A Pivotal Week

The next week could prove to be a pivotal one for the stock market,
determining whether the move out of the current trading range will be up
or down.

Beginning with the Producer Price Index and Michigan consumer sentiment
this morning, and continuing through next week’s Federal Reserve meeting
and key technology earnings reports, the market should have enough
information to determine near-term direction. (Note: The Morning Report
and technical market commentary will not be published next week, and
will resume the week of May 21. The Market Close will continue to be
published next week.)

After Tuesday’s first-quarter productivity report showed falling
inflation and rising wages, a recipe for inflation that hopefully will
be a one-quarter phenomenon, investors will be watching economic reports
closely for signs of weakness and inflation, which when combined produce
stagflation. Hopefully we won’t need to take those 1970s leisure suits
out of storage just yet.

Inventory and production numbers come out on Monday, and then Tuesday is
the Federal Reserve meeting. The Fed funds futures are pricing in about
a 90% chance of another 50 basis point rate cut on Tuesday, and the Fed
is unlikely to disappoint. More important will be the accompanying bias
statement; any hint that the Fed’s bias is shifting back toward neutral
would likely be met with selling. An interesting coincidence for
followers of the market commentary is that May 15 is also a fairly
significant cycle turn date, give or take a day. If the market’s going
to break one way or another, May 14-16 is a good window for that to
occur.

After the Fed’s work is done, the parade of earnings reports begins.
After the close on Tuesday, chip equipment leader Applied Materials
is expected to report that earnings declined 40%, to
33 cents a share. At $52 a share, AMAT is trading at twice the level it
has historically bottomed at, but the entire sector has been held aloft
by Intel’s projected $7.5 billion capital investment
spending budget. Storage leaders Brocade and Network
Appliance also report after the close on Tuesday,
and analysts will be looking for signs of a bottom in that most
important of sectors.

The CPI will be reported Wednesday morning, and then Hewlett-Packard
will report earnings after the close, but given that
the stock is barely above its 52-week low with the Dow up 20% off its
low, it appears investors already fear the worst. Ciena and Dell , before and after the close on
Thursday, will be much more important. Ciena has been one of the very
few tech stocks to show no signs of slowing, and will be watched closely
for signs of a slowdown in optical equipment spending. Dell has been
rewarded by investors this year for gaining market share from rivals,
but at some point business has to begin to show signs of bottoming.

And if all that isn’t enough to worry about, some analysts are expecting
Oracle to issue an earnings warning some time after
May 15.

If all that isn’t enough to move the market one way or another next
week, we could be range-bound for a long time.

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