It Is About Time
Are analysts starting to finally "get it"? Do not bet on it, at least not without a severe clubbing on the side of the head from corporate brass. Such a clubbing took place last night as Applied Micro's (AMCC) CEO, Dave Rickey, warned that revenues would fall far short of estimates and that expected profits will vaporize to become an actual loss when it reports on July 18.
But the real clubbing was his admonishment of analysts For pinning hopes on the worn out phrase, "slower pace of cancellation". Other CEOs and analysts want the public to think this is positive news when, as Rickey pointed out, it is merely a reflectance of a smaller backlog of orders. He also noted a lack of any evidence that suggests revenues would stabilize this year. Notice his intentional use of the word "stabilize", rather than "rebound"?
As Greg Jones of briefing.com adroitly points out, "a slowing pace of order cancellations is not necessarily good news. If it was, then it would be great news if orders hit zero. Think about it." In short, if you do not order as much, you cannot cancel as much. If you order nothing, cancellations shrink to zero. Rickey, as Jones points out, would not let analysts walk away with any notion that this was good news. Hats off to Rickey for this unusually blunt warning and admonishment of apparently lobotomized analysts, and to Jones for smartly connecting the dots.
However, since AMCC actually gained $0.53 on the news to close at $14.73 when it has lost $436 mln on revenue of $435 mln in the last 12 months (read that $871 mln in expenses), and its revenue stream is predicted worse by its own CEO going forward, you have to wonder if the bubble is perhaps still fully intact.
OK, enough ranting. Merrill Lynch also warned by stating this morning that revenue would fall 10% short of estimates and that earnings would come in below the consensus estimate of $0.83 at $0.52-$0.57. MER was clocked for a $7.54 loss to $58.91.
Theoretically, these two should have set the tone for the market, and they did in the early going as the Dow touched down at 10,394, the NASDAQ 100 at 1705, and the SPX at 1204, all at reasonable points of support from which they rebounded. Even so, volume was light to average at nearly 1.2 bln shares on the NYSE and just 1.66 bln on the NASDAQ. Gainers beat losers by roughly 4:3 on both exchanges where the ratios started out much worse. But at the end of the day, the recovery was enough to bring the final Dow score in at 10,472, down 31; NASDAQ-100 at 1751, up 7; and the S&P 500 at 1216, down less than 2 - a lackluster day if you turned your back since last night.
Nobody can explain the rise in the second half of the day other than to pass it off as short-covering on the eve of the expected rate cut. Maybe so, but nobody knows for sure either if the rate cut will be 25 or 50 basis points. It does not really matter except to say that the futures show a slightly favored probability of a 25 bp cut compared to the slightly favored 50 bp cut of yesterday. In the end, the difference will amount to a rearrangement of the deck chairs on the Titanic. It is highly unlikely that a rate cut will spark any rally, as the five previous cuts have failed to do so.
Also, what are we to make of today's surprisingly positive economic releases? Durable goods orders were up 2.9% vs. the expected fractional loss while consumer confidence for June came it at 117.9, higher than estimates of 114.5. New home sales too of 928K beat the estimated of 900K. This can only viewed as encouraging by bulls, but it was not the spark for today's second-half rally.
Much as I think fundamentals are still lousy (and likely to get worse) with business recovery much further off than many think, I cannot argue with this little glimmer of bullish hope that suggests today's losses might have been sustained or even gone lower had the markets not talked themselves into thinking the news was good for the long term. The fact is, excepting the tech-heavy NASDAQ, the charts of the SPX and Dow do not look so hot, and have extinguished the bullish flame that looked to ignite from oversold only two days ago.
Care to take a peek at the charts?
NASDAQ-100 chart (QQQ):
On the surface of the NDX, things look promising in the short term. We see a gap down with a strong recovery off support at 1700 ($42.50 on the QQQ) and a nice white candle that keeps the daily stochastic oscillator marching up out of oversold. In a vacuum, that looks nice. But this is not a vacuum. There is stiff resistance at $44.25 from the previous nine days of trading and the highs have become successively lower in the last month. Add to that the 60/30 min chart candles hitting the upper Bollinger bands along with oscillators topping out, and we can that these are not in a position to carry the daily any higher right now. In fact, if the recent stochastic failure to reach an oversold high is any indicator, it is about time for the daily to roll again, and the 60/30 may help it along tomorrow. The broader weekly trend leaves a bigger clue that the overall trend is down.
DOW Industrial (INDU) chart:
Unfortunately for the Dow, all signals make it look like a terminally ill patient that can no longer get out of bed. In fact, the daily stochastic suggests that it cannot even turn over at this moment. In short, the fast over slow stochastic cross was a headfake. The 60/30 oscillators have already maxed-out on the current attempt to reach overbought. The corresponding candles could not even reach their upper Bollinger band extreme before reversing. That leaves the daily oscillator buried on oversold waiting on the next cycle of the 60/30 to help pull it up. Bears beware. When things look their worst, that is often a green flag for the bulls to start racing. Why they would do that I cannot rationally comprehend. But who said the markets are rational when human emotion has driven them as long as they have existed? As Molly has often wisely noted in these pages, oscillators oscillate, and the daily chart leaves nowhere but "up" to go. When that happens though is anybody's guess. The weekly chart certainly says look out below!
S&P 500 chart (SPX) from last Thursday:
As for the SPX, recall the daily chart with the green circle from last Thursday. While the oscillators said bull ahead, the trendline said no way. Take a look at the latest chart.
S&P 500 chart (SPX) today:
In fact, the candles did not have enough strength to get back above 1238, let alone historical resistance at 1241-1248. It has been downhill since. While support held nicely above 1200 and delivered a nice rebound, the downward trend remains intact. Meanwhile, the 60/30 charts look fatigued after today's recovery with the 30-min stochastic already rolled down from what was barely overbought. Close enough for horseshoes and tiddly winks. The probable downward trend for the 60/30 candles does not look good for the prospects of a bullish daily chart going forward. Once again, it too has rolled over and formed a lower high. OK, for you bulls, today's candle cannot be ignored. That rebound that left a long tail (wick) is a real sign of strength. It shows that bulls had the gumption the let bears take it down, wherein bulls then steam-rolled bears back up the charts in almost unstoppable fashion. While the bigger weekly trend says look out below, let the bear beware of bullhorns.
As for the VIX, it gapped up to 24.5 today, but fell over a point back to 23.35. Frankly, it has me perplexed. It has been showing an abundance of bullish optimism lately as it hovers within a few points of 20, which indicates either put selling or call buying - hard to tell which. Either way, it is bullish, but perhaps too much so, and perhaps ready to reverse back up to the 30 or higher level. In short, it is at odds with chart oscillators. A low VIX generally means a market topping out, yet oversold oscillators suggest higher equity prices soon. Nothing says the VIX cannot go lower, but the lower it gets, the stronger the case for the bears to feed on the honey pot.
As for tomorrow? Coin toss. Charts are still sloppy with a general downtrend interspersed with bouts of optimism. The rate cut could change all that. Or it could be greeted with indifference as it is already expected. A 25 bp cut could cause investors to think, "It is not enough to overcome the terrible times we are about to encounter", and thus send markets down. Just as easily, investors may greet it with "Wahoo! Party hats and horns! Times are not as bad as we thought since apparently the Fed thinks only a 25 bp cut is necessary." The same fickle bunch will apply a mirror reaction to a 50 bp cut. "Oh boy, he cut by 50 bp. Things must be awful in the economy", or "Wahoo! That should really stimulate the economy - the bottom must be in!"
No matter what, the market will likely be quiet with lower volume going into the announcement at 2:15 ET, then get jumpy in either direction as mind-numbed robots try to figure out which end is up. Personally, I will sit it out for an hour after the announcement before I take any position. I have no clue as to the direction markets will take, and will let markets tell me. I do not want to guess right. I want to make money in the direction the market says we are headed.
That is not the answer we all want to hear on the eve of a rate cut, but that is reality. We must wait for the market to show us the opportunity. We cannot create the desired outcome with wishful thinking.
See you at the bell!