Will they or won't they? The Fed bears test the porridge.
Too hot, too cold or just right? Is the economy still too hot or has the economy cooled off enough to allow the Fed to go back to business as usual. The official consensus is the Fed will pass on raising rates tomorrow but may move back into rate hike mode at the next meeting in August. Inflation news today came in the form of the Consumer Confidence Index which dropped from 144.7 in May to 138.8 in June. The weakening in the consumer confidence is usually felt with a corresponding drop in retail sales and a backup in product inventory. The Consumer Confidence today is just one more sign that the economy is slowing but many Fed watchers feel the Fed will still apply one more tap on the brakes in August. While the decision this week is a yawner with everyone expecting no hike, the indecision for August will provide more market instability the closer we get. The decision this week is a non-event since the Fed always telegraphs their direction in advance and they have been very quiet this cycle. A hike on Wednesday would be very bad since traders had no warning.
The recent trend of a rally the two days before the Fed announcement fell short with both major indexes rolling over in the late afternoon. The Nasdaq closed at the low of the day and the Dow was very close. The down markets the day before a possible change in rate policy by the Fed is troubling. Several recent meetings with almost 100% chance of a rate hike were met with rallies into the announcement. What held the market back? Could it be the changing of focus from the Fed to earnings?
Other factors, which have been impacting the market, include the July 1st reshuffling of the Russell indexes as well as window dressing by portfolio managers for the end of the second quarter. Normally these are bullish events but the markets have not been following the script. The Russell adjusts the top three indexes on July 1st and the shakeup causes many index funds to buy and sell stocks to adjust their fund ratios. The Russell-1000 is the top 1000 stocks by capitalization, the Russell-2000 the next 2000 stocks and the Russell-3000 is the combination of both. Funds following these indexes amount to about $200 billion. Not all of this money changes hands by far but there is quite a bit of shuffling. If a company moves into the Russell-1000 from the Russell-2000 the funds must buy to fill any R1000 requirement and sell to close any R2000 requirements. These movements across the different indexes then impact the weightings of stocks that did not move causing minor buying and selling. If you are an index fund you could literally be forced to trade hundreds of stocks in various amounts. Still this volume is not showing up in the market or regular trading has been so minor as to hide it.
The end of quarter window dressing has also been nominal. Fund managers like to show leaders in their portfolio at the end of the quarter instead of cash. By buying leading large caps they can remain liquid and move out of them just as quick after the quarter end passes. One of the biggest tech leaders is IBM and they sold off over -$4 today on earnings and currency worries. Intel also lost almost -$3 and CSCO -$.50. One of the few sectors to show strength was the retail sector, go figure? With retail sales down for two months in a row the retail sector had been devastated. It appears the big money is looking for a sector with a bottom and retail was nominated. Sounds defensive to me! GPS +2.13, WMT +3.06, TIF +3.81, Sears even added to a three day streak with a +.81. (nice 60 min chart on S, could be a bottom)
Oil is still a problem with August crude moving over $32 a bbl today. Analysts are expecting the continued high prices to start pressuring the inflation numbers with a critical number being $34, the same high we hit last March.
The big news today was the WCOM/Sprint merger wreck. The Justice dept filed suit to block the merger on the grounds that it would be anti-competitive for the consumer. Lets see, if one company controlled 80% of the long distance traffic, could that impact prices in the Internet economy? While many analysts thought it would not matter, the Justice dept took exception. The merger is all but dead but many other smaller companies just became targets. VoiceStream VSTR, Nextel NXTL, Alamosa PCS APCS to name several. There is still a rumor that DT is looking for an American outlet as well.
After the bell today Phelps Dodge (PD) and Tenneco (TEN) both warned that they would miss estimates for the quarter. Yawn! COMS did announce and beat estimates, we think, by a couple cents. There was some discussion after the announcement by First Call on some one-time charges and did they apply to the estimate but the final decision was a better than expected number for COMS. They were up slightly in after hours trading.
The Fed announces their interest rate decision at 2:15 ET tomorrow and will have to compete with president Clinton for airtime. The president announced today he would hold a full scale news conference at 1:30 tomorrow. Since they usually start with a speech and then open the floor to questions it is entirely possible he will still be speaking when the Fed makes their announcement.
Once the Fed is done the focus will immediately move to earnings which start in force the second week in July. Even though we have had some high profile earnings warnings the number is still less than normal. This should either lift expectations that we are going to have a good crop of earnings OR more companies than usual will miss earnings after expected last minute orders never materialized. Regardless of the expectation there are only seven days left for an earnings run to occur.
I got a lot of hate mail from people objecting to my bearishness last Sunday. Good! If that many people had to take a minute to actually decide if I was off base and then write me then it shows you are not just blindly buying calls just because they are in the newsletter. I got several emails saying "why do you have calls in the newsletter if summer trading is so tough?" 1. Because most of our readers don't care what the market is going to do, they just want to buy something. Believe it! 2. Just because prior summers have been tough to trade does not mean this summer can't be different. We could start a rally tomorrow that could run till October. Elvis could also come back to life too. 3. Yes, you can make money trading in the summer even if the market is choppy. Nothing goes up or down OR SIDEWAYS in a straight line. Look at the Dow chart or the Nasdaq chart above. Both have several trading rallies in the last several weeks even though they are both moving sideways. You can still make money, it is just much harder.
It is ENTIRELY up to you to decide what to buy and when to buy it. The newsletter gives you 20-30 prescreened plays as a starting point to do your own research. You decide when and if you bet (not invest) your money and how much you are willing to lose. Sometimes I spend hours researching plays the night before and when the market opens it goes against me. I must decide if I want to try and force a play or wait for the next day. You have heard me say many times that the entry point is the key. In tough times it is even more critical. I certainly do not expect everyone to stop trading for the summer. I simply advise more caution than normal. For a new trader it is difficult not to confuse a bull market with genius. Last fall anyone with a blindfold and darts could have made money in options. Choppy sideways markets like we are seeing right now is what builds experience and character. Remember the old saying, "Good judgement comes from experience and experience comes from bad judgement." Your results in this market will be 100% related to how you approach it.
Good luck and sell too soon.
Current long positions include:
NOK, VOD, MSFT