And Back To The Top Of The Range We Go
Just when you thought the market was ready to breakdown, the Nasdaq rebounded back to the top of the recent trading range. I hate to report this once again, but we are still range-bound, and with no relief in sight. I guess I should be happy the markets didn't breakdown yesterday as it teetered on the edge, but at least it would have offered some direction. Anyway, today's action is somewhat positive and the bulls did return, albeit cautiously. The Nasdaq finished up 97 points while the DJIA rallied in the afternoon to nearly wipe out the morning losses by finishing down only 2 points.
Here is the scenario that you should be thankful for if you have a bullish bias. Yesterday, amidst a slew of unexpected earnings warnings, the Nasdaq Composite began to breakdown. It gapped down and lost 125 points on Wednesday, taking it to the low end of the current range around 3840. Today, with the backdrop of even more bad earnings news from the likes of VWNK and FWIS, the Nasdaq pushed below this key level and was in serious jeopardy of letting go. You can see the piercing of support in the first couple hours this morning. Fortunately, the move ran out of gas in a hurry and the Nasdaq had a great looking trend after 11am EST today, closing right at the high. You could make a case to be excited about the recovery if it wasn't for the fact that we are already back to resistance between 3950 and 4000.
Here is a closer look at today's closing numbers and the market internals. The Dow Industrials closed at 10481.47 on volume of 947 million. The Nasdaq is at 3960.57 with 1.48 billion shares changing hands. The S&P 500 ended at 1456.67, while the Russell 2000 is 523.32. Advancers beat decliners on both the NYSE and Nasdaq by a narrow margin. The 10-year Treasury Note dipped by 14/32 to yield 6.04%, but trading was relatively muted ahead of the Employment Report released Friday morning. Oil was a bright spot for the markets as it continued to fall on the news of increased production for Saudi Arabia. August Crude fell $0.62 to $30.05, slightly off the lows for the day.
The real story for the day was about tomorrow's Employment data. I have heard estimates ranging anywhere from 400,000 non-farm payrolls created on the high end to about 176,000 on the low end. Either way it is likely to be above May's number of 231,000, which was surprisingly low. You see, this is the big dilemma. If June numbers snap back to a robust level, let's say 300K or more and the unemployment rate dips back to towards 3.9% or so, economists will say that May was an aberration and the Fed needs to keep tightening. So much for the hopes of a rally on that kind of news. The flip side would be for another soft number, let's say 275K or less with unemployment of 4.0% or higher. That would back up the other recent economic reports that show a slowing economy. The great thing about the Jobs report is, this is very fresh data and considered very important to the Fed in determining economic growth. So it will have a serious impact on trading tomorrow.
But before we get ahead of ourselves, let's finish up today's action to set the stage. The Semis, Software and Oil sectors all bounced back from Wednesday's losses, plus the Financials continued to rebound. In fact, Merrill Lynch hit a new 52-week high today on strong volume. It would be rare to see the DJIA breakdown with MER hitting new highs. The problem is with shares of IBM. They continued to slide, hitting $100 a couple times during today's session before bouncing. Rumors are that a typical slow second quarter for Big Blue may be slightly worse than expected. This is all just a rumor right now, but a collapse below $100 on some sort of warning would be a significant blow to the DJIA. Other losers today include the Drug sector, which can be expected in an up day for the tech stocks as the Drugs are considered defensive.
In other economic news released this morning, Retail sales had an impact on the market today. Shoppers held back in the month of June, but the big name retail stocks rallied nevertheless. I think this quote said it best, "Investors have been anticipating this for a long time," said PaineWebber retail analyst Jeffrey Edelman. "The thinking is, it didn't get any worse so I'll buy now." That has never been my favorite reason to buy stocks, but it was good enough for a relief rally for the sector. The biggest gainer, and a perfect example of that quote, was Abercrombie and Fitch (ANF). They reported a loss of 4% over last year's same store sales for June, but analysts had been expecting as much as a 15% loss. Therefore, bad news becomes good news and the stock soars 23%.
Ok, so where do we go tomorrow? Obviously it depends on the Jobs data, but until the market breaks out of its current range, it might be irrelevant. My vote is for a non-farm payrolls somewhere between 250K-280K. I know, I know...right on the meaty part of the curve with everyone else. The point is that I don't expect a blockbuster number either way. Although, if we do get a biggie, I would hope it would be on the side of a slowing economy. The reason it may be irrelevant is I don't expect to break out of the current Nasdaq range on Friday regardless of the news. The range I am talking about is 3800 on the downside and 4000 on the upside. Although, you may remember from Monday that I said I am waiting for the close above 4075 (the last rally's peak) to be safe. Conservative investors may want to do the same. The reason being is that the move over 4000 on June 20th was a false alarm and I really want to see some confirmation this time. It got me last time and I am not falling for it twice. But, the chart does show that 4000 has been short-term resistance over the past two weeks.
Other indicators to watch include the VIX. Hovering in the middle of the road at 24.11. This really hasn't been a factor this week, but can move suddenly at any time. The next factor to watch is Yahoo. Believe it or not, but earnings are just three trading days away and YHOO is considered the kick-off to the Internet earnings season. We've suffered through a few last minute warnings for tech companies so let's see if Yahoo can turn the tide. I don't expect YHOO to go up after earnings, but if they have strong earnings it could excite investors to start earnings' runs for other stocks.
Trade smart and sell too soon.