The S&P 500 edged slightly above the high end of my price range target of 1289-1292 last week. However, then it backed off and broke its seven week win streak. There was no technical damage done as the index held above the previous weekly low. The S&P did lose momentum and a close below the lows of last week in the 1270 range would be a negative.
The Dow put in another good week as key components IBM and GE responded favorably to better than expected earnings reports. The narrow nature of the Dow, just 30 members, hid some distribution in the broader markets last week. The NASDAQ and Russell 2000 indexes closed below very near term support levels. The selling showed rotation in the market as several big winners from December have been sold off in 2011.
Looking at the longer term Dow chart 12,000 is a key level. In 2008 the Dow broke down from support near 12,000 and selling intensified. So, that old support of 12,000 on the Dow is now resistance. As I write the Dow is within a stone’s throw of that level as the market starts the week off strongly. Let’s see how the index acts near the key 12.000 level.
The metals complex saw continued selling last week. The selling intensified last Thursday on fears that China will aggressively hike interest rates to combat inflation. Gold performs best in a negative real interest rate environment. If interest rates increase to curb inflation the allure of metals is decreased.
The dollar continues its rapid decline this week. The dollar reached its lowest level since mid November. As of this morning the dollar Index is down for the ninth session out of ten bringing the slide to more than 4% during this period. This negative action in the dollar has given commodities a mild boost today. In the CRB index, 10 are lower and nine are higher. Cocoa futures are up sharply, over 4%, after the Ivory Coast put a month-long export ban in place. Cotton and lumber futures are limit up in early trading. The energy and metals markets are not responding favorably to the declining dollar, opposite of the trend over the past several months.
As companies report earnings this month, a key factor in forward guidance will be how they handle rising input costs. With the CRB in a strong uptrend over the past several months management teams have been dealing with rising costs to the raw materials required in making their products. Companies that can pass through those additional costs to their customers will continue to thrive. Companies that cannot will see margin pressure and likely selling pressure in their shares.
McDonald’s, American Express, 3M, DuPont, EMC, Johnson & Johnson, U.S. Steel, Qualcomm and Starbucks are some of the key fourth quarter earnings releases for the week. How the market responds to these leaders will set the tone for the market this week.
