Going Nowhere Fast
We saw quite a wild week last week, with big intraday moves over the past few sessions, plenty of Iraq posturing and a slew of earnings reports. Monday was no exception, with an intraday range in the Dow of 100 points. However, in the end, we are just about where we started out last week. In fact, the Dow is off just 22 points from where it began last week, with the OEX off just 0.44 and the SPX off only 1.08. For traders who have gotten whiplash watching the recent movement, it doesn't really seem worth it, as they could have gone on vacation and come back to see little had changed.
We had some economic data to drive the market today, coming in the form of positive releases for the ISM manufacturing index and Construction Spending. The Construction Spending number for December showed an increase of 1.2% in December, a significant increase over expectations for a rise of 0.3%. That result could also lead to an upward revision in GDP for the fourth quarter. The November number was also revised higher, showing an increase of 0.9%, versus the previous reading of 0.3%.
The ISM data came in at the high end of expectations, with a reading of 53.9%. Anything over 50 shows an increase in manufacturing activity. There had been some concern that December's increase had been an aberration, but the January numbers indicate that even if things are not exactly robust in the manufacturing sector, they are still improving.
Of course, for all of the economic data we are seeing, the big issue still hanging over the markets seems to be Iraq. We have gone into a holding pattern for the last week, following the President's State of the Union address last Tuesday. While we are seeing day to day swings, we are not seeing enough conviction from either bulls or bears for a true breakout in either direction. We got a nice rally to start the year, as investors funded their yearly contributions to the retirement plan, followed by a big sell-off once earnings reports started rolling out. It wasn't that the reports were bad, as much as it was due to the accompanying cautious statements about 2003. After the 1300-point swing in the month of January, the market seems a little exhausted and simply awaiting the resolution of the Iraq situation. We are trading in a range below the 2002 year-end sell-off, indicating the overall trend in the markets is still bearish, but the drop has certainly slowed and we are beginning to make back some of those losses. On any given day it can feel as though the worst is behind us and we are headed higher. It can also feel like the sky is falling, and it is time to get out - just throw a dart at any day of the week over the last five or six sessions and you're equally likely to feel either way. In reality, a big continued move is unlikely before we know just how long a war will last and if we even are going to invade.
Chart of the Dow
While it seems a foregone conclusion that we will invade, the notion of Saddam Hussein and his posse heading into exile is becoming more frequently discussed and seems like his only way out at this point. Oil futures continue to set higher highs, but have seen a steep drop the last couple of days. If traders truly felt we were headed into Iraq in the next couple of weeks, we probably would not be seeing such a pullback. The bet seems to be that we are in for another round of haggling at the U.N. following Powell's presentation on Wednesday. That view is contrary to what we are hearing on television, but I can't think of a better barometer of war in the middle-east than the price of oil. Make no mistake, war is still expected, as per barrel future prices remain well over $30, but with a drop ahead of the U.S. presentation, the market seems to be forecasting a slightly longer wait. The Venezuelan general strike is also a big factor in oil prices, so traders need to keep an eye on those developments as well, before concluding that movements here are only Iraq-related. In fact, Venezuelan President Hugo Chavez claims that his country has increased its output to 1.8 million barrels per day, which is more than three times what it has been in recent months. The country was pumping more than 3 million barrels before the beginning of the general strike, but that total dropped to 500,000 at one point, which helped drive up prices, along with middle-east tensions. In actuality, positive developments on either front can reduce the price of oil, at the same time helping the equity market. However, as long as we are faced with war, prices should remain elevated, thus keeping a lid on a stock market rally, as fuel costs remain high.
Chart of Oil Futures
Ford was the big winner among automakers, as it saw an increase in January sales over a year ago. That was better than GM or Daimler-Chrysler could do, as those manufacturers saw declines from the torrid pace set last year. Ford Chairman Bill Ford Jr. did caution, however, that some economic trends were worsening, such as unemployment and consumer confidence (which hit multi- year lows last month), and that Iraqi worries are also still contributing to a slow down in spending.
Gold futures climbed higher, indicating a defensive play, which is also tied to the sinking U.S. Dollar Index. Gold futures are now trading 371.2, staying close to multi-year highs, set in January. Those futures are giving us bearish signs, failing to confirm what we are seeing in other areas. The dollar started off strong today continuing its rebound from mutli-year lows, but finished the day slightly in the red, also indicating a market on hold.
Chart of Gold Futures
The bond market also indicates bullishness in equities, as the five, ten and thirty year notes all saw selling today. There have been recent instances where both bonds and equities have dropped on the same day, but it is rare. We usually see contrary movement, with sinking bonds confirming rising equities and that is exactly what we got today. The data for inflows and outflows of funds between stocks and bonds shows just the opposite for the month of January. It is estimated that funds investing primarily in U.S. equities saw an outflow of over $5 billion in January, while bond funds saw an inflow of $3.8 billion over the last two weeks. With bonds rallying as stocks sunk during those last two weeks, we may now be seeing a reallocation back in the other direction by those institutions that are either taking profits, or taking advantage of the stretch in prices.
One sector that many traders use to confirm broad market movements is the Semiconductor group. These stocks tend to reflect overall tech demand and recent action has shown little strength. The Semiconductor Industry Association this morning released data that showed the first month over month decline in global semiconductor sales in several months. For the year, the industry saw just 1.3% growth, which makes the accompanying prediction for growth of 19.8% in 2003 seem a little lofty. Traders apparently didn't seem too impressed by the prediction either, and the Semiconductor Index remained mostly flat following the release. This sector is getting tougher to predict after falling 120 points from its December high of 393. Last week's warning from Applied Materials (AMAT) that its orders would drop 35% this quarter sent the SOX down another leg, where it bounced strongly from 360, but remains below previously strong support at 280. It's clear from the statements accompanying most recent earnings releases that IT spending has not yet turned the corner and the SOX seemed to be entering a free-fall area between 280 and the low 200s. However, the drop has slowed and we seem to be suspended in space. The fact that it has not rebounded with the broader markets the last couple of days can be seen as bearish and I would be hesitant to go long the sector. Still, the second leg of the big breakdown has not occurred.
The Market Volatility Index (VIX) also saw a drop today and is now below the 35 level that has been pivotal in recent months. That 35% resistance level had capped equity market drops and was broken on the most recent plunge. After topping out at 40%, it has crept lower, in spite of the recently large intraday moves. The move back under 35% indicates we are seeing some of the downside fear dissipate as we have settled into a range and tested the upside of that range today. As long as we test the upside, we can expect to see the VIX continue its descent. Those traders holding straddles are likely suffering these days and will continue to do so until we break in one direction or another. Until then, the best strategy will be buying small dips and selling small rallies against the positions in order to make up for the time decay.
Chart of the VIX
Point and figure charts are beginning to give us some bullish signals, with the Dow, OEX, SPX and NDX all reversing back up into bullish columns of "X." However, only the Dow has managed to break above its most recent rebound high and the bullish percents for all of these remain in reverse mode. Once again, conflicting signals as to where we are headed next.
Today's bottom line seems to be a tepid attempt at a rebound. We are getting bullish signs after a big drop, but we are still range bound at sub-breakdown levels and very light volume ahead of this week's events. It is difficult to determine whether we are just taking a breath before the next leg down, or building support for a rebound from the late-January sell-off. We are likely to remain on hold throughout much of the day Tuesday. We will get Cisco's earnings after the bell and then the Powell presentation on Wednesday. Following that presentation, we are likely to have a better idea of whether the U.S. has worldwide support, or if we will be going it alone. In either case, once the picture becomes clearer, we should break out of the current range and get a better signal on where the trend goes from here.