Not so fast there partner! The Fed is alive and well!
Just when you thought it was safe to go back into the market the Fed heads, led by Parry and two others, took center stage with comments detrimental to the market. Parry said it was too soon to assume the Fed was done raising rates. This was a small comment but enough to punch a hole in the rally balloon and attempts by analysts to repair the verbal damage were not successful. Parry said one month's data or even one quarter's data would not be enough to show a lasting trend. With earnings warnings and signs of slipping sales on almost every front, the possibility of even more rate hikes and the resulting profit slow down sent investors heading for the exits.
Picture this. A conference call between Greenspan and associates over the weekend. Greenspan talking, "as you can determine from the rapid escalation of speculative equity values over the last four days that the financial markets are expanding at rates that exceed the targets we established from years of empirical data and I am concerned that the rapid cessation of worry in the financial arena about future Fed policy will encourage a continued rise in equity values above our established norms." Say what? In English, "Wow, did you see that +800 point gain in the Nasdaq?, we need to hit the lecture circuit and talk this puppy back down." Kelly, you hit them on the jobs report. Figure out some way to down play that data! Right boss! Everybody else, fire (talk) at will!
Today, Kelly said that the Jobs report data was encouraging but it is not a soft landing yet. There is still a lot of data we need to see before moderating the interest rate policy. While others are worried about a crash landing "I see no signs of the economy falling off a cliff." Interpretation = "no signs" means there is nothing yet that would tell us we have gone too far in rate hikes. If they don't see "any signs" of serious slow downs then they are not done yet! The number of analysts that were leaning toward no rate hike at the June-27th meeting just took a serious turn downward. The sentiment turned on a dime and now almost all the Fed watchers expect a +.25% hike in June. Fed sentiment can change faster than weather in Colorado when analysts decide they made a wrong turn at the last economic report.
While the Feds have seen no major signs of a slow down the investing public saw a vivid display today. Circuit City announced today that May sales were flat and earnings would suffer. They said they were also seeing lower margins and a big slow down in large appliances. Appliances are one of the first signs of a slow down in consumer purchasing. Big ticket items are the first to get axed when money starts to tighten. CC lost -$12.50 or -24% of its value on the news. Immediately the rest of the retail sector reacted and prices slid across the board. Many analysts think the problem is simply Circuit City and they may be losing sales to Sears and others but all retailers took a hit.
EFII also warned today and lost -10.81 or -31% of its value. National Semi (NSM) warned after the bell that it was experiencing slower growth and margin squeeze. This should impact the otherwise hot chip sector on Wednesday. The offset to this was an announcement by Microsoft today that they were seeing PC growth running at a +12% to +15% growth rate. This positive news as well as comments from the CEO that they expect to win the breakup case on appeal, added +2.75 to the stock price. MSFT filed what was expected to be their last brief in the breakup case before the Judge issues his ruling.
The financial sector took a hit today as well after Merrill Lynch expressed concerns about future profits. Citing past times of multiple rate hikes, the banking sector suffered from fewer deals, fewer loans and fewer trades which all contribute to weaker profits. The sector had been in rally mode with anticipation that the Fed was done. Looks like the rally was premature.
In spite of the way the markets turned out today we should be thankful that the damage was not worse. With an active Fed and huge profits from last week we could easily have lost a couple hundred points on both indexes. On the Dow we have back filled about half of the big gains made since the Jobs Report last Friday. The Nasdaq has only given back about -100 points of the +300 gained. As of the Tuesday close we are just profit taking and consolidating from those big gains, even if the analysts tell us it is Fed dread causing the problems. What happens on Wednesday will tell us if we have the guts and conviction to hold the line. Conviction is something we have been lacking, even when the rally was on fire. Traders are taking positions but running for cover whenever there is the slightest bit of negative news. Without conviction we have no chance of holding our gains. Until traders feel they can hold through the next dip we are doomed to maintain the extreme volatility.
The volume was still decent today with 1.6 bln on the Nasdaq and 945 mln on the NYSE. But, decent volume on a down day is not a good sign. But were the markets really down? The advance decline line was exactly flat with equal advancers and decliners. After a record +19% gain last week you would expect a bigger drop if traders were very nervous. The cash is still on the sidelines and the next major economic report is Friday. The PPI report will give the Fed one more piece of important data on which to base their decision. Recently the PPI has been a leading indicator for the CPI which follows next week. Should the PPI come in lower than expected investors would expect the CPI to be lower also and this would set us up for another possible rally. Recent PPI reports have been preceded by rallies the day before as traders placed their bets on a benign number. We will see if traders are as convinced this time around by the market activity on Thursday. Wednesday is anybody's guess since we closed on the lows of the day. Futures are up slightly but there is a lot of dark before morning. If we have an uptrend over 3800 in the afternoon I would feel positive about a follow through rally on Thursday as well.
In our seminars we have a saying, "trade what you know not what you don't know." This means you should not "gamble" money by holding over earnings announcements, economic reports or Fed speeches. You should only place your bets when you are in control or fully aware of as many pieces of the puzzle as possible. The things you do not have control over are the things that will bite you. Nobody will ever eliminate 100% of the risk of investing in the market but you can reduce it to a very small amount with the right attitude. Should you hold over the PPI report? Those that do will either win big or lose big depending on the numbers. Personally I think they will be market neutral but I am not willing to bet the farm on it. Are you? This is where the term risk capital comes into play. If the market is up on Wednesday afternoon and Thursday, take a smaller position than you would normally. If it works in your favor, add to it. If it goes down you will lose less.
Good luck and sell too soon.
Current long positions include:
NOK, VOD, VIGN, MSFT, YHOO