Despite worse than expected economic reports and a +1200 point move the Dow held its ground and even recovered significantly from the lows of the day. The Nasdaq was the hero and came back from a -29 point deficit to post a +9 point gain. While traders may feel this was a draw most were happy to avoid serious losses due to profit taking.
Chart of the Dow
Chart of the Nasdaq
The morning started off negative with a -134 point drop before the Consumer Confidence report and quickly lost another -37 points from there. The Conference Board Consumer Confidence survey dropped much more than expected to 97.1 in July. The consensus estimates was for 102.0, down from 106.3 in June. This was the largest drop since October and the lowest level since February. The expectations component dropped even more, falling from 107.2 to 95.7. 37.7% of the consumers polled expected the markets to fall farther over the next 12 months. Jobs were seen as harder to get and getting worse. Cars and homes remained in demand as consumers planning on buying them remained slightly improved while those planning to buy consumer goods like appliances and electronics began to drop. This is not good news for the markets but they shook it off as old news and attempted to rally into the afternoon. This will come back to haunt us.
CSFB said a survey of mall traffic showed that it had fallen in July and retail sales were suffering. Wal-Mart and Target both said sales for last week were under plan and this was the third week down for Target. I wrote about this coming for several weeks and the mainstream media is now picking up on it. The discount stores are typically the last to fail since they offer a broad range of low level inexpensive consumable goods. The consumer has been the building block for the recovery since business spending is still dropping. If the consumer is now going into conservation mode the second dip may not be far ahead. The GDP report is expected to show growth of only +2.5% in the 2Q following the +6.1% 1Q surge. The reason for the 1Q numbers was inventory replenishment. That inventory cycle was over in the 2Q and final sales also slowed. A serious miss in this number would be very detrimental to the markets. Some analysts are estimating numbers as low as +2.2%.
Also on Wednesday we will get the Beige Book and the Chicago PMI report. The Beige Book reports regional economic conditions and provides indications of orders and shipments across almost all sectors except telecommunications. Last months report did not provide any good news other than the economy was holding on to a very slight recovery. If this months report shows any weakness it could accelerate the double dip uncertainty.
After the close today IBM announced they were acquiring Price Waterhouse Consulting for a little over $3 billion in cash and stock. This is a move by IBM to add top line growth and was seen by early analysts as a positive for IBM. The stock dropped only -$1 in after hours.
Also after the close NVDA warned that its revenue and earnings for the just completed quarter would fall substantially below analyst expectations. They said they expect to report revenue of $410-$430 million compared to estimates of $568 million. NVDA said as late as May that it expected revenue to rise +1% to +3% from the $582 million in the first quarter. Something happened between manufacturing and sales it appears. The NVDA CEO said weak PC sales overall, a larger mix of low budget sales vs high-end sales and excess supply (lack of sales) contributed to the -30% shortfall. Quite a drop in two months! Weak PC sales and those that did sell were the low-end models? Sounds like more problems for Intel and the PC sector ahead. Remember, TSM warned last week that weakness in a number of sectors, including PC's and game consoles, had caused it to cut capital spending and would miss estimates.
KLAC also announced earnings after the close and said it had a six month backlog at current shipping levels but that the order flow was flattening out. They said they had received bad news out of Taiwan with TSM cutting the budget -23% and UMC, the second largest chipmaker, by -19%. Both firms are large customers of KLAC. The stock was flat in after hours.
There are multiple challenges for tomorrow. Bulls are still chomping at the bit to buy but are being handicapped by current resistance levels and the lack of oxygen at this level. The Qwest earnings disclosure was repeated over and over again today along with constant pictures of Merrill Lynch employees taking the 5th before congress. We are getting closer to August 14th and the rest of the week is an economic minefield. Companies are still warning that orders are slowing and PC sales are dropping. These are not conditions that give much hope to a continued rally. Still the bulls made a valiant effort today to hold the high ground. The Dow has serious resistance between 8700-8800 and the Nasdaq has a solid top at 1400. The bulls need an event to provide a spark for the next leg up.
The bears are becoming braver. There were a few more sell programs today and with no upward progress they will be joined by many more. The majority of the short covering rallies over the last two months failed on the fourth day. This one was by far the strongest and from the most oversold. Today was the fifth day. Tomorrow will be driven by the GDP, Beige Book, PMI and the NVDA warning. While the bulls would just be happy to hold Dow 8600 and Nasdaq 1300, they have to gain ground to convert new believers. The vast majority of investors are still on the sidelines and waiting to see if this one will fail like all the rest. The bulls must gain ground, even if it is just a little, in order to convince those investors.
Institutional investors, firm in the understanding that the two worst months of the year, September and August, are just ahead, are not racing to commit money to the markets. Yes, they are spending some just in case this is the "one" but they are keeping much more in reserve. This will limit the success of the rally until the company certifications have passed. They have all the time in the world and when you are investing tens to hundreds of millions of dollars you leave nothing to chance. It is my opinion that we have a retest in our future and until that retest occurs we need to be constantly looking over our shoulder for the next shoe to drop. A breakout over 8800 would be great and could signal another wave up but without a much stronger than expected GDP report tomorrow I find it hard to imagine.
Enter Very Passively, Exit Very Aggressively!