The Week Ahead: Stocks to Rally Despite the Short Week!!

All of the concerns that hung over the market going into last week were exacerbated by earnings disappointments in many of the key sectors (Google (GOOG), Infosys (INFY), andBank of America (BAC), to name three).

Even though the major averages closed lower for the week, they were also well off their lows. This should set the stage for a resumption of the rally next week.

Globally, the focus was on inflation last week. It was higher than expected in China, India, and in the Eurozone. This increases the move towards higher global interest rates.

The downgrade of Ireland’s debt and restructuring in Greece also hung over the markets, though Europe held up surprisingly well.

Emerging markets overall declined less than those in the United States—and while the iShares MSCI Emerging Market Index (EEM) pulled back 3.7% from its recent highs, some of the emerging-market country ETFs held up much better. This is clearly a positive sign, and they will continue to be helped by a weaker dollar.

The economic data in the week ahead is focused on the housing market, with housing starts data on Tuesday and existing home sales Wednesday. Passover begins Tuesday and the markets are closed on Good Friday, so trading volume is likely to be very light.

The sentiment picture for the stock market is clearly mixed. While 55% of newsletter advisors were reported to be bullish, AAII data shows that only 42% of individual investors are bullish, while 31% are bearish. Put/call ratios and the VIX analysis, according to option expert Larry McMillan, are also still positive, and did not deteriorate much as the market was correcting.

WHAT TO WATCH

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S&P 500
The Spyder Trust (SPY), after failing to move above the February highs at $134.69, corrected to stronger support in the $130 area on Thursday before rallying into the close. Further gains Friday and positive Advance/Decline numbers caused the S&P 500 Advance/Decline line to turn higher.

The Advance/Decline lines on the NYSE Composite and other major averages recently made new highs, which is positive for the intermediate term trend. The McClellan oscillator (a short term A/D measure) dropped to its most oversold level since last May and has turned up.

A close in the SPY above $133 would be a strong sign that the correction is over. The next upside targets for SPY are in the $138 area.

Dow Industrials
The Diamonds Trust (DIA) were also able to hold above the stronger support in the $120.50 to $121 area. Once above the previous highs at $124.35, the next targets are in the $125.50 area, with resistance at $128 to $131.

Nasdaq-100
The PowerShares QQQ Trust (QQQQ) will be an important ETF to watch as the overall market turns higher, because the tech sector has lagged the rest of the market. QQQQ declined to the support zone at $56.40 to $55.80 but turned higher Friday.

A daily close above $57.30 followed by a break of the downtrend (line a) will suggest that the tech sector is ready to catch up. This does look likely as the A/D line on the Nasdaq 100 has turned up sharply and shows a bullish zig-zag pattern.

Sector Focus

source: forbes.com

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