Doves and Bulls Prevail, But Market Tests Loom

Ms. Yellen’s magic touch is back. Her dovish tenor came through in the Fed’s March meeting minutes released Wednesday and the market responded much like they did in the early days of her chairmanship – with a rally. There are convincing signs behind yesterday’s move, including the fact that 1845 support in the S&P 500 has held and that the CBOE Volatility Index (VIX), the market’s “fear gauge,” has remained relatively low during this early-Q2 market correction; VIX closed below 14 Wednesday. Shorts were getting too comfortable and Wednesday’s action was likely a corrective short covering move by traders who positioned for a Fed minutes hawkish surprise.

But Wednesday’s strong gains look vulnerable for a repeat early Thursday. Why? In part because there was little volume behind yesterday’s advance. The 1845 support may be subject to a few more tests. Now past the Fed minutes, focus can (and is), returning to the just-started earnings season and the warnings that preceded it. Wall Street may now demand more than just a passable earnings round to justify record index levels.

Hot and Cold Retail. Bed, Bath & Beyond (BBBY) is lower early Thursday after the housewares seller’s forecast for the current quarter missed industry forecasts. Family Dollar Stores (FDO) missed Street expectations with fiscal Q2 profit as revenue fell. But Costco Wholesale (COST) was up after reporting a March rise in comparable-store sales. Retail earnings will continue to be an important gauge of economic strength.

Bracing for the Banks. The week’s key earnings releases will be the Friday morning reports from banks Wells Fargo (WFC) and JP Morgan Chase (JPM). Bank results offer valuable information not only on the strength of the financial sector but traffic for construction and business loans, too.

Look Abroad. It’s no time for economic tunnel vision. Chinese data Thursday is a quick reminder. Chinese exports fell 6.6% in March from a year earlier in March, missing forecasts for a 4.2% gain. Also from overseas headlines, the Bank of England released its monetary policy decision and, as expected, kept the key rate at 0.5%. The rate has been at that level since March 2009. Industry analysts had widely expected the BOE to stand pat in the face of low inflation below the bank’s 2% target and an unemployment rate that’s above 7%.

Good trading,  JJ