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Chicago PMI too much for bulls to swallow

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The major indexes have given back earlier gains after this morning's 10:00 release of the Chicago Purchasing Managers Index (PMI) fell to 45.9% in October, down from September's 48.1% reading and below economist's forecast of 48.7%. While the Chicago PMI is more regional, and measures the pulse of economic activity in the northeast part of the United States, levels below 50% indicate a contraction in economic activity.

New orders fell to 47.7% from 49.2% while production fell below 50% to 48.6%.

The national index from the Institute for Supply Management will be released tomorrow, with economists expecting a dip to 48.9% from September's 49.5%.

"This report does not guarantee a lower ISM tomorrow ... but it does make it a bit more likely," said Ian Shepherdson, chief U.S. economist at High Frequency Economics. "Chicago's troubles might be localized, perhaps auto-related."

Market response to the Chicago PMI numbers has been modestly negative with the Dow Industrials (INDU) 8,391 -0.43% off its earlier highs, which had rallied just shy of the 8,500 level at 8,493. Dow breadth is slightly negative with 17 stocks lower versus 13 higher. Trading to the downside are Alcoa (NYSE:AA) $22.20 -2.63%, United Technologies (NYSE:UTX) $61.20 -2.3% Boeing (NYSE:BA) $29.79 -1.35%, while upside gainers have Hewlett Packard (NYSE:HPQ) $16.28 +4.02%, SBC Communications (NYSE:SBC) $26.38 +1.65% and Johnson & Johnson (NYSE:JNJ) $58.04 +1.27% posting gains.

The S&P 500 Index (SPX.X) 891 +0.07% now edges positive as I type with sector action mixed. Financials have the S&P Banks Index (BIX.X) 288 +0.04%, KBW Bank Index (BKX.X) 766 -0.34%, Broker Dealers (XBD.X) 766 -0.34% and Insurance (IUX.X) 262 -0.34%.

Technology stocks have given back the bulk of their earlier gains, with the NASDAQ-100 Index (NDX.X) 985 trading unchanged, with best levels of the morning having been 1006, just shy of Monday's relative high of 1007.

Tech sector action has the Semiconductor Index (SOX.X) 295 back below the 300 level after analysts once again downgrade the sector saying visibility for any rebound remains limited. UBS downgraded Cree (NASDAQ:CREE) $17.28 -5.3% to "Reduce" from "Hold" on valuation; Microsemi (NASDAQ:MSCC) $7.28 -5.4% to "Hold" from "Buy" due to concerns about lack of visibility as company exits nonstrategic business lines; and Aeroflex (NASDAQ:ARXX) $5.49 -14.21% to "Hold" from "Buy" on concerns about margin compression in Sep quarter.

The GSTI Software Index (GSO.X) 100 +1.15% trades higher with sector bellwether and NASDAQ-100 heavyweight Microsoft (NASDAQ:MSFT) $53.35 +0.45% showing a marginal gain. Key technicals in play for MSFT right now is the trending lower and longer-term 200-day SMA of $53.63 serving as near-term resistance. It's been my thoughts in the past that MSFT is "the" stock institutions seeking technology exposure would be buyers of if a tech-recovery is to be found. With a 13.6% weighting in the QQQ and NASDAQ-100, further bullishness in MSFT could drive index action.

Treasuries are seeing modest buying this morning with the 10-year December Treasury futures (ty02z) 114'145 +0.16% ticking higher with YIELD ($TNX.X) lower at 3.93%.

December Fed Fund Futures (ff02z) 98.59 are near their highs and indicating the MARKET expects the Fed to cut rates by 25-basis points (100-98.59 = 1.41%) next week, with slight possibility for a 50-basis point cut.

Jeff Bailey

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