Fed Governors, CPI reports, Housing Starts, Oh my!
While the post-Labor Day rally failed to materialize for the entire market as many had hoped, big name tech stocks still managed to land on the yellow brick road. Investors could take their pick of reasons not to buy last week with a host of Fed governors speaking and a frightfully decisive PPI report expected last Friday. Thus, the stampede to Emerald city that we expected last Friday was suddenly lost in a cloud of dust. Earnings warnings, higher oil prices, and plenty of Fedspeak were enough to keep the Dow 30, OEX, and the S&P 500 all stuck in a week long trading range. Even the yield on the 30 year bond couldn't do much more than trade sideways.
Alas, next week does not appear to look much better. However, with our normally optimistic outlook, there are opportunities aplenty for stock pickers extraordinaire. Before we can look to the future, let's glance back to Friday and see how the shortened trading week ended.
After the weathering a handful of speeches from the Fed governors, the market was poised to move on the data presented in Friday's PPI report. What we got was a +0.5% gain in August. This was higher than the expected 0.3% economists were predicting. However, excluding the more volatile energy and food prices, the "core" rate actually fell -0.1%. To most of us this is a mixed bag and amateur hour on Friday showed it. The NASDAQ gapped up about 30 points to 2880 and the Dow quickly shot up as well before both of them fell back to more mundane levels as traders stopped to decipher the data.
Here is how the week looked:
The PPI's core rate that came in unchanged, or down from the expected 0.1% gain, is what the market was looking at the most. This was the 4th decline for 1999 and really helped ease concerns among bond traders that the Fed would raise rates again in October. Bond yields gapped lower and actually fell to a low of 6.01% (with a little help from the Bank of Japan, but more on that later), before climbing back to end the day at 6.03%. Economists and the Fed both realize that inflation is currently non-existent. However, our economy is so strong and retail spending has been so robust, that both are looking for any pressures from the wage market to signal any growth in inflation. The wage market is not the only culprit. The rising price of oil is putting pressure on certain industries and inflation may be building in the pipeline. Additionally, economists are noting that the two year decline in commodity prices may have stopped. Any rise in raw materials will eventually raise the prices of finished products. Some expect that rising oil/energy and commodity prices may begin to show inflation over the next three to six months. But short term, the coast appears clear. A survey by CBSMarketWatch of economist showed that sentiment is 9:1 against a rate hike on October 5th.
News of a 0.9% growth for Japan's 2Q GDP numbers sent the dollar to three year lows against a rising yen. While the yen's recent trend is probably still intact, U.S. bond traders were happy to see the Japan government step in to buy dollars and slow it down. This added a little extra emphasis to the U.S. 30 year bond's drop on Friday before its late day recovery. Japan is the second largest economy in the world. A stronger yen only makes its exports more expensive forcing you and I to pay more for that new Sega Dreamcast or Honda Accord. Not exactly what Japan is looking for while its struggling economy finally appears to be pulling out of a 10 year recession. Of course a weaker dollar doesn't help our inflation concerns either. A weaker dollar could add to inflation pressures by forcing the price of imports higher and increasing exports here at home. At the moment, domestic policy is to let it the currency rates run its course as long as it remains slow and steady. In the mean time, intervention on the side of Japan has sparked renewed interest in its recovering stock market which is expected to keep the momentum alive though next week.
While we are on the subject of foreign markets, most of Europe appeared to rally on the U.S. economic data and the continuing rise in oil prices. Germany, France, and Italy were all higher on the day while England fell to some late day selling. Our neighbors, Canada and Latin America also gained on the day.
To bring the focus back home, most of us were watching the tech stocks. And how could we not! The NASDAQ turned the heat on slightly after 10 o'clock on Friday and came within less than 2.5 points of hitting 2900 before succumbing to a little late day profit taking ahead of the weekend. Our old intraday high was 2874 set back in mid-July. Several sectors helped spur the rally as hardware, semiconductors, networking, Internet, and even software stocks all helped push the index higher. It is not hard to understand why. With the perception that the Fed "should" have a harder time rationalizing a rate hike in October, investors fly back to the interest sensitive, high P/E growth sectors.
Sector rotation might be making it too simple, but there are arguments to support such a move. Just recently, the passing of Thursday, September 9th or 9-9-99 gave the software sector it first dress rehearsal for Y2K. It was previously thought that this string of 9's could cause problems with older programs. Without any major failures this week, investors may be feeling more confident that Y2K will pass without incident. We also have a new belief that corporate spending is not falling behind like we previously thought. Again, previous assumptions expected corporations to with hold any new spending in light of Y2K fears. This may prove untrue. Last but not least is the growing expectation for holiday sales on the Internet. Last year, holiday sales figures were a mystery. This year, expectations are rising. While this allows us a great chance to play the "rumor" it is setting us up for a "sell on the news" later in the year.
Let's take a quick look at some of the major events we need to be aware of this week:
As you can see, it is not the most benign schedule the market has to work with. However, last week didn't look too hot either.
What is going to move the markets will be investors' (both small and large) fear's of a rate hike in October versus not wanting to miss out on possibly the best 3Q earnings in a long time. At this point I'd like to remind you that there is something called the greed factor. Unless we get some drastic economic numbers or some extremely negative comments from the Fed heads this week then we are likely to see an uptrending market. That does not mean bet the farm on Monday.
This is the week we need to be making our earnings season game plan. Take the time to pinpoint those stocks we want to play and identify their earnings dates. Do they have a previous earnings run trend? When does it normally start? If you are a believer in contrarian viewpoints, look at the current disposition of call options versus put options on your favorite stocks. Do you see any overhead resistance or support there? Where is the best entry point for you to target shoot your way in? Where and how am I going to allocate my capital for the next 6 weeks? For most of us, we have four weeks before Intel kicks off the 3Q earnings season on Tuesday, Oct. 12th. For the braver traders, we have three weeks before Yahoo! kicks off the Internet earnings game on Thursday, Oct. 7th. Everyone remembers how we played YHOO last time, right? You won't see it as a current play this weekend, because of its one week $30 run up. However, if we get any kind of entry point this week, you'll probably see it on the letter soon (I'm hoping for a retracement to at least $160, maybe more).
Technically, Friday's strong close on the NASDAQ with volume of 1.14 billion bodes well for the tech sector. Temporary support should be 2800. If the Dow still needs more consolidation, look for 10,950 to be our first line of defense. Many believe that if we are to have any kind of sustainable rally we need to see a broad market advance. Without the small caps confirming the move, then it is prone to be short lived. Fortunately, we had such a move in the Russell 2000 just last week. Whether this new trend holds up or not remains to be seen.
Tips for next week: be patient, don't chase stocks you shouldn't and don't place all your bets before we see the CPI on Wednesday. After that, we'll probably all go cross eyed keeping one eye on the approaching 3Q earnings and the other on the October 5th Fed meeting.
Sell too soon.
P.S. yes, Jim is still the editor but we've grown enough to need two. Secondly, we dropped quite a few plays this weekend and some of them are still good plays. Make a careful decision before bailing out of something that may still work for you.