Bigger than Hurricane Floyd...
People are running for cover. They are boarding up windows and evacuating their homes. These people are doing everything they can to avoid the monster that is approaching with terrifying ferocity. Hurricane Floyd? Not hardly, it is the American consumer, and those people are investors and traders everywhere.
Twice the size of the state of Florida, Hurricane Floyd has been flooding the airwaves before it floods our East coastline. While 150 MPH winds are intimidating... investors were more fearful of the August Retail Sales numbers this morning. A 1.2% jump in retail sales for August pushed investor's buttons this morning. That button said "sell". The jump was nearly double what analysts had been expecting for the retail sales figure. This was the largest move in six months. While this may be good news for store owners, it alludes to an economy that may be out of control.
Overheating may be the correct term. Bond prices took a tumble this morning on word of the super strong retail number. This drove the yield from 6.05% yesterday to 6.11% today. Traders are concerned that a U.S. economy that is too strong will be enough reason for the Fed to raise rates again on October 5th. The previous two interest rate hikes were enacted to cool this raging machine we have created in the U.S.
It is not just numbers alone. Fed bankers believe that the recipe of extremely strong consumer demand mixed with a very low unemployment rate will eventually produce sharper inflation. Rising oil prices and a weakening dollar against the yen have not been helping the matter. Yes, oil was down today. It fell $0.35 to back under $24/bbl. But the dollar slipped again to under 106 yen. This is the lowest in years. While not all companies do worse with a weaker dollar, it does make imports from Japan more expensive creating more inflationary pressures here at home.
It is this combination of Oil, $/yen, and consumer spending that has traders worried about the Fed. Word is out that retailers have been doing very well in September. There has not been much support for a slow down in the U.S. economy. Domestic consumers have basically ignored the previous two interest rate hikes. Today's figures have done nothing but heighten our Fed watch for Oct. 5th; but the key will be the CPI (more on that later).
First, let's look at what the market did today. The good news today was the Dow finally broke out of its recent trading range. The bad news was it went downward. Falling quickly below support at 10,980, the Dow 30 didn't even hesitate to blow past 10,950 (expected support) and aimed for the more crucial 10,900. All of this is obvious on an intraday chart, but I'm happy to see we closed above 10,900 after hitting the low of 10,886 near the close. Even so, the index lost 120 points on the day.
The other side of the market chose to rally instead. The NASDAQ turned in a quick morning rally of 20 points before rolling over and bottoming shortly before noon. However, the semiconductor index lead the charge and tech stocks rallied behind them. Many of the semiconductors did exceptionally well after getting booster shots from two different sources. First, there was another rally in spot DRAM chip prices pushing them up to $15. Compare that to just $4 in June of this year. Secondly, J. Morgan, chairman and CEO of Applied Materials, offered some very bullish opinions about the future of the chip industry. He believes that the Internet will continue to create a strong demand for computers which in turn will cause chip production to more than double over the next few years. Semi's in general rallied on the news with MU +6.13, KLAC +6.56, VTSS +5.06, ADI +4.13, TXN +2.56, and RMBS +2.19. Intel was only up 1.44. We struggled with dropping Intel today for two reasons. First, earnings are expected in about four weeks. Secondly, a lot of traders really expect Intel to pre-announce strong earnings for the quarter. However, we've been so successful on the play, that we wanted to make room for a couple of more stocks that have a higher potential. Besides, it has recently fallen out of its ascending channel and may need to consolidate before closing in on its earnings run.
Other sectors in the news were Banking, Brokers, and the Internet. The Internet sector continues to capture the spotlight with a constant barrage of IPOs. However, more recently many of the big names have begun climbing as we approach 3Q earnings. You'll see YHOO on the list today after slipping back to my target price of $160 in yesterday's sector wide profit taking. Fortunately, buyers were a little subdued before the CPI report tomorrow, but several of the Internet stocks are trending higher. Some of the bigger winners were: INKT +4.19, YHOO +4.44, EBAY +7.06, DCLK +6.06.
Quite a difference from the rest of the interest rate sensitive stocks. Normally, high P/E, high growth stocks like the internets would cringe with new inflationary data on the horizon, but today they left it up to the banks and brokerages. The retail numbers sent investors on the run with the CPI looming over our heads. In effect it was the banks (BAC -2.69, JPM -2.81, WFC -1.88), the credit cards (COF -1.13, PVN -1.31, ONE -0.94, AXP -0.88), and the brokers (MER -2.88, MWD -1.31, LEH -0.88) that suffered the most.
While most of us are concerned over a potential disaster with the CPI, other investors were focusing on the Floyd's potential to do some damage to their favorite holdings. Insurance companies took a beating while airlines also hit some turbulence in afternoon trading. Hurricane Floyd now has the dubious distinction of closing Disney World for the first time in its 28 year history. Roller coaster ride, anyone?
Speaking of rides...we can probably count on the CPI report tomorrow morning at 8:30 a.m. to really move the market. The CPI is one of the MOST followed indicators for measuring price inflation. It is guaranteed that Greenspan and company will be all over this report with a fine toothed comb. What exactly is the CPI? The Consumer Price Index is a "basket" of goods with hundreds of categories to help identify rise and fall of prices on items the everyday consumer will be buying. Only once every ten years is this "basket" re-evaluated to correctly reflect new consumer spending patterns.
If you are optimistic, we can hope that the CPI will be flat to down. The current consensus is for a rise of 0.3% (the same as July). This may not be just wishful thinking. The CPI is a product of the PPI, or the Producer Price Index. What happens to producer prices should trickle up to the consumer prices. We all know that the PPI was disinflationary, at least in the core figures. However, all of this pain and anguish may be for naught. Some economists believe that the Fed has more than enough ammunition to raise rates again this year. The question we are trying to answer is whether Greenspan will raise rates in October or will the CPI allow us a couple of more months to trade before the next hike. We obviously hope the report is low and we can get back to business with 3Q earnings right around the corner. Not to be left out, the July business inventories will also come out tomorrow, but it tends to leave less of an impact.
If the numbers are bad, our first line of defense is 10,800 on the Dow and 10,600 beyond that. We are currently resting on the 100 dma which has held as support for the last several weeks. The NASDAQ, while it looks more positive, would probably react violently. The first level of support is 2800 (doubtful) and beyond that we are looking at 2700.
Whatever you do, I don't recommend trading during amateur hour tomorrow unless you like chasing stocks. However, there is the possibility that the numbers will come in mixed or undecisive and we may be stuck in a trading range for the rest of the month waiting on the Fed's next move.
Sell too soon.