High Time

Traders,

The lines converging where you stand

They must have moved the picture plane
The leaves are heavy round your feet
You hear the thunder of the train Suddenly it strikes you
That they’re moving into range
And Doctor Strange Is always changing size
And it’s high time Cymbaline
It’s high time Cymbaline
Please wake me
Pink Floyd, “Cymbaline ”

Our current position:

BUYERS BEWARE

In this week’s edition you will find:

  • Where We Are
  • What Was Important About Last Week
  • What We Are Watching For This Week
  • A Word On Discipline

The following sections are on our home site:

Where We Are:

Taking a look at the broader market:

The bulls are glowing.

Action for the week was marked by solid performances across nearly every sector.

Fed Chairman Bernanke said the media misunderstood his congressional testimony last week.

Despite a weaker than expected employment report the market rallied. Positive reactions to negative news can only be considered characteristic of strong environments.

Though generally speaking, the economic news is very bullish.

“We are now in the midst of economic nirvana. Never in my wildest dreams could I have imagined such incredible economic news. First, despite higher gasoline prices, consumer confidence is near its highest level in almost four years. Second, business investment remains very robust, and has been growing at a 14.3% annualized rate, which represents the fastest pace in six years,” fund manager Louis Navellier said.

As far as our beloved Growth Stocks are concerned, the enthusiasm the broader market is receiving has not carrying over.

The Russell 2000 small cap index is actually showing warning signs as heavy selling has raided it for the past three weeks.

The Technology heavy Nasdaq is not keeping step with the broader market.

The hot Broker Dealer sector is showing its first signs of losing ground as a relative strength winner. This has been a leadership area, and could very well lead things down.

The Hi/Lo Ratio, while improved over the past few weeks, is still showing evidence of bearish divergence against the Dow and S&P 500.

And don’t forget it’s May. This is when we typically see funds unwind positions before the traditional slow time of the year. As mentioned last week, for the past 50 years very little gains have been made for the upcoming six month period.

Markets suck people in. They get people excited and convince them they need to hop on in fear of missing the boat. We suspect this is going on.

From a technical, fundamental and common sense perspective we see no point in jumping in here.

We’re not sellers either. Should this bull have further significant upside we’re likely to get an opportune pullback to get into ideal industry groups.

Technically speaking:

The Dow Industrial Average
($INDU), +1.85%, cruised to a new six year high.

The S&P 500
($SPX), +1.16%, hit a new high.

Nasdaq
($COMPQ), +0.86%, closed in positive territory after testing below its 50-day moving average.

Russell 2000
($RUT), +2.27%, hit a new high.

Volume indications are showing a mixed bag. The Dow and S&P 500 for the past three weeks show four accumulation days vs. three distributions days. The Nasdaq shows three accumulation days and three distribution days. The Nasdaq 100 shows four accumulation days and four distribution days. And the Russell 2000 shows two accumulation days and four distribution days. Topping patterns often show high volume, which this environment is certainly characterized by. Heavy selling in leading index Russell 2000 also is considered bearish for the market.

The Hi/Lo Ratio improved significantly on the NYSE for the week, though has yet to make a new high for they year. This is indicator continues to show bearish divergence against the Dow and S&P 500 indexes.

Key chart action for the week:

Charts courtesy of Stockcharts.com

The 10-year Note Yield
($tnx) extended on its year long trend up.

The U.S. Dollar Index
($USD) fell further.

The Gold Miners Index
($XAU) hit a new high.

The Dow Jones AIG Commodity Index
($DJAIG) posted a gain and has formed a cup-and-handle pattern.

Consumer Staples
($CMR) made gains, though did not take out the high for the year.

Consumer Cyclicals
($CYC) hit a new high.

Technology
($DJUSTC) continues to mostly consolidate for the year.

The Semiconductor Index
($SOX) made gains above its 50-day moving average, though did not take out the high for the year.

Banks
($BKX) hit a new high.

Broker Dealers
($XBD) edged higher, though did not make up for last week’s carnage as a first sign of relative weakness sets on for the index.

Retail
($RLX) is pointing up as a year-long cup-and handle pattern has formed.

Healthcare
($HCX) slipped lower under its major moving averages.

Biotech
($BTK) posted a modest gain as it attempts to trend up above its major moving averages.

REIT’s
($DJR) mostly consolidated for the week as it finds resistance at its 50-day moving average.

Homebuilders
($DJUSHB) dipped to a new low before posting a small gain on the week as the index continues to trade well below its major moving averages.

Transportation
($TRAN) hit a new high.

Airlines
($XAL) inched higher, though continues to trade below its 50-day average and above its 200-day average.

Defense
($DFX) hit a new high.

Energy

($IXE) consolidated for the week as it trades above its major moving averages, poised to move higher.

Utilities
($UTY) rallied above to close above the major moving averages.

The top 10 industry groups from the 6 month RS screen are:

  1. GOLD
  2. SEMICONDUCTOR-INTGRTD
  3. STEEL IRON
  4. INTERNET SERVICE PROVI
  5. PRINTED CIRCUIT BOARDS
  6. BASIC MATERIALS WHOLES
  7. INDUSTRIAL METALS MINE
  8. INDUSTRIAL EQUIP WHOLE
  9. INDUSTRIAL ELECTRICAL
  10. FARM CONSTRUCTION MACH

What Was Important About Last Week

STOCKS:

  • Chesapeake Energy (CHK) reported Q1 (Mar) earnings of $1.07 per share, which excludes non-recurring items. Total revenues rose 148.2% year/year to $1.94 bln vs. the $1.67 bln consensus.
  • Hovnanian Enterprises (HOV) lowered its Q2 and FY06 outlook. Co now sees Q2 EPS of $1.40-1.50 (consensus $1.68), down from $1.55 to $1.80, and sees FY06 EPS of $7.20-7.40 (consensus $7.92), down from $8.05-8.40.
  • Dollar Financial (DLLR) reported Q3 (Mar) earnings of $0.45 per share, $0.06 better than the Reuters Estimates consensus of $0.39. – Excluding non-recurring items.
  • THQ Inc. (THQI) Reported a fourth quarter loss. Following current trends for video game publishers, the company’s near-term outlook remains dour.
  • El Paso Corp. (EP) reported earnings more than triple in the first quarter, led by growth in its pipeline unit.
  • McKesson Corp (MCK) reported Q4 (Mar) earnings of $0.68 per share, in line with the Reuters Estimates consensus.
  • Activision (ATVI) surpassed analysts’ expectations by five cents, and reported Q4 (Mar) loss of $0.03 per share. Total revenues fell 7.7% year/year to $188.1 mln, also above forecasts (consensus $132.5 mln). Co issued downside guidance for Q1, sees a loss of $0.10 versus a consensus loss of $0.02, and sees revenues of $145 mln (consensus $171.09 mln).
  • Barrick Gold (ABX) reported first quarter profits more than tripled on surging prices and production.
  • Whole Foods (WFMI) announced third quarter profit rose 27%; the company also raised its same-store sales guidance.
  • Prudential Financial (PRU) reported Q1 (Mar) earnings of $1.38 per share, excluding non-recurring items, four cents better than the Reuters Estimates consensus of $1.34.
  • Starbucks (SBUX) reported Q2 (Mar) earnings of $0.16 per share, two cents better than the Reuters Estimates consensus of $0.14. Revenues rose 24.2% year/year to $1.89 bln (consensus $1.87 bln). Co issued in-line guidance for Q3, sees EPS of $0.17 (consensus $0.17), but raised its outlook for FY06. Co now sees EPS of $0.71-0.72, up from $0.68-0.70 (consensus $0.70).
  • Electronic Arts(ERTS) reported Q4 (Mar) earnings of $0.14 per share, five cents better than the Reuters Estimates consensus.
  • JDS Uniphase (JDSU) reported Q3 (Mar) net of breakeven, in line with the Reuters Estimates consensus of ($0.00). Total revenues rose 89.7% year/year to $315.5 mln (consensus $313.2 mln). For Q4, JDSU issued in-line guidance, sees revenues of $302-322 mln (consensus $316.88 mln).
  • Caremark (CMX) posted a 16% jump in Q1 profits, topping the consensus view by a penny.

ECONOMY:

  • Non-farm payrolls increased by 138,000 jobs in April, less than the expectations (consensus +200,000, First Trust Economics +205,000). Payrolls were revised down by a total of 36,000 in February and March. Manufacturing payrolls added 19,000 jobs, the largest gain in nearly two years.
  • The household survey reported that employment increased by 47,000 last month, while the labor force increased by 159,000. The unemployment rate held steady at a 4 1/2 – year low of 4.7%.
  • Average hourly earnings jumped 0.5% in April and 3.8% in the past year. This is the fastest YOY gain since July 2001.
  • Non-farm productivity increased at a 3.2% annual rate in the first quarter. Non-farm productivity is up 2.4% in the past year.
  • Manufacturing productivity continues to outpace the gains in the rest of the economy, growing an annualized 4.2% in Q1. Manufacturers have increased productivity by 4.1% in the past year as they adapt their business models to utilize new technology and compete in a global economy.
  • Non-farm unit labor costs increased a more-than-expected 2.5% at an annual rate in the first quarter. Manufacturing unit labor costs fell 2.6% at an annual rate in Q1 and slid 1.1% in the past year.
  • The ISM non-manufacturing business barometer jumped to 63.0 in April versus 60.5 in March. This was well above consensus estimates of 59.3 and First Trust Economics forecast of 61.0. Fourteen of 17 industry groups surveyed reported growth in April compared to 13 in March and just 10 in February. The new orders component increased to a two-year high of 64.6 last month.
  • The ISM Manufacturing index increased to 57.3 in April versus 55.2 in March. This was above consensus estimates of a 55.0 level.
  • Personal income is up an annualized 7.6% in the last three months and 6.0% in the past year. Wages and salaries rose 0.4% last month and an annualized 6.2% in the last three months.
  • Personal consumption jumped 0.6% last month after a 0.2% gain in February. Consumption is up 6.4% in the past year.

What We’re Looking For This Week

Key earnings releases:

  • MONDAY: Cell Genesys (CEGE), Fluor Corporation (FLR), OSI Pharmaceuticals, Inc. (OSIP), Six Flags, Inc. (PKS), ValueClick, Inc. (VCLK),
  • TUESDAY: Baidu (BIDU), Hansen Natural (HANS), King Pharmaceuticals (KG), Walt Disney (DIS),
  • WEDNESDAY: an International Group (AIG), Autobytel.com (ABTL), Federated Department Stores Inc. (FD), Mittal Steel Company (MT), Toyota Motor Corporation (T M).
  • THURSDAY: Agnico-Eagle Mines Limited (AEM), EchoStar Communications Corp. (DISH), Expedia, Inc. (EXPE), Kohl’s (KSS), The Knot (KNOT), Urban Outfitters (URBN), Viacom (VIA).
  • FRIDAY: none

On the economic front we have potential market movers with:

  • MONDAY: none
  • TUESDAY: Wholesale Inventories
  • WEDNESDAY: Crude Inventories, Treasury Budget, FOMC policy statement
  • THURSDAY: Business Inventories, Initial Claims, Retail Sales, Retail Sales ex-auto
  • FRIDAY: Export Prices ex-ag., Import Prices ex-oil, Trade Balance, Mich Sentiment-Prel.

The Following Sections Are On Our Home Site:

This Week’s Word On Discipline:

“Slow and steady wins the race.” – Aesop

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