Just like two ordinary buddies getting together on the phone, an imaginary phone call between Bill Gates of Microsoft (MSFT) and Jack Welch Of General Electric (GE) last night might have gone something like this.
"Hey, Jack. . .whuss-uuup?"
Jack replies, "Nuttin', Man. . .just announcing my retirement now that the Honeywell (HON) deal is dead. Whass-uuup with you?"
Bill: "Well, I got this idea to turn the market around. First, I'll ask Steve (Balmer, CEO) to preannounce that MSFT will meet its earnings estimate, and revise June quarter revenues upward. Yeah, I know there won't be any improvement until 2002, but I'll emphasize the positive. Then you tell everyone that will listen in the morning that GE will meet its earnings too and stick with your earlier numbers going forward too. How's that sound?"
Jack: "DUDE!! That's awesome! You think it will make a difference? They already know that since we gave everyone the numbers to begin with."
Bill: "Sure, we are the two biggest-cap stocks out there. If we sound confident, it will gloss over the notion that none of the negative news is gone and that nothing has changed fundamentally in the markets. I mean, who cares about Argentina and job losses? How about it?"
Jack: "Cool! I'm there. . .I'll just tell them that GE earnings are in at consensus estimates and affirm the full year estimates. They'll think that means the bottom is in, and there is no hint of things getting worse. Retirement is gonna be SWEET!"
Bill: "Besides that, if MSFT affirms, it will mean the same thing - it aint getting any worse, and what's good for me is good for technology, right?"
Jack: "I'm going to Dunkin to get a donut with Immelt. Wanna come along?"
Bill: "Naw, gotta a little thing at the Justice Department I need to take care of. Later!"
Jack: "Yeah, later!"
And so it happened. MSFT was up $5.10 to $71.60 on volume that exceeded its ADV by 64%, and GE was up $2.39 to $47. Most other equities were up on their coattails.
Even with warnings screaming in the retail sector from the likes of Ann Taylor (ANN), Men's Wearhouse (MW), and Sharper Image (SHRP) (a sector heavily reliant on consumer demand), the S&P retail index (RLX) was up a whopping 4.3%. The government's retail sales and spending report released tomorrow is expected to show a 0.3% gain; 0.1% if we take out auto sales.
If these numbers come in negative instead of with the expected gains (today's retail warnings suggest that it is possible), investors will have to take notice. Consumers are still assumed to have their wallets open with money flying out, the presumed reason that some have yet to acknowledge a recession in many major industries. If data shows the wallets are shutting, today will seem like a hiccup rally.
Not only that, but referenced above in the imaginary Bill and Jack conversation is the Argentine debt crisis. There is almost no chance that a default and/or devaluation can be averted now that confidence in their government's fiscal policy has fallen. Critical momentum has been reached and the effects will likely spread to other South American nations. Frankly, we will all be touched by this; some with a heavier hand than others.
If there is a silver lining, it is that by now everyone has heard of this. Using the tribe in jungle analogy, a good number of natives have turned to face the threatening noise in the bushes, and by its very recognition, the perceived danger subsides.
Still, all this does not avert bullish moves when the market wants to be bullish. However, unless you were in calls on the major indexes at the open, entries opportunities were almost non-existent. Yours truly is loath to buy the open with inflated time premiums, and thus I missed the boat today - not a single trade did I enter.
The difficulty was in stochastic bars all over the chart while price movement stayed flat, flat, flat. Even tougher was that the early move put the indexes right up against major resistance as the stochastics on the 60/30/10/5 minute charts were simultaneously at overbought extremes, and begging for relief. In situations like that there is no way to tell if the coiling action is going the pop the price through resistance or if overbought conditions will send price action back south.
Our answer came late in the afternoon as volume swelled and price action broke through resistance in what looked like a significant short-covering rally. Still no volume records were set today, which says that short-covering aside, there is not a bunch of conviction to be anything but temporarily bullish. This is not the beginning of a happy ending. It is not going to happen in the lazy days of summer.
Even so, upward price action could easily continue tomorrow morning, then fade as is typical of short covering, not to mention Fridays in general. Were the covering pressure not on, oscillators would already be suggesting an imminent and immediate down move. Shall we take a peek?
Dow Industrial chart (DJX):
We have to admit, today's 200+ point gain on the Dow made us nostalgic for the wondrous days of yore when equities did nothing but rise. But as we see from the gap up, INDU spent most of the day Velcroed to the 10,400 resistance level before bursting through as shorts covered in the final hour. Notice the daily chart though. It now shows the 20-dma at the 10,500 level providing resistance, then significantly more resistance at 10,600. Given the overbought stochastic condition with today's lack of overall volume, we might be well served to lean toward puts or a short position if the Dow hits 10,500 and the 60/30 stochastics roll from overbought during the first hour tomorrow.
NASDAQ-100 chart (NDX):
Remember this? "While it (NDX) may be playable for a small bounce, the better odds play is to the downside once any strength exhausts itself. We used to buy the dips. Now why not short the spikes?"
We ALMOST had it right from Tuesday night, but the small bounce was anything but small. Of course, we had not counted on Jack and Bill either. That begs the question, has strength exhausted itself? Hard to say for sure, but the dead stop at 1757 is right at previous resistance and will have the added burden of trying to pierce a declining trend line at around 1775 and the next resistance level of around 1790 if it is to move higher. While the daily stochastic emerging from oversold suggests it will eventually make that move, the 60/30 suggests exhaustion is not far off, especially on Friday following a big move up.
Now to the S&P 500
S&P 500 chart (SPX):
Once again, for the SPX we focus on the daily chart. Scouts honor, I never touched the center horizontal support/resistance line at 1208. Yet there it is, stopped dead at 1210 and retracing two points after shorty covered. We can also see that the 20-dma at 1214 and the descending trend line at about 1218 might present formidable resistance. If we play this one bullishly, I would be nervous as a rabbit surrounded by coyotes until SPX breaks through 1220. But with the 60/30 oscillators deep in overbought along with the 10/5, that seems unlikely, at least for tomorrow. While the daily stochastic looks to coming off the bottom, we have been faked out before. Also, the 10/5 stochastics have already made a bearish cross in a descent from overbought.
I'll probably get hate mail, but I just can't get bullish on this chart until the 60/30 cycle into oversold again, then reverses from a higher price action low. . .still a nervous rabbit.
Also, concerning the VIX spiking nearly to 28 yesterday, I was glad to see it happen as it pierced, then moved down, from its upper Bollinger band, which also happened to coincide with previous resistance. Up or down from here, I don't know the answer. The declining VIX is at odds with the bearishness shown in the SPX chart above.
As for tomorrow, keep a sharp eye on the markets' reaction to the economic news - retail sales and PPI. It may very well be a non-issue by the time the market opens, but do not trade without prior knowledge of the outcome. Second, with nice gains but on less than stellar volume, any remaining short covering that moves prices up tomorrow is likely to peter out quickly on a summer Friday. Besides, gravity always wins and we could easily see chips snatched off the table following today's gains, especially with the oscillators overbought and just beginning to roll.
Trade smart. The bear is not as dead as Abbey Cohen (bless her bullish heart) thinks it is.
See you at the bell.