Break Time

Stocks fell for a third day today, but April still ends with the best S&P 500 monthly gain since December 2003. A consolidation or small correction will not be at all surprising after several strong weeks. Intermediate-term indicators remain firmly bullish.

Economic indicators continue to drive market activity, and the latest numbers suggest U.S. growth is faltering. March personal spending came in below forecasts at the same time as construction activity slowed. This suggests that the falling housing sector is having a wider impact than previously thought by many. Analysts at top Wall Street firms are openly questioning the Bernanke Fed's view that lingering inflation may require further interest rate hikes. The opposite may be closer to reality if the housing slowdown continues to cut into consumer spending. This may be why retailers, especially those who sell expensive luxury goods, have been weak recently.

A more immediate cause of today's losses may have been in Washington. President Bush and Congress are in a sort of stand-off about Iraq war funding. This afternoon Bush made some conciliatory comments that suggested a deal could be reached with the Democrats. Crude oil prices and energy stocks dropped at about the same time as Bush spoke, so we suspect there is a connection. If so, it suggests that conventional wisdom is wrong; higher oil prices are actually bullish for stocks.

If it doesn't get any worse, today's energy downturn could prove to be a good test of the uptrend's continuing viability. This volatile sector can turn on a dime, however, so we remain cautious.