Merrill Lynch, Goldman Sachs even Intel gets into the act. Everyone is aware of the upgrade of eleven chip stocks by Merrill Lynch on Wednesday which lit the rally fire. Not to be out done, Goldman Sachs promptly sent Abbey Joseph Cohen out to trumpet her year end numbers and a new "the worst is over message." Also, in an effort to grab the spotlight Intel CEO, Craig Barrett, said chips had bottomed and lent the credibility of Intel to the Merrill chip upgrades. All is well in tech land or so everyone would have you believe.
The major indexes are poised to break out of overhead resistance that has held for over a month. It has been an uphill battle as the Dow has bounced off 10600 for three days in a row only to fall back again. The Nasdaq saw daylight over 2100 for about ten minutes Thursday before falling back to negative territory for a regroup.
I have been quoting these two levels for several weeks and every time they were touched they failed. It is a very good possibility that their time has come and a rare August rally is about to break out. Shorts are getting scared and contrary to the patterns from earlier in the week of selling off in the afternoon, there was a buy spurt at the close on Thursday. Shorts afraid of holding over the jobs report on Friday? Could be! The unemployment numbers on Thursday were surprisingly positive and caught traders by surprise. Secondly the trend of public announcements could start at any time. By this I mean the "jump on the bandwagon" type that appear positive even when nothing is said.
The Intel announcement appeared positive with statements about low inventory overhang and improving sales expected in the 4Q. However the real facts are Intel never had an inventory overhang like Cisco for instance. Intel was ramping up the new processors and still selling chips two and three generations old. The breadth of their product line keeps them from being a one trick pony. Sales of the P4 processor were only 25% of analysts estimates but they did not make an extra hundred million or so just because they did not yet have the capacity. But, I am getting distracted here. They are saying things about improvements in the 4Q which got retail investors excited. However they are basing this news on "the expected return of seasonal buying trends," not new demand.
Intel was widely credited today with energizing the markets with their bullish remarks which were really not new or bullish at all. Still they get the credit. Now we can expect other companies eager to grab their share of the spotlight to come out with their own "we think the worst is over" press releases. They will be hard pressed to say anything concrete after "zero visibility" comments with their recent earnings. Still the lure of fame and hopes to improve the fortunes of their stockholders will provide ample opportunities to posture. AMD promptly fired back at Intel and took exception with their comments. Using the term "give me a friggin break", CEO Sanders said "Intel is just trying to appear invincible when in fact they are not." "They are the most arrogant group in the world." Sour grapes Mr. Sanders? Don't rain on our parade! Issue your own bullish press release, the market could use it!
Don't get me wrong. I want to see a rally as much as anyone and I will take it from any source available. It is just that there is so much bullishness based on pure hope and no facts that there is a good possibility there could still be problems ahead. The Merrill Lynch upgrade of eleven chip stocks was laughable. "We feel the chip sector may bottom in the next quarter or two and we feel that the chip sector may improve in 3-4 quarters." No jury in the world would convict you of being bullish or truthful with that kind of qualification. Instead the Nasdaq has moved up to within 13 points of major resistance.
Goldman Sachs fired back with their queen of spin, Abbey Joseph Cohen, who actually said some bullish things without qualification which is quite contrary to her usually scripted performance. "We feel the worst is over and strongly recommend over weighting techs.." Pretty bullish Abbey! She did affirm her year end targets for the Dow of 12500 and 1550 on the S&P-500. Let's hope she is right! That is almost a +2000 point gain for the Dow and +330 point gain on the S&P in only five months.
Economic reports do not show any broad improvement yet. Factory Orders for June fell almost twice as much as expected at -2.4% although semiconductor orders posted a significant gain for the second month in a row. This would lend some credence to the Merrill upgrade even though the sector is a long way from healthy. The biggest surprise today was the unemployment claims. With massive layoffs still being announced the Jobless report posted its third week of significant drops to 346K from a high of 449K on July 7th. Continuing claims also fell. Analysts caution reading too much into this report since seasonal auto and textile worker layoffs cause big swings in the late summer months.
The economic reports on Friday include the NAPM and non-Farm payroll report. The payroll report is the market mover and last months was a shocker. Traders will be looking for signs of a recovery in this report and the Fed will be looking for a reason to not cut rates again at the Aug-21st meeting.
The Nasdaq has now posted five days of gains out of the last six days. Sounds good but the total gain was only 65 points. The sell off early on Thursday on what was interpreted as bullish Intel comments showed that there are still sellers in the house. The advance/decline ratio on the Nasdaq was 18:17 or basically a dead heat. There is still not a ground swell of bullish buying. However, this stealth rally has quietly snugged up to within 13 points of strong resistance. Every day here provides more explosive potential once 2100 is broken. The basing pattern is very positive and with the Dow knocking on the 10600 door three days in a row it is possible we could see a breakout any day.
Volume is very high for August. 1.2 bil on the NYSE and almost 1.7 bil on the Nasdaq. I would be much happier to see more up volume because 7:5 is not particularly bullish. This tight trading range pattern with a bullish bias, no matter how slight, if very encouraging. Earnings are basically over, which may be a good thing, and enough momentum is being provided by company press releases and analysts to challenge resistance. Wow, just think what will happen when real data starts to show up!
This may sound like a bullish article. It is, but it is based on market technicals not fundamental developments. Technically the Dow and Nasdaq are poised to breakout Friday or Monday assuming the jobs report is not a black hole and there is no negative news from elsewhere in the world over the weekend. Actually the switch by the Bush administration to supporting loans for Argentina should remove the fuse from that powder keg as well. The S&P has already broken resistance at 1217 and appears ready to rock. The markets have been so beaten up over the last two months that there appears to be little risk at this point. Considering August is normally a bad month this is also encouraging. Big cap tech stocks are showing signs of a recovery. The Dow and S&P both had successful retests of the July 11th low.
While the economic conditions have not yet improved the rate of decay has slowed. Consumers have started getting their rebate check and heading to the malls. Sounds like a recipe for nibbling on stocks and the heavier than normal August volume shows that bargain hunting is alive and well. I said on Tuesday night that the bad news was already priced in and all the market was waiting on was a good news event. With the Merrill chip upgrade the following morning and Abbey Cohen and Craig Barrett dueling for the press spotlight, we got that positive news momentum. Tenuous at best but it is momentum. Nasdaq 2100, time to go long? Yes, but be just as ready to go flat should that level fail again!
Enter passively, exit aggressively!