This holiday-shortened week may have ended too soon for the bulls. Buttressed by the positive tilt of corporate earnings, major averages ended the week uniformly higher, despite limp macroeconomic data.
Dow Jones Industrial Average
rose 1.6% for the week, while the
jumped 4.4% and the
climbed 2.9% to 1425.19, its highest close since Jan. 15. The Dow and S&P each surpassed their 200-day simple moving averages this week, something the Comp accomplished long ago, although the S&P again failed to surpass 900.
In a somewhat unusual development, Treasuries and gold rose this week in concert with shares while the dollar fell despite equities' strength. The yield on the benchmark 10-year note fell one basis point to 3.96% while gold futures rose 0.9% to $327.60 per ounce and the Dollar Index shed 0.8% to 99.33. Participants in those "other" markets seemed to focus more intently on economic data than did equity traders, who were fixated on earnings.
Whether the mainly optimistic tone of earnings presages better economic news or the downbeat economic data continue and ultimately hurt corporate results remains to be seen. Regardless, it's unlikely that shares, Treasuries and gold will rally in tandem for very long. Notably, oil futures also rose this week, up 7.5% to $30.25 per barrel amid expectations OPEC will lower production targets next week.
Micro Vs. Macro
Monday's economic data included a sharp rise in business inventories and corresponding slump in sales. Nevertheless, shares posted solid gains as traders cheered better-than-expected results from financial giants
Bank of America
, as well as upbeat guidance from
On Tuesday, shares rose despite sharp drops in both industrial production/capacity utilization and the New York Fed's Empire State Manufacturing survey, as well as disappointments and/or cautious guidance from
Johnson & Johnson
. Earnings guidance from
and strength in truckers such as
were credited with helping the S&P 500 and Dow rally beyond their respective 200-day moving averages for a second-consecutive session.
In conjunction with that closely watched technical accomplishment, the Dow Transports hit a 52-week high Tuesday, further fueling the bullish tone. Positive earnings news late Tuesday from
further enlivened bullish spirits, so much so that downbeat guidance from
was largely ignored.
The swelling optimism manifested itself early Wednesday as equity futures rallied sharply in preopen trading. But major averages were unable to sustain early strength, and the Dow slumped noticeably, ultimately suffering its worst point decline since March 31. Ironically, Wednesday brought the week's best economic news as the Consumer Price Index was benign and housing starts higher than expected, although building permits fell by a larger-than-expected 7%.
The Dow rebounded Thursday, rising 1% while the S&P gained 1.6% and the Comp rose 2.2%. An investigation into
alleged front-running at the
New York Stock Exchange
did little to inhibit trading, apparently, as nearly 1.4 billion shares changed hands. (Options expiration likely contributed to the volume tally, and Thursday's rise as well.)
The Dow was aided by
, while broader proxies benefited from better-than-expected results by
. The latter helped sustained a week-long rally in chip that saw the Philadelphia Stock Exchange Semiconductor Index rise 11.7%.
Confirming the week's theme, shares rallied Thursday despite weakness on the economic front. Weekly jobless claims rose a higher-than-expected 30,000 to 422,000, and the Philadelphia Fed's manufacturing report cited a "notable decline" in both new orders and shipments, while the overall index was negative 8.8, its second-consecutive month below zero. The Philly Fed survey was deemed "not-as-weak as feared" and shares hit their intraday peaks after the survey was released.
Indeed, the consensus expectation was for a larger drop in the overall index, but the positive interpretation of this unabashedly weak data reflected the week's overriding bullish tone, despite evidence to the contrary.
Further verification of the prevailing optimism came from the CBOE's volatility indices. Intraday Tuesday, the Nasdaq Volatility Index hit its lowest level since 1998 and the VXN ended the week down 9.4% at 35.88.
Additionally, the VIX fell 13% for the week and, at 24.59, is now at its lowest close since May 31, 2002. The VIX has been this far below its 200-day moving average -- currently 35.77 -- only three times since January 2000, according to Peter Eliades of
Stock Market Cycles
. Each of those three prior instances -- Aug. 28, 2000, July 2, 2001, and March 27, 2002 -- augured significant market tops, he noted.
Meanwhile, some observers noted the Dow declined sharply and other averages fell from intraday peaks amid the week's highest volume of nearly 1.6 billion shares on Wednesday. The recent trend has been higher volume on up days vs. down and a reversal of that would be decidedly negative for those long.
Last Friday, in
Columnist Conversation I opined: "The short-term trading environment is looking/feeling better but the long-term outlook looks worse," judging by various technical developments.
Little this week has changed the long-term view and, paradoxically, the tenor of this week's rally raises questions about the market's short-term outlook.
Phil Erlanger, editor of
Erlanger's Squeeze Play
, has written repeatedly of late about the "extreme expectations" among the bullish crowd, whose ranks dipped to 50.6% from 51.1% this week, according to Charcraft.com's
survey. Bearish sentiment also fell, however, to 30.3% from 31.1%.
"Now that the Iraq war is in its d¿nouement, expectations have risen while the market sputters," Erlanger wrote early Friday. "The volatility indices are down substantially, our confidence indices are flashing caution signals, and market advisors wax euphoric."
The technician suggested there is "one sentiment shoe left to drop;" specifically, the short-interest data due after the close on Tuesday. "This month's short data will tell us if there was indeed a lot of short selling, or if shorts increased with the market," he wrote. "The former is bearish, the latter would be bullish. Stay tuned."
Until then, a happy holiday to those who are celebrating Easter and an enjoyable long weekend to those who aren't.
Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
Aaron L. Task.