MarketTrends: April 30, 2009

Issued by Colin Cieszynski, CFA, CMT, Market Analyst, CMC Markets Canada

North American Indices and Commodities: US Equities Break Out of Consolidation Zones

After declining through February and rebounding in March, US equity indices consolidated their gains through April. Through this period, equities encountered significant resistance but kept forming support at higher lows, forming bullish ascending triangle patterns. This morning, the Dow Industrials (US30 CFD) and S&P 500 (SPX500 CFD) overcame resistance and broke out of these triangles, suggesting that a new upleg may be underway.

These breakouts, coupled with breakdowns by gold and silver below $900/oz and $12.50/oz respectively suggest that investor confidence continues to grow. In addition to a number of better than expected earnings reports, comments from the US Federal Reserve Board yesterday suggest that the US economy may be starting to stabilize. With the street ignoring yesterday’s worse than expected US GDP numbers it appears that many investors may be thinking the low point of the global recession may be close at hand or already behind us. The next major resistance levels appear near 8,350 then 8,900 for the Dow, 900 and 950 for the S&P.

That being said, the road to recovery may yet be long and bumpy and retests of previous breakout points are common so it may be a bit early to get overly excited about the market. There are a number of factors that may affect sentiment over the next few days. First, there have been a number of reports overnight that Chrysler may declare bankruptcy as soon as today, although this may have already been discounted in market pricing. Second, a number of overseas markets are closed tomorrow for holidays so there may be fewer participants about on Friday. Third, when US equities move significantly in one direction on the last trading day of the month, they tend to reverse course a bit the following day on normal profit-taking. Fourth, don’t forget that stress test results are due on Monday, May 4^th, which may yet have a significant impact on the global banking sector.

Although Canadian markets have rallied today, the S&P/TMX 60 (Toronto60 CFD) has remained in its current 550-575 trading range. It appears that the retreat in the precious metal sector may be offsetting gains in other areas of the market.

Commodity trading today also suggests investor confidence may be growing. Precious metals, which had previously acted as a safe haven for capital, have been under pressure with gold breaking down through $900/oz and silver dropping back under $12.50/oz. Meanwhile, economically sensitive commodities continue to rebound, led by copper which has rallied back through the $2.00/lb level, wheat’s move through $5.25/bushel and corn’s advance toward a test of $4.00/bushel resistance. US Crude also continues to attract support, holding near the $51.00/bbl level with resistance near $51.50/bbl and $53.00/bbl and support near $50.00 or $49.00/bbl. Concerns over swine flu now appear to be contained to the pork area with lean hogs falling 3.2% and breaking down below $0.60/lb and pork bellies sliding 0.8%.

Canadian and US Share Update: Earnings Reports Drive US Month-End Trading, Canadian Metals Move in Different Directions

Today’s advance in the US markets appears to be particularly broad based, with leading climbers coming from a number of different sectors. The common theme of the day appears to be a positive reaction to earnings reports and guidance. Leading advancers off of earnings news include: Owens-Illinois (OI) up 27.0%, First Solar (FSLR) up 24.2%, Newell-Rubbermaid (NWL) up 23.1%, Dow Chemical (DOW) up 18.3%, International Paper (IP) up 16.5%, Akamai Technologies (AKAM) up 11.8%, Citrix Systems (CTXS) up 10.0%, and Starbucks (SBUX) up 10.9%.

In Canada today, the main theme has been a significant split in sentiment toward metal producers, with base metals climbing in tandem with the copper price and precious metals falling along with gold and silver. Leading advancers include: First Quantum (FM) up 8.5%, Teck Cominco (TCKb) up 6.0%, Thomson Creek (TCM) up 5.4%, and FNX (FNX) up 4.5%. Falling precious metals include: Agnico-Eagle (AEM) down 6.4%, Silvercorp (SVM) down 5.1%, Silver Wheaton (SLW) down 4.3% and IamGold (IMG) down 4.0%.

Sentiment toward the forest products sector may be improving in response to International Paper’s earnings report. Canfor (CFP) has advanced 5.4%, while Sino-Forest (TRE) has climbed 3.5%.