Lott Trots, Frist First.
Senator Trent Lott finally bowed to pressure and said he will step down as Senate Majority Leader. Tennessee Senator Bill Frist is now first in line to take over the post. What does this have to do with the markets? Nothing really but it is one more distraction out of the way as we move into the normally bullish holiday period.
Dow Chart - Daily
Nasdaq Chart - Daily
Friday began with a bang on several counts. The final Q3 GDP came in at +4.0% growth as expected and helped to allay fears that the economy had slipped at the end of the quarter. The top line number was strong and there was plenty to worry about internally but the markets ignored the news. Auto sales have dropped significantly from the 3Q levels. Retails sales are coming in at the low end of estimates. Inventories are being allowed to deplete due to lack of orders in the pipeline. Even mortgage rates have started to bounce off their lows as the expectation of future rate hikes grows. The rising unemployment indicates that the rate of consumer spending in the 1Q should slow. Despite the negative internals the outlook is still positive and no change in the headline number eased many traders minds.
Greenspan provided an upbeat view of the economy Thursday night and said the economy was working its way through the soft patch and would eventually emerge stronger for the long term. He emphasized that inflation, a decades old monster, was under control and would remain under control and he squashed fears that deflation could be in our future. He said the Fed was watching for approaching signs of D-monster and would take prompt and decisive action if conditions changed. He commented that since the bursting of stock market bubbles caused such serious economic problems that maybe they should be prevented in advance. What? He went on to prove why that idea would not work and stressed that the passage of time required to erode the traumatic memories was deterrence enough. He tried to diffuse the idea that the Fed had collapsed the bubble by raising rates and stressed it fell from a lack of emerging profits instead. New technology burst onto the scene filled with promise of a new era but that new era actually leveled the playing field for everyone and massive profits never appeared for most companies. Overall it was seen as a bullish speech and the markets celebrated his outlook at the open on Friday.
The first quadruple witching event coupled with an NDX and S&P rebalancing went off pretty smoothly. It appears most positions were squared earlier in the week and the bounce off 8350 at the open did not really trigger that much short covering. Surprisingly the stocks being deleted from the NDX tended to rise on Friday while the stocks being added have mostly been trending down this week. It appears the speculators who bought/sold the NDX stocks or options on them got caught holding the bag when the index funds failed to show up on time. The index changes actually take place at the opening of trading on Monday and index funds generally have three days on either side of Monday to dump the old ones and add the new ones. With the quadruple witching Friday it appears many funds have opted to wait till next week to shuffle the deck.
The big news for Friday was not the rebalancing of stocks but the rebalancing of funds from the major brokerages and into the pockets of regulators with a $1.4 billion settlement. Considering over $7.5 trillion in stock market value went up in smoke while these brokers were touting stocks in the press and trashing them internally it looks like a bargain. That equates to about $1 in penalty for every $5,357 dollars lost. This is far from over and there are thousands of shareholder suits that will extract billions more from the banks in the near future. Don't worry about the banks having enough money to pay the fine. Citigroup for instance averaged $65 million profit for every business day in the third quarter. The real blow will come from the class action law suits which could run in the tens of billions in settlements.
Jack Grubman agreed to a fine of $15 million and a lifetime ban on working in the US securities industry for his role in the scandal. Guess he will have to sell his WCOM stock to pay the fine. Surely he owns millions of shares of the companies he recommended, right? He bragged he was close friends with CEO Bernie Ebbers. He can probably get a loan from him as soon as Ebbers repays the $1 billion he owes WCOM. He could probably apply as a high profile securities analyst for some foreign power. I hear Saddam has an opening coming up and their communications sector will be exploding soon.
The semiconductor sector shook off the flat book-to-bill numbers and the seven semi stocks being dropped from the NDX and closed slightly positive for the day at 297. This was significantly below the recent resistance at 330 but it appears to be holding at a higher low despite negative news. Could it be that semis are about to find a new life? If the Nasdaq is going to have any chance next week it will require the semis to participate. The Nasdaq comp rallied to close right at the 38% retracement level at 1367 and the 50 DMA at 1369. Now that the stocks leaving the NDX are gone and can no longer impact the index we have a better chance of breaking through that resistance on Monday. As I stated several times in the last three weeks I think any holiday rally will fail in the 1415-1425 range on the Nasdaq. That gives us a narrow range to trade in the holiday shortened week.
The Dow took the news that Boeing was dropping its high speed jet in stride and the stock helped power the +146 point gain. Only five Dow stocks ended the day negative, MSFT, KO, HD, HON and HPQ. MMM led the charge on the improvement in the ECRI Weekly Leading Index and the bullish comments from Greenspan. After two negative weeks the Dow bounce put it back into positive territory for the week. Once there it ran into strong resistance at the 50 DMA at 8512. Once over that 8512 level the Dow is in a little better shape than the Nasdaq but has strong resistance just over 8600 and then 8750-8850 range. Despite the historical trend for a holiday rally there may not be much upside in our future. I am still looking for the rally but I am also expecting a post holiday sell off as well. The economy may be improving slowly but until more indications appear the gains from the October lows are still at risk. If you are following my suggestions for the week you should be long from 8350-8450 and looking for 8750 as an exit after the holiday.
Enter Very Passively, Exit Very Aggressively!
"If you can count your money, you don't have a billion dollars." J. Paul Getty