Market Week in Review

S&P 500 1,134.61 -.41% for the week.

U.S. stocks finished mostly lower on the week as investors rotated out of perceived riskier and interest-rate sensitive stocks and into energy and defensive shares. Pharmaceuticals paced gains for the week on this rotation and Johnson and Johnson's strong 1st quarter report. Energy-related stocks continued their outperformance on rising crude oil prices as very strong U.S. and Asian economies spur demand.

Small-caps and technology shares fell on the week as investors fear rising rates will hurt riskier stocks the most. The exceptionally strong retail sales report sparked fears that the Fed is falling behind the curve on inflation, thus sending interest rates higher. This resulted in continued selling in interest-rate sensitive sectors such as homebuilding and financials. Finally, small/mid-cap security-related stocks plummeted as traders began to sober up on the prospects for many of these companies, thus putting an end to the recent mania in these shares.

BOTTOM LINE: Reports from Intel, Nokia and IBM contributed to the weakness in tech stocks. I viewed both the Intel and IBM reports as moderately positive and think both will be higher by the end of the year. Nokia has its own company-specific problems and I would not be a buyer at these levels. Small-caps hit an all-time high two weeks ago. It is not surprising that these stocks are seeing the majority of the profit-taking on interest rate fears. In the short-run, I expect tech to continue to underperform. However, I think this sector will significantly outperform in the second half of the year. Interest-rate sensitive sectors will remain under pressure until the first Fed rate hike. I also expect energy-related stocks to continue to outperform as there is no quick fix for the world's current energy shortage. Finally, I expect pharmaceutical shares will outperform until the first rate hike. However, I then expect political banter to bring these shares back to the low end of their trading ranges.

I was disappointed to see the amount of complacency displayed by investors last week. Notwithstanding steep loses across a broad array of technology stocks, rising energy prices and rising interest rates, the AAII Bullish % rose 8.46% last week and the VIX fell 8.12%. This, along with the short-term sell signals generated by my technical models, leads me to believe that the tech sector has further to go on the downside, while the broad market should remain neutral to slightly lower in the short-run.