By James Hyerczyk
Commodity Trading Advisor
U.S. equity markets are called higher on Thursday after the bond auction in Spain contained no surprises and was deemed relatively successful. The auction of Spanish 10-year Bonds eased investor tension and may have temporarily numbed the pain from the thought the country would soon need a bailout. Even though yields rose to 5.7%, up from 5.4% during the last auction in January, this rise was expected since short-term rates had been moving higher.
Although many equity traders sat on the sidelines on Wednesday and during most of the overnight trade while awaiting the results of the Spanish Bond auction, U.S. indices managed to post only relatively small losses. For many of the indices and individual stocks, Wednesday’s rally marked a normal 50 percent correction of the break from recent highs. This action essentially created a “pivot” zone that is expected to be attacked from underneath by bullish investors and defended from above by bearish traders.
With the Spanish debt auction seemingly out of the way, U.S. investors will have to battle through another series of corporate earnings reports as well as economic reports dealing with new jobless claims and existing home sales. Better than expected earnings reports today may be no guarantee that the stock market will rise; however, based on the performances of IBM and Intel on Wednesday.
Besides worries about Europe encouraging investors to be defensive, IBM fell after its earnings beat analyst profit estimates but missed on sales. Intel, on the other hand, had stronger than expected sales and earnings, but its share prices fell anyway. The declines in both equities could be a sign that technology stocks have fallen out of favor with the investing public perhaps because of the meteoric rise in the technology-laden NASDAQ index during the first quarter.
With the markets reacting negatively to the earnings reports of two big tech companies on Wednesday and in similar fashion last week to Google, investors will likely be watching closely the first-quarter earnings report from Microsoft after the close which analysts predict to come in at 57 cents per share.
How can I talk about technology stocks without mentioning Apple, Inc.(AAPL)? After selling off sharply last week from its high at $644.00, this stock started the week under pressure, changing the main trend to down on the daily chart after breaking $597.94 before reaching a low at $571.91. At this point value investors stepped in, driving the market to $620.25 before settling lower.
Technically, the rally to $620.25 represented a normal correction of the $644.00 to $571.91 decline. However, since the main trend is now down on the daily chart for the first time since late December 2011, a subsequent sell-off from Wednesday’s high will be a sign that sentiment may be shifting.
It doesn’t mean that the long-term bullish outlook for the stock has been trashed, but fresh weakness may indicate that investors feel the stock is a bit pricey at current levels and in need of some serious price adjusting. Based on the size of previous corrections, a 15% move to the downside from the recent top is certainly reasonable given the huge run-up, making $574.40 a possible downside target. Today, $607.96 will be the key pivot price where the bulls and bears are likely to do battle, but this battleground may even extend to $616.46. Regaining this price level on a closing basis will mean that the bulls have won the battle at least temporarily.
Aside from the Spanish auction affecting demand for risk, and earnings reports driving demand for individual stocks, the broader-based indices will be feeling the effects of U.S. economic reports. Even before the U.S. stock market opening, the U.S. government will report initial jobless claims for the week-ended April 14. The forecast calls for 375,000 new claims versus 380,000 last week. Touching 400,000 could have a devastating effect on stock prices while coming in better than expected should underpin the major indices.
Later in the trading session, investors will get the chance to react to the National Association of Realtors March Existing Home Sales data. Traders are looking for a slight rise of 4.68 million in March versus 4.59 million in February. After the release of this report, the focus is likely to shift to any new developments in Europe and to the technology sector.
For outside help throughout the trading session, investors should focus on the direction of the Euro and the U.S. Dollar. A falling Euro will be a strong sign that investors will be shying away from risky assets. Consequently, a rise in the dollar will mean increased demand for safer, lower-yielding assets.
If demand falls for risky assets then the stock indices are likely to turn their small pre-markets gains into early session weakness. Traders should pay particular attention to the NASDAQ futures as this index may turn out to be the weakest today especially if sellers begin to emerge in Apple, Inc.