On the surface, the performance of the major indexes appeared to show a calm market over the first few days of the week. If we look deeper there is a raging battle between the bulls and bears. That was very evident today at the major indexes slumped, led by the Nasdaq which was down 1.75 percent.
The Dow Jones Industrial Index came within 16 points of its all-time high during trading on Tuesday, and closed Thursday about 0.5 percent away from that new high. A new high was not yet meant to be; the DJIA dropped .85 percent on the day. Earnings results from Ford (F) and Amazon (AMZN) sent the market sliding today. Bulls are still waiting and watching for a break, but selling throughout the day means no new highs will come for several days.
Nevertheless, the DJIA is still close to a new high. A solid day or two in the market could push it into record territory and force the bears to cover shorts. This has the potential to start another multi-week rally in share prices after a long sideways consolidation period this year.
The next few days will give us a strong indication of the direction the economy and stock market will be headed over the coming months. The bears believe the markets are topping and chartists see the Nasdaq and Russell 2000 as tracing out head-and-shoulders patterns. This would indeed be a bearish topping pattern if fully formed. Luckily for the bulls, these patterns are not complete and are only speculative guesses.
More worrisome is the economic weakness in China. The yuan weakened below the critical 6.25 level and reports show no sign of a pickup in economic growth. Also of concern is the escalating situation in Ukraine. There is a financial war unfolding and Russia is responding to U.S. financial attacks by threatening retaliation. China and other emerging economies could deliver a major blow to Western markets if they act in concert, and they have grown increasingly wary of U.S. political interference in economic affairs.
If the conflict escalates in this direction, it could prove to be the financially destabilizing shove that finally pushes China into a further slowdown. Investors should not assume that leaders in Moscow and Beijing, who are politically secure, would be unwilling to make economically damaging moves that have big political payoffs.
While a few high profile risks exist, there are still a number of positive indicators. The most important stock for technology funds is Apple (AAPL), which delivered a positive earnings report, raised its dividend, increased its buyback plan and announced a 7 for 1 stock split.
Additionally, the flash manufacturing PMI for April indicates the U.S. manufacturing sector is still expanding at a healthy clip. Manufacturing is a leading sector in the economy and continued strength here will mean solid growth for months to come. Confirming the PMI number were strong results in durable goods orders. Next week the GDP report for Q1 and the unemployment rate for April will be released. This will give us even more insight as to the direction of the economy.