What a great week! It was not that the major indexes added hundreds of points, it was the fact that they did not LOSE hundreds of points! After soaring for huge gains the previous 10 days the Nasdaq, Dow and the S&P pulled back only slightly, consolidated and for the DOW and S&P closed at the high of the week. For me this was a tremendous achievement. Unfortunately it all came on relatively low volume and without any real conviction.
Friday morning opened with a huge upside surprise. The GDP report showed an increase to +2.0% in the first quarter which was double the expected +1.0% rate. While this does not bode well for future Fed rate cuts it does appear the threat of a recession has been overstated. Business spending was stronger than expected rising +1.1% after falling the previous quarter. Consumer spending remained solid with a +3.1% gain. Durable Goods jumped +11.9%. Inventories fell by $7.1 billion indicating the backlog was decreasing rapidly. So much good news you wonder what all the fear was about just weeks ago.
Gosh, seems like it was just yesterday that Jobless Claims rose to 408,000 for the first time since October-1992 which was higher than any time during the 1995-96 economic slowdown. Wait, that was yesterday! Labor markets are clearly weakening and conditions are expected to deteriorate further in the coming months. Many companies are announcing layoffs and many more are increasing the number of cuts from those previously announced. Sounds like the GDP report and the Jobless Claims were for different countries!
The market cheered the Jobless Claims on Thursday as evidence the Fed would cut rates again on May-15th and cheered again on Friday on news the recession may be overstated. Come on guys, you can't have it both ways. To be fair Greenspan may have influenced the markets slightly on Friday with comments that productivity gains are likely to continue in the work place because of increased technological improvements. If productivity continues to increase then profits will also increase. Thank you Alan for your market moving remarks.
Traders will get another chance to find confirmation of their biases next week with Personal Income/Spending and Chicago PMI on Monday, Construction Spending on Tuesday, Factory Orders on Wednesday and NAPM on Thursday. Of course the biggest report for the week will be the Nonfarm Payrolls on Friday which will give us a much better read on the job market.
One of the biggest drags on the Nasdaq Friday was Microsoft. Bridge News reported that MSFT was going to delay their new Windows-XP product until October instead of August. Microsoft issued a statement that they were sticking to their "2nd half" release date and claimed they had never suggested an August release. Some analysts said it did not really matter to their earnings if they waited until Oct but MSFT still dropped over -$2 on the news and -$4 off Thursday's high of $71.
Who said there was no future for Lucent? The persistent rumor last week was merger talks with Alcatel. Both companies denied the rumors but LU has gained almost +4 (+56%) in the last four days. Alcatel was also gaining ground indicating analysts think it may be a good deal for both companies.
The Biotech Index was up strongly again with HGSI posting better than expected earnings. Even AMGN, which warned about results going forward was up +4 on Friday. The BTK.X has now posted three strong day in a row at 545 and looks like it is poised to retest its recent high of 561 next week.
The Internet is not dead as evidenced by earnings from Verisign which blew out their quarter by almost doubling estimates with a +.23 profit. They announced a stock buyback as well and the stock rallied +5.68 or +12.28%. VRSN and EBAY have each found a niche where nobody has even come close to competing with them. These niche players may prove bullet proof for buy and hold investors.
The adage "Never Short a Dull Market" proved true this week. The Dow was coasting until early afternoon on Wednesday when a computer buy program was triggered and it never looked back. Shorts were again caught off guard with the expectations that profit taking would take us back down again. Once stocks started running again there was persistent buying on Thursday and Friday. Have they given up? I doubt it but they are definitely running scared. The Dow is now less then 200 points from 11,000, a closing level not seen since September. Now well over its 200 DMA of 10615 and gaining speed it looks like it is ready to finally sprint through the 11000 barrier. It has traded within 10 points of 11000 or higher 11 times in the last six months without being able to close over that level. Will the jinx stand one more time? Nobody knows but you can bet there will be an army of shorts lined up at 11001 to bet on at least one more failure. Great! Just what we need, one more short squeeze before we hit a new high. (the power of positive thinking!)
With Friday's close the Dow has turned positive for the year by +24 points. The S&P however has not been so lucky. Closing Friday at 1253, it is still -13 points under serious resistance at 1266. It has not been able to make it above this level since late February. The current momentum looks good but almost every analyst questioned is looking for the catalyst that will knock the legs out from under this rally. (the proverbial wall of worry) While the volume was terrible on Friday with only 1.7 bil on the Nasdaq and 1.1 bil on the NYSE, the internals were good. Advances beat decliners by 2:1 across the board and up volume beat down volume 3:1. As I said before, the major drag on the Nasdaq was MSFT, but WCOM and QCOM also turned in negative days. The positive leaders were not very encouraging with Dell +.68, CSCO +.39 and ORCL +.24. The Nasdaq big cap winner was Intel with a +1.54 gain after they said they were seeing a rebound in the PC sector. It appears traders were torn by the drag on MSFT and the gain in the PC sector. Monday will be another chapter when the MSFT story is old news. Do you ever notice that bad news lasts a day and good news a week? Not always but quite often.
The Nasdaq, which should be rising on any hope of a tech rebound, simply did not rally while the Dow surged ahead. Granted it only lost -87 points for the week but after a +32% gain the prior ten days it is still remarkable that it held. Which way do we go now? I think it is a pretty sure bet that the Dow will open up on Monday unless we get some more negative news out of South America or Japan or some country not even on the radar screen on Friday. The Fed appears to be on our side since Greenspan had no negative comments on Friday and shorts still appear to be on the run. The order on close orders Friday were 99% weighted to the buy side with some huge orders for GE and AT&T among others. Several stocks had well over one million to buy at the close. This is very bullish since it means they were willing to be long over the weekend and face the Monday open with long positions. This should strike fear into the hearts of traders currently short since it means a serious change of sentiment in the market. Very few institutional investors have wanted to be long anything over a weekend recently.
Earnings are now half over for this period and there have been no real disasters. Everyone kept waiting for the nuclear blast from a major company with near bankruptcy results. It never happened and many companies managed to beat estimates. The GDP has given investors new hope and the markets are rising when they are normally falling. Investors normally checking out for the summer doldrums are now trying to go long to avoid missing the boat. It must be driving the bears crazy! I glanced at a couple hundred individual charts and I was amazed at the last week. Stocks that had missed earnings were moving up again. Stocks that met or beat estimates were setting new relative highs. Many have broken through resistance over the last ten days and did not slow. The rampant euphoria is almost too good to be true. The VIX has fallen back to 27.77 and nearing a two month low. Not in a danger zone yet but the collapsing volatility is a sure sign everyone is lining up on the buy side of the boat. The problem here of course is what happens when everybody stands on the same side of a boat. It tends to roll over. (back to the wall of worry) As long as the bears/shorts continue to sell into every big gain we will be okay. Sounds crazy but true. As each dip from a new relative high is met with buying the shorts that created the dip are forced to buy back at higher and higher prices and a real rally is born. Momentum creates volume and volume attracts new buyers. Has anybody considered what would happen if the Fed failed to cut rates just 12 sessions from now due to a stronger than expected GDP? This meeting is shaping up to be a rally killer if we don't get some new negative information to put the Fed at ease. Everything is looking up for next week but remember the roadblock at 11,000. Please, let there be an army of sellers in hiding and an even bigger army of buyers waiting to ambush them on the dip!
Trade smart, enter passively, exit aggressively!