Casey may not be at bat but Bonds and Sosa will be, but while there may be joy in the ball parks there was no joy in the markets on Friday. For the last 21 years the Friday before Labor Day closed positive 77% of the time. After a valiant effort by the Dow the tech problems on the Nasdaq became too heavy an anchor to drag. The Dow posted its fifth losing month in a row for the first time in 21 years.
The fifth losing month in a row was not the only negative record set in this bear market. ICI, the official record keeper for the mutual fund industry announced that -$52.63 billion in cash flowed out of funds in July. This was the largest outflow on record since they began keeping records in 1949. This correlates to the reasons behind the July-24th low of 7532 for the Dow. If investors withdraw more money than funds are holding they have to sell stock. Funds had been very quiet about the withdrawals in hopes of preventing a bank type run that would feed on itself. Third parties like AMG Data and TrimTabs had already estimated it was in the $50 billion range. Money is still not flowing back in yet. According to TrimTabs only $1 billion flowed into equity funds last week. This does not inspire confidence in any future rally. This is also one of the reasons we did not see a big markup rally on Friday. Funds simply did not have the money to buy stocks.
Friday started off positive despite an initial drop on the SUNW news. The markets recovered quickly, ignored a slightly negative Consumer Confidence number and then rallied on a much stronger than expected PMI. The Consumer Confidence number came in at 87.6 compared to a reading of 87.9 earlier this month. The current conditions component fell to 98.5 while the expectations component fell to 80.6. This falling confidence is likely to pick up speed going forward as worsening business spending weighs on jobs and salaries. Mortgage applications fell slightly showing that maybe the house buying/refinancing boom may have run out of candidates. Still traders focused instead on the gains in the PMI. It posted the first gain in three months to 54.9 from 51.5 last month. This was positive and could be a leading indicator for the ISM report next week. This report is also expected to show improvement but not enough to prevent more layoffs and more slashed earnings ahead. This was also represented in the drop in gains in Personal Income to zero. This was the first month since November that income did not rise. Consumers still spent money with spending rising +1.0%. Since we all know how to add and subtract we know this cannot continue without an increase in income. Spending will eventually shrink.
The markets did dip on the SUNW and NVLS at the open but the rebounding Dow dragged the Nasdaq back into positive territory despite more chip downgrades. In the late to the party category, Merrill lowered estimates on NVLS, KLAC, AMAT and LRCX based on weak demand in the chip sector. Duh! Way to avoid the bleeding edge of investment research! Despite the downgrades and warnings NVLS actually closed up for the day and SUNW only lost -19 cents. The SOX did lose ground to close at 300 after JPM set a target of 230 for the index. Ouch! Intel also lost ground and is trading near a 52-week low on worries that it will also guide lower on its 9/5 mid-quarter update call. There are two tech conferences next week to help spread the message but that message may not be one traders want to hear.
Arthur Anderson quietly closed its doors on Friday as the last of its 1200 public company clients left to a competitor. Anderson is down to 3,000 employees from 28,000 when the Enron problem began. The remaining employees will handle shutting down the remaining facilities, handling litigation and inventorying assets for the eventual billions in investor damage payments.
Friday did not go as planned. I carefully scripted a dip at the open on the SUNW news followed by a rally on bargain hunting and short covering going into the close. I just could not get the market to follow my script. I have to admit the 77% positive record for the last 21 years of Labor Day Fridays had tainted my vision. I expected the bullish undertones for the week to increase near the close as bargain hunters expecting September to open strong for the seventh year in a row established positions. This string is widely reported in the stock traders almanac. The exact opposite occurred. The Dow has been having trouble with strong resistance at 8750 all week and Friday proved no different. Several times the Dow tried to penetrate that level and hold only to be knocked back again. This is the 50 DMA and the 38% retracement level and is proving to be a solid top.
With oversold conditions easing and lack of volume there was just not enough power to punch through with conviction. The only conviction for the day was the slam dunk which began at 2:30. The Dow dropped -134 points to close near the lows of the day on the strongest volume of the day. According to many analysts I read this presents a bearish scenario for the normally positive post holiday Tuesday. As I mentioned above, the lack of a mark up rally by funds, very dreary earnings warnings, worry over Iraq and the 9/11 anniversary is impacting investor sentiment and clearly investors used the intraday bounce to close positions not open them. Since post holiday trading is normally volatile I think we just increased that volatility quotient substantially. There are only six trading days left before 9/11 and while I don't expect any terrorist attacks there are quite a few investors who were burned last year and have vivid recollections of their portfolio losses. With the Dow still up over +1100 points from the July lows there is plenty of profit at risk.
Despite everything I wrote above I am neutral about Tuesday. I think there may be enough bullish sentiment left that when traders return from vacation there could be a flurry of buying activity. There were a lot of big block orders going at ask on the QQQ at the close. This could have been speculation on that bullishness. The problem as I see it is the distance to resistance. Had we closed right at 8750 I think we could have had a chance of a stronger rally if a strong spike over that level triggered a bunch of short covering. However, from 8658 we will be already +100 points before we reach that level and a lot of the buying pressure will have been expended. I could easily see another run to near Friday's highs of 8783 and another failure. Only this time a failure will attract strong volume with all the players back at their post. I am currently short in the Market Monitor from OEX 465, which was only two points off the high of the day. With strong resistance in that area I am very comfortable with the outlook for Tuesday.
Last Sunday my target for this week was a dip to Dow 8400. 8558 was as close as we got. My target for pre-9/11 September was 8100. The Dow bounce Thursday afternoon and Friday has tempered my thought process somewhat. 8100 is only -558 points away but those would have to be garnered in more or less a straight line, a couple days of -200 drops. I don't see it happening that way based on the underlying bid last week. Every dip was met with large block orders in just enough quantity to stop the drop. Granted it will take more buyers to counter any investor flight next week because of the expected higher volume. Whatever happens we are approaching a week of possibly extreme volatility where you are either quick or busted. Once 9/11 passes there are many people expecting a strong rally. This expectation will also put a floor under the market on the 9th and 10th as risk averse bargain hunters take positions in advance. Whatever your market view the next ten trading days are definitely going to be exciting.
Enter Very Passively, Exit Very Aggressively!