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This Week on Wall Street
A tremendous run up in stocks this week, sparked by the release of the minutes from the last Fed meeting, sent the Dow to its highest level since may of 2001. The benchmark index broke 11,400 on Friday morning and, even though oil prices are still rising (we’ll discuss this in a moment), traders are now eyeing Dow 11,500 with whispers of 12,000 by years end.
Bullish sentiment has swept through the market sending the three major indexes higher on the week. The big driver behind this sentiment has been the Fed. On Tuesday, the Fed released the minutes and stocks simply jumped. The Fed suggested that it was near the end of its rate tightening cycle… the result? The single best day for stocks in about two years.
In recent weeks, strong economic data had traders worried that the Fed would continue to raise rates. This perception of future increases in borrowing costs is awful for equities markets as both corporations and consumers spend more money on debt rather than on consumables--in the case of corporations, more of their revenues go to debt rather than to bottom line earnings per share. Not very attractive for investors!
Earlier that day (Tuesday), the Commerce Department said groundbreaking for new homes fell 7.8 percent to a 1.960 million unit pace from an upwardly revised 2.126 million unit rate in February. This drop in housing starts helped to start the trading day off with a bang as the market saw the economic writing on the wall. “If housing is finally slowing, interest rates will not need to be raised more to cool it.”
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And the market was right… well; at least we think it was. Just prior to the release of the minutes, Janet Yellen, president of the San Francisco Federal Reserve Bank said that the current fed funds rate (4.75%) is “close to a neutral stance.” Wow! Exactly what the market was looking for and perhaps expecting after reading the housing starts number (and a report on inflation which showed core wholesale prices have not risen all that much).
In plain English terms, the stock market is very happy right now and bulls are running the show.
Traders are now targeting Dow 11,500 with a very good possibility that we’ll see that index at 12,000 by years end if the Fed does indeed halt rate hikes and the economy continues to grow at a 3 to 3.5% rate—a rate of sustainability for both price and wage growth at the current Fed Funds rate.
But there was more than just the Fed minutes that had investors feeling chipper this week. Earnings season was officially kicked off last week but has now hit stride… and has surprised to the upside (for the most part) thus far.
Nokia, the world’s top cell phone maker, blew out expectations by reporting a 21% jump in quarterly profits. Shares of NOK jumped on the day and are now trading at a new 52 week high. Interestingly enough, a company that was once our “Pick of the Week” saw some tremendous growth this week on the heels of the Nokia report.
RF Microdevices (RFMD), covered here on December 16th at $5.95, is looking good. The company engages in the design, development, manufacture, and marketing of proprietary radio frequency components and system level solutions for wireless communications products and applications.
The company offers various products, including power amplifiers; mixers; modulators/demodulators and single chip transmitters; Bluetooth products; and receivers and transceivers. It develops components for satellite radio and global positioning systems (GPS); and solutions for handsets, personal digital assistants, handheld navigation applications, and telematics systems.
Nokia happens to be one of RF Microdevices’ biggest clients. RFMD has been a superstar stock rising as high as $9.25 per share this week, or 55% since we first covered it. We’re still bullish on RFMD with a target price of $12 per share.
Back to the market: While this recent rise in stocks has traders excited, we should look at a longer term chart of the Dow before we jump to any conclusions on when the Dow will hit 12,000… if it even does.
This year to date chart clearly shows a simple wave pattern has developed in the Dow and the predictability of future moves on this chart is quite easy. While we’re clearly bullish, we’re expecting a short pullback on the Dow to about 11,100.
Using this chart, you can see that the index is nearing the top of its current wave pattern-and subsequent resistance point-near 11,500. Barring some unusual earnings reports, economic reports or geopolitical phenomena (such as Iran backing down from its nuclear plans, or Osama bin Laden being captured), we’re not expecting this pattern to be broken to the upside during this current movement.
That being said, we should be nearing a point where traders will soon move the index lower which should bring the Dow to around 11,100 (when extrapolated out over time, the support line runs to 11,100-a point where we think the index will hit the current support trend.
So while the stock market is enjoying one heck of a week, we’re not really expecting this to continue and push through resistance. The pattern above has predicted this current move and predicts a future move to the downside as well—again, barring some unusual news we’ll see a move lower once we hit that resistance line.
The Crude Truth: Crude prices hit all time highs this week after, yes, you guessed it, Iran refused to stop with its plans. Contributing to the rise in crude this week was a government report that showed energy stockpiles had a draw for the first time in weeks.
The June contract for light sweet crude traded as high as $74.50. Last week we discussed what to do if oil traded over $70.85… buy! This week, we’re not sure where oil is going since we really have no technical resistance points to work with.
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![]() The trading pattern, somewhat evident in the June contract chart, has been completely blown out by this recent run. The top black line indicates a possible resistance/support zone that may be developing. The two lower lines were the former trading channel before this whole Iran thing happened.
How do we trade crude now? We’re not sure. The best thing to do now (safest) is to wait for another pattern to develop. Crude has never traded at these levels so we have no overhead resistance and support is tricky here as well since the run is based mostly on geopolitical news, and not on supply and demand. At these levels, it may be a wiser move to sell your contracts and wait for more developments.
Pick of The Week
This weeks hot stock pick is EuroZinc Mining (AMEX:EZM) $2.15.
EuroZinc engages in the acquisition, exploration, development, and mining of base metal deposits internationally. The company owns the Neves-Corvo copper mine; and the Aljustrel zinc, lead, and silver project in southern Portugal.
This week, China released its GDP report which showed growth at 10%. This enormous growth, which was more than expected, is putting serious strain on global commodities. To profit from this China boom, simply buy commodities. EZM happens to be a small cap miner with positive earnings and great products… copper and zinc!
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We’re expecting to see EZM rise throughout the remainder of this commodities bull market, which could last 5 or more years. Our target price on EZM is $5 per share. Until next week!...
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