Don't Chase Rainbows

Don't Chase Rainbows
by Sam Collins 04/28/08

Following a shaky start on Friday, stocks rebounded in the afternoon, ignoring record-high crude oil prices and the lowest consumer confidence number in 26 years. The higher crude price resulted from a report that several U.S. cargo ships fired at two unidentified boats in the Persian Gulf but this couldn't be confirmed.

By late afternoon, there was more talk of the financial stocks having hit bottom and less chatter about the problems of the morning. Earnings from Ericsson AB (ERIC), the world's largest maker of mobile networks, encouraged buyers with earnings that far exceeded analysts' estimates.

So with the financials leading the way, the Dow Jones Industrial Average (DJI) gained 43 points to close at 12,892 and the S&P 500 (SPX) rose to 1,398, up nine points. But the Nasdaq (NASD) -- still impacted by Microsoft's (MSFT) lower forecasts -- fell six points to 2,423.

The New York Stock Exchange traded 1.3 billion shares, with advancers ahead of decliners by almost 2-to-1. On the Nasdaq (NASD), 870 million shares crossed and advancers outpaced decliners by 5-to-3.

The Dow (DJI) ended the week up 0.3% but was off 2.8% year-to-date. The S&P 500 (SPX) was up 0.5% and down 4.8% year-to-date and the Nasdaq (NASD) gained 0.8% but was off 8.6% year-to-date.

As for action in the commodity pits: On Friday, June crude oil prices gained $2.46 to end at $118.52 a barrel, and the Amex Energy SPDR (XLE) rose $1.16 to $82.88. Gold futures for June delivery gained 30 cents at $889.70 per troy ounce. The PHLX Gold/Silver Index (XAU) bounced from the conjunction of the 200-day moving average and its bullish support line by $3.45 and closed at $176.05.

What the Markets Are Saying

Each of the major averages appears poised to break out from the troublesome tops that have taken since January to form. However, technical factors support only more sideways movement.

The internal indicators are overbought and the sentiment indicators show the public and letter-writers are bullish. Only the CBOE Volatility Index (VIX) is bullish, along with its partner, the Nasdaq Volatility Index (VXN). (The VIX measures volatility on the S&P 500.)

Both the VIX and VXN are at their lowest numbers of the year. The VIX closed on Friday at 19.59 and the VXN at 23.24. In early March, those numbers were much higher, with the VIX at 35.60 and VXN at 36.75. The theory is that, with lower volatility, the indexes are telling us that the period ahead should be less volatile and more inclined to favor buyers than sellers.

But the jury is still out and, until it comes in with a solid vote for the bulls, I'd recommend buying the best quality at the lowest price. Chase nothing and own quality -- it's hard to go wrong with that advice at any time.

Today's Trading Landscape

Earnings to be reported today include:

Alberto-Culver (ACV), Alliance Resource Partners (ARLP), American Safety Insurance (ASI), Axis Capital Holdings Ltd. (AXS), BankAtlantic Bancorp (BBX), Bookham (BKHM), CH Energy Group (CHG), China National Offshore Oil Corp. (CNOOC), China Petroleum & Chemical (SNP), Choice Hotels Int'l (CHH), CNA Financial Corp. (CAN), Coachmen Industries (COA), Cognex (CGNX), Compass Minerals Int'l (CMP), Cott Corp. (COT) and Covance (CVD).

Darwin Professional Underwriters (DR), Digi Int'l (DGII), Duckwall-ALCO Stores (DUCK), Ducommun (DCO), Education Realty Trust (EDR), Enbridge Energy Management (EEQ), Enbridge Energy Partners (EEP), Enterprise Products Partners (EPD), Fair Isaac Corp. (FIC), FEMSA (FMX), First Citizens BancShares (FCBN), First State Bancorp (FSNM), FMC Technologies (FTI), FPL Group (FPL), Franklin Electric (FELE), Frozen Food Express Industries (FFEX) and Fujifilm Holdings Corp. (FUJI).

Hartford Financial Services (HIG), Humana (HUM), iBasis (IBAS), IHOP (IHP), Integral Systems (ISYS), Interactive Intelligence (ININ), Intevac (IVAC), JDA Software (JDAS), Loews Corp. (LTR), MasterCard (MA), Matsushita Electric Industrial Co. (MC), Meritage Homes Corp. (MTH), Microchip Technology (MCHP), Microtune (TUNE) and Moog (MOG).

Old National Bancorp (ONB), Olin Corp. (OLN), PAB Bankshares (PABK), PartnerRe Ltd. (PRE), Plum Creek Timber (PCL), Pre-Paid Legal (PPD), Questar Corp. (STR), RadioShack Corp. (RSH), Rent-A-Center (RCII), Rock-Tenn (RKT), Seaspan Corp. (SSW), Silver Wheaton Corp. (SLW), SonoSite (SONO), Southern Copper Corp. (PCU), Spherion Corp. (SFN), STMicroelectronics (STM) and Sysco Corp. (SYY).

TGC Industries (TGE), The Hanover Insurance Group (THG), Travelzoo (TZOO), Trident Microsystems (TRID), TeleCommunication Systems (TSYS), Tyson Foods (TSN), Veeco Instruments (VECO), Verizon (VZ), Visa (V), Washington Real Estate Investment Trust (WRE) and Wausau Paper Corp. (WPP).

The April Dallas Fed Manufacturing Production Index and March Chicago Fed Midwest Manufacturing Index are due today; however, today's emphasis will be on earnings.

But with more than half of the publicly traded companies having reported their numbers, look for a focus shift to economic reports later in the week -- particularly on the Federal Open Market Committee (FOMC) meeting on Wednesday, and talk of inflation and the factors that could cause inflation.

Mergers are in the news, too -- William Wrigley Jr. (WWY) is apparently the target of Mars and Warren Buffett's Berkshire Hathaway. A number of airline mergers are in the news, and Visa (V) will be in focus when it reports earnings late in the day.

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