Daily Market Assessment

Monday: Decent Bounce, But No Follow-Through

It was tough to sit on the sidelines Monday as the DOW and NASDAQ jumped off to a rousing good start for the week. But closer examination revealed a lot of concern.

The major averages opened with a positive bias and spent the rest of the session trading up, but the major averages failed to meet the required +1.7% percentage gain on higher volume to produce a sound follow-through day. Volume, a critical component of institutional buying, waned on both exchanges, which further emphasized that institutional buyers were nowhere to be found. One might expect to see volume recede from Friday's levels which were inflated due to the quadruple witching day of multiple options expirations. However, volume totals on Monday were not only below Friday's session, but also below average.

Breadth was positive as advancers led decliners on the NYSE by greater than a 3-to-1 ratio and by a 2-to-1 ratio on the Nasdaq exchange. The number of new 52-week highs led new 52-week both exchanges.

The latest round of multi-billion dollar mergers and acquisitions (M&A) helped build optimism and send the major averages higher on Monday. Community Health Systems Inc (CYH -5.49%) said it will buy Triad Hospital Inc. (TRI +5.25%) for $5.1 billion. ServiceMaster Co. (SVM +12.40%) surged to its highest level in over 5 years as the nation's largest provider of lawn-care and landscaping services was bought out by a private equity group. So far this year, $507.7 billion in US deals have been announced, exceeding $386.7 billion at the same time last year. The recent spate of M&A's has led many to believe that 2007 will be another strong year after a record number ($ value) set in 2006.

The National Association of Home Builders/Wells Fargo released its sentiment index which fell to 36 from February's revised 39, the first decline since September. A reading below 50 means most respondents view conditions as poor. Concerns over the housing market remain on the horizon as investors await Tuesday's housing starts data. The Fed Open Market Committee (FOMC) is also set to begin its two day meeting on Tuesday. Their decision will be announced on Wednesday and as always, investors will take a close look at the language for a better understanding of what concerns the FOMC has. At this point, must people are looking for the Fed to hold rates steady, but they may have to lower borrowing rates in the future to offset the effects of falling real-estate market.

Monday marked the fourth anniversary since the war in Iraq began. March also marks the month when the present multi-year bull market began, after the horrific bear market ended in October 2002. During that time, the S&P 500 has climbed +60% and reached a six-year high, however, it is still well below the all-time high set in 2000.

Summary: Short Term Bearish; Long Term Bullish