Saxo Bank: US Equity Trading Strategies

The fight is on: Great Earnings vs. Big Bad Inflation. Which will gain the upper hand?
--- Today or tomorrow may finally decide which way this market will go in the coming weeks.

Today's Stock Market View
Trader's Note: Today and possibly tomorrow are the twelfth round of the twelve round match between buyers and sellers that has been running since earlier this month. In the bear corner we have the fear-mongering promulgators of 1994-style inflation who are frantically waving a sheaf of Prices Paid reports, and CPI and (possibly today's) PPI numbers, while in the bull corner, buyers are backed by one company after another snorting and pawing the ground with expectation-busting earnings and rosy outlooks. This analyst will take a ring side seat and see which side gains the upper hand before joining the action. A TKO will soon decide the direction this high-strung market will take.

Economic Items This Week:
Today: PPI for Mar. (out at 0.5% vs. 0.4% expected and 0.2% vs. 0.1% expected Ex Food and Energy), US Weekly Jobless Claims (out at 12:30 GMT)
Friday: US Durable Goods (Mar.)

Earnings Highlights This Week:
Today: Merck, MBNA, AT&T, Office Depot, Sears, UPS, Viacom, Microsoft, Amgen, Xilinx
Friday: International Paper, Xerox

Market Comments:
As I suspected, Greenspans's additional testimony yesterday failed to offer any additional "surprise kerosene" - at least short term - on a highly flammable market. There was an initial panic around the time of his testimony, but the market quickly recovered and closed the day strongly. He really didn't have much to say other than the wonderfully sanguine "I'm not worried about deflation, but I'm not worried about inflation, either." (that's my paraphrasing). The general market action was a deja vu of Teusday, in which the "hot money" tech sectors (save biotech) saw the strongest buying. Healthcare was also strong as was the media sector on more takeover hullabaloo related to the potential Sony/MGM deal.

In earnings news, the ranks of companies filing by with blockbuster earnings reports is turning into a regular parade. Will the market finally take notice? Names like EBay and Qualcomm reporting great results and positive outlooks is very important for this market, as they are true market leaders, having been some of the best performers among large caps in this bull market from last March. A key litmus test today is whether perfection is already priced in. It certainly wasn't priced into Ford's stock price, which was boosted 10% by yesterday's Q1 results.

Today's PPI report is the last concrete inflation data point we will get until the April 30 Chicago PMI. While higher than expected, it wasn't 1979 all over again. Traders have extremely short attention spans and may manage to temporarily forget the inflation issue for a while, now that inflation worries may have climaxed for now.

Trading Strategies: The tech charts are giving me fits. Many look simply awful, but many are also oversold. If you have a look at Cisco (CSCO), for example, you see a break of long term support followed by a small rally that brings the stock back into the range. So, while the longer term picture looks awful for one tech stock after another - the shorter term oversold reading could mean some kind of relief rally that lasts for a week or slightly more before the resumption of the sell-off in the sectors. That's the hope for the bullish corner at least. To make matters more confusing, bearish engulfing formations from two days ago have now been replaced by hammer and harami reversal formations after yesterday's new lows followed by a rally to highs for the day.

Market Technicals:
All commentary in this section is for the June futures contract of each index.

Nasdaq-100 - The Nasdaq-100 had a bit more pep than may have been expected, and a spate of positive, post-close earnings offered a risk to the bearish argument. The technical picture is fraught with signals from different time frames. The shorter term time frame is still looking for a continuation of the sell-off to lower levels - possibly 1400. But the longer term picture is still waving the green flag as long as 1425 is not violated. Perhaps it's best to wait this one out. One can establish shorts if the index collapses lower and then retraces - or longs if the index is able to wipe away the Greenspan gap and reattain the upside swing level - which is now around 1480. Trade Positioning: Stand aside.

SPX – The SPX lacked enthusiasm yesterday and also needs a strong uptick through the upside swing level around 1140 to rekindle any hopes for the bullish scenario, which has the 1110 as the final support area. It suffers from the same short-term, long-term contraindications as the Nasdaq-100. A break of 1110 to the downside has negative implications further out. Trade Positioning: Stand aside.

Dow - The Dow tread water yesterday. It needs a surge back through the 10450 area to make me believe that a retry for new highs in the year is possible. Otherwise, a significant break of 10200 to the downside may have negative implications and could bring on a sell-off back to the 10000 base. Trade Positioning: Stand aside.

John J. Hardy
Saxo Bank Market Strategies