. The SPX, NDX and RTY touched critical long term support we've been discussing for the past few years. A break at these critical levels may suggest a major shift in long term market direction toward a downward bias and a potential return to a bear market.

Whatever the case, the technicals continue to suggest the market will re-test the recent lows. The reversal on Thursday provided some glimmer of hope for the bulls after recent weakness. The action was encouraging given the magnitude of the recent decline. However, it is important to note the rally occurred on what we would characterize as "decent" volume. We thought the action reflected short covering as market participants locked in gains ahead of option expiration. Fed Chairman Bernanke, who roiled the markets last Monday with his seemingly contradictory remarks, offered less hawkish comments on Thursday to help pace the gains.

On the earnings front Lehman (LEH), Goldman (GS) and Bear Stearns (BSC) all beat estimates handily but concerns about the outlook for the second half of the year kept the impact somewhat muted. The banks, which had held up relatively well during the course of the correction began to break down. That's a development worth following closely given the groups roughly 20% weight in the S&P. KB Homes (KBH) continued the weakness in the housing sector missing earnings late in the week. The stock held flat on the day which in the context of the 25% fall in the HGX from April may suggest the group is due for a (short term) oversold bounce.

Top Headlines

The Labor Department's Consumer Price Index (CPI) for the month of May rose by the consensus estimate of 0.4%. However, the rise in core CPI, which excludes energy and food prices, was 0.1% higher than estimates and this news sent the probability of a June rate hike to 100%. (Wed 14th)

The Producer Price Index (PPI) for the month of April slowed to a 0.2% increase below analysts' estimates. However, the jump in core PPI was 0.1% higher than Wall Street's expectations. (Tue 13th)

The global market sell-off continued Tuesday highlighted by a 4% drop in Japan's Nikkei as investors continue to worry about rising interest rates and the controversy surrounding BOJ governor Toshihiko Fukui's personal investments. (Tue 13th)

Microsoft's (MSFT) co-founder Bill Gates plans to relinquish his day-to-day duties at the company over the next two years in order to focus on his charitable foundation. (Fri 16th)

Industrial production dipped by 0.1% in May versus a 0.8% rise in April, another signal that the economy is beginning to slow. (Thurs 15th)

President Bush made a surprise visit to Baghdad on Tuesday reassuring Iraq's Prime Minister that the U.S. will not pull out its forces without restoring stability to the region. (Tue 13th)

VeraSun Energy (VSE), the second largest ethanol producer in the U.S., began trading on Wednesday as it priced an IPO of 18.3 million shares at $23 per share. (Wed 14th)

Oil prices fell sharply after the International Energy Agency (IEA) lowered its original world demand forecast and stated that inventory levels in the U.S. and Asia are at a 20 year high. The demand forecast has been revised down by 30% from its January growth estimate. (Tue 13th)

Shares of business software maker Oracle (ORCL) were sent higher Friday after the company raised its 4th Quarter guidance ahead of its earnings report next week. (Fri 16th)

On the earnings front, investment banks Goldman Sachs (GS), Lehman Brothers (LEH), and Bear Stearns (BSC) reported healthy profits fueled by strong investment banking and trading revenues. Consumer electronics retailer Best Buy (BBY) easily beat estimates as demand increased for big ticket items such as flat panel televisions. (Tue 13th)

Market Movers: Winners and Sinners

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No positions in stocks mentioned.

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