Wow! Just days after the market took a breather when New Home Sales jumped unexpectedly, Factory Orders fell unexpectedly. The -7.5% drop was the biggest drop on record. Traders celebrated with a pair of triple digit gains on the Dow and the Nasdaq. The attempt to breathe life back into the Fed dread failed miserably. Retailers also announced today that slowing sales may impact third quarter earnings and the race was on. The retailer conspiracy consisted of JCP, GPS, TGT and ROST. All of which expressed concerns about slowing summer sales and third quarter profits. While this is bad for the retail sector it is good for the economic outlook. Add this to the slowing Factory Orders and traders could not resist buying before the holiday.
Not all is as rosy as it seems. The Dow was up at one point +200 points! 200 points, how long has it been since we have seen a move like that? Unfortunately almost half of the Dow advance was on the back of a +$16 gain in Dow component JPM. Yes, it was a good day but the closing +112 gain included almost +75 points from only one company. We should expect some weakness in the Dow as the Nasdaq nears 4300 when traders head for faster moving tech stocks instead of old economy.
The JPM gains came on rumors that the company may be an acquisition target by one of the giants in the space. Chase is rumored to be one of the possibles. Sanford Bernstein said the global mergers are putting pressure on Chase to grow with an acquisition. JPM receives about 50% of their profits from international sources and that makes them an ideal target for the new globally focused giants. Others feel that the current brokerage community is over priced after their recent gains and we are not likely to see another merger until some of the speculation fades from the sector. Still, the gains today helped power the market and we are not complaining.
$2,000,000,000 loss + $250,000 gain = 15 years in jail.
Is that a healthy pulse we see in the market? The Dow finished July at 10,521 and closed August at 11,231 or a +7% gain. The Nasdaq closed July at 3766 and August at 4208 for a solid +7% gain as well. The Nasdaq composite index managed to post an even larger +11% gain for the month. Yep, just a sleepy August. Not! The markets have been undergoing a stealth rally for almost the entire month and have managed to finally close above many of their previous resistance levels. The Dow, Nasdaq and OEX are all poised to break their last levels on good news. The roar you hear is the volume returning with the NYSE trading 1.06 billion shares and the Nasdaq posted 1.9 billion. Internet stocks, Biotechs, networkers even mineral and mining stocks were hot. The broad market advance was punctuated by a 3:2 overall advance/decline ratio with new highs swamping new lows. The expectations of a post Labor Day rally are approaching 100%.
Before you start popping the champagne corks we need to remember the big Employment Report on Friday morning. Good news is likely to fuel the fire but bad news could cause an entirely new round of profit taking. It would have to be very bad numbers but the question is now mute since the answer will already be known before trading begins on Friday. Professional traders are still skeptical that the rally will hold and this could produce some volatility before the holiday. August window dressing can lead to September window breakage if the sentiment changes quickly.
While it appears we have the yellow brick road laid out in front of us we need to keep in mind the results of a slowing economy. Even if the economy is only slightly slowing there will be earnings short falls. We are only about a week away from the start of earnings warning season and the retailers today along with VIAN and HRZ after the bell are just hints of things to come. The market will be torn between good economic data and bad earnings data and bad earnings usually win. The end of August window dressing helped fuel the rally today and traders expecting a rally next week are likely to power the market on good Jobs news tomorrow. Next week will depend on Tuesday. If everybody is expecting a huge rally and Tuesday does not start off with a bang then pessimists will begin second guessing the trend and traders will stay or move to the sidelines again. A good opening jump followed by good volume should provide a fun week. A good report could be the catalyst we need to break out of the last resistance levels. The Dow has bounced off April resistance at 11250 twice this week. The OEX is bouncing off resistance dating back to March at 830 and the Nasdaq is closing on the July 4300 top. It is just like a July 4th fireworks display. The rockets are all in place ready for launch and dark is approaching. Now, if we can just find a match!
Good luck and sell too soon.
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Chris & Steve, I would like to thank both of you for a great experience at the Atlanta Workshop. I learned more in the three days of the workshop about investing and trading than all of my undergraduate and graduate courses combined. It was a lot of information in a short time and I hope to put it to use very soon. Mike
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