We made it to the weekend but just barely! Both major indexes managed a positive close but were well off the session highs. Not a problem in my book, just simple profit taking going into the long holiday weekend. The positive Employment Report and the shrinking PMI were a positive influence and the lack of major moves was simply due to a lack of traders. The NYSE only managed to trade 771 million shares but shook off a major drop by yesterday's big winner, JPM -6.31, and held its ground. Two days in a row and three out of the last five the Dow has bounced off resistance at 11300 but the up trend is still clear. Since August 11th the Nasdaq has managed a beautiful stealth rally of over +500 points and only one day was a triple digit gain.
Your attention please, now entering into investor Nirvana! The Fed was dealt a death blow Friday with the double tap of the Employment Report and the PMI numbers. The Employment numbers showed a drop of -105,000 new jobs last month. This was the largest drop in nine years. Even if you factor out the major strikes and the census workers you would only have had an increase of +102,000 jobs which is substantially under previous estimates. The unemployment rate rose to 4.1% and the average hourly wages only rose +.3%. The PMI dropped into negative territory with a 49.5. Any number below 50 indicates contraction in the economy and very Fed friendly. Typically whenever the PMI is below 50 three months in a row the Fed follows with a rate cut. Add to this the slowing retail sales, a drop in retail jobs of -35,000, the NAPM report showing slowing across the board and construction spending dropping -1.6% and you have a prime example of a Goldilocks economy.
You would think the Fed was a faint memory, and they may be soon, but a survey of the top 29 bond dealers showed that only four are expecting a rate cut as the next Fed action and 25 are still calling for another rate hike. Eight expect a rate hike this year. Come on guys, get with the program! I even heard the "D" word several times Friday. If we can get enough people using "deflation" in their daily commentaries then we can get those 25 dealers to change their votes pretty quickly. Any takers? The votes from the investing public may not count to Alan Greenspan but the economic conditions, which appear to be moderating, definitely have him smiling. The soft landing he was orchestrating appears to be heading for success.
The only fly in the soup is the oil prices which closed at a six-month high of $33.38 a barrel. This jump came even though Saudi Arabia is expected to push OPEC for a higher than expected increase in global oil supplies. With cooler weather coming and oil prices still rising this one price component is likely to maintain the inflation watch.
While we are not expecting a +3% GDP any time soon we are expecting the markets to react favorably to today's economic news when everyone returns from vacation on Tuesday. The economic calendar next week is very light with only the Productivity Report on Wednesday and Wholesale Inventories on Thursday. Not exactly market movers and shakers! With record cash inflows into equity funds in the last four weeks the outlook is good. According to TrimTabs.com over $17.6 billion came into equity funds in August compared to only $9.2 billion in August of 1999. With August normally a sleepy month the influx of cash has created a steady up trend. Not all this money has made it into the market yet and a rousing open on Tuesday could prompt money managers to open the spigot. Many have expressed concern about the recent rally as they sat in cash waiting for the summer doldrums to be over. Fearing they have missed the train, they may throw September caution to the winds if we get a strong Labor Day week.
These money managers may not be jumping into Yahoo after continued warnings from analysts that Internet advertising is dropping rapidly. With much of Yahoo's earnings coming from banner advertising their earnings and very high PE of 364, which has already fallen from over 500, are in jeopardy. Where is the bottom for YHOO? Previously it has bottomed around $105 between earnings runs but with all the negative publicity we will probably see this trend tested. Internet stocks other than YHOO have been on a run recently with many gaining +25% or more in the last two weeks. This is a good sign that speculators feel the correction is over and they are willing to buy the sector again, just more selectively.
Proving what goes up quickly may come down just as fast was JPM which dropped -6.31. This equates to about 35 Dow points. While the speculation cooled on JPM, other brokers continued upward with LEH making yet another new high. MWD is only $1 away, as well as BSC. Brokerage stocks not considered take over targets like Schwab are stuck in a trading range as attention is focused elsewhere.
Anybody with any doubts about the strength of the Nasdaq rally need only look at a couple dozen charts of the market leaders. They bear an uncanny resemblance to the move out of the October lows of last year. Check out the charts for big gainers from Friday. Yes they are up strong for the last two weeks but they are showing no signs of slowing. While many are waiting on the sidelines for Labor Day many of these have added $20-30-40-50 even +$60 over the last three weeks. ITWO, HGSI, MLNM, PMCS, ARBA, CIEN, JNPR, TIBX, IDTI, SNDK, ABGX, DISH, BRCD, CHKP, MRVC, BEAS, QLGC, AAPL. Even their NYSE friends look the same, GLW, LH, HWP, CRA and CLS. While this looks good on paper we could be setting ourselves up for a fall five trading days from now. Until then we could see these stocks accelerate into next week.
The markets continued their staging for next week as each major index moved even closer to its current resistance level. The Dow is still struggling with 11300 but the OEX is only .40 shy of closing over 830 which has been a problem since March. Breaking over 830-833 appears to be a slam dunk for Tuesday with any market movement at all. The S&P-500 (SPX) closed only -6 below its all time closing high set back in March as well. The Nasdaq edged about +28 points closer to the July resistance of 4289. A breakout close over 4300 on Tuesday would be the equivalent of the starters gun for pole sitters.
The first week of September is normally a winner but once the earnings warnings start in earnest around the 11th things get a little dicey. These warnings and then the missed earnings in early October lead to the recent mid-October disasters. The economic calendar for the week after next is loaded with PPI, CPI, Import/Export Prices, Retail Sales, Business Inventories, Capacity Utilization, Industrial Production and Michigan Sentiment. Plenty of chances for confirmation of the current slow down or a reversal of the trend.
In case I have not painted a clear enough picture above, I think we should have a pretty good week but the following week could be a nail biter. Those that have been playing the current list of calls should be very happy and profitable. I would expect this to continue BUT there is always the possibility of a high profile earnings warning or news event that could stop the rally cold. We saw some selling into the rally on Friday which means not everyone is of the same mindset. According to Austin Passamonte in the market sentiment section this weekend the large commercial traders are still short the S&P. It takes guts and a lot of money to short a rising market over the last 30 days and they are seldom wrong. This sets up a confusing set of possibilities. While almost every retail trader is expecting a rally next week commercial traders are betting millions on a market drop. I actually think that is a good thing. I would love to see a short squeeze of titanic proportions. Still we need to always be aware that what we expect may not always come to pass. Just because the mantra for the last three weeks has been "just wait till traders come back after Labor Day" does not mean they left their brains on the beach. They will evaluate the stocks they like and the current market posture. They will then vote for a rally by spending money or vote to wait for a pullback by continuing to sit on the sidelines. Lately traders have been perfecting the "buy on the rumor, sell on the news" trick and even the killer Employment report today was a selling opportunity. Could we see a "sell on the news" event Tuesday? It is possible and it would not be the first time but historically the next three days are up days. However, when everybody expects the market to do something like the expected rally next week, there is always the possibility that the opposite will happen. Let's hope history repeats itself!
Trade smart, sell too soon.
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