Sunday, March 28, 2004

Market Week in Review

S&P 500 1,108.06 -.15%

U.S. equity markets drifted lower early in the week on more geopolitical concerns. Israel's assassination of the spiritual head of the Palestinian militant group Hamas and Taiwan's increasing turmoil over its recent presidential election both weighed on equities Monday morning. These concerns, multiple terror threats in France and inflation jitters sent Gold up 2.3% for the week. The Volatility Index(VIX), a gauge of investor anxiety, reached 22.67 on Monday, 63.91% above its recent lows set in the first week of the month. The NYSE Arms Index reached 4.52, its highest reading since the market bottomed last March. Finally, the AAII Bullish Sentiment Index fell to 31.48, down 54.71% from its recent high set in late January.

Goldman Sachs(GS) annihilated 1st quarter earnings and revenue estimates after the close on Tuesday, yet the markets shrugged. Seemingly overnight, investors' attitudes towards stocks turned more positive. On Wednesday after the close, Micron Technology(MU) missed sales targets for its second quarter report. However, the semiconductor index, which began to rally on Wednesday in anticipation of a strong report, continued rising on Thursday. The 6.0% rally in the SOX led to gains in the entire tech sector and eventually the broad market. Moreover, the price of crude oil fell over 5% from its recent high, leading some pundits to call a bottom for the recent correction. The unexpected rise in consumer sentiment helped propel equities further early Friday. However, stocks fell late in the afternoon on profit-taking, weekend terror fears and interest rate worries, leaving major indices mixed on the week.

BOTTOM LINE: The spike in the VIX and Arms, the significant fall in the AAII Bullish Sentiment Index, a breakdown in crude oil futures, an unexpected rise in consumer sentiment and outperformance by the semiconductors are all very positive developments for U.S. equities. The fall in energy stocks and underperformance by defensive sectors during the rally are also positive signs. Finally, the two-day 7.6% rally in airline stocks was mainly a result of falling energy prices, but may also signal investors fixation on terrorism is temporarily subsiding.

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