Bears Losing Grip?
As amazing as it may seem the bears were unable to hold back the bulls even after a terrorist scare knocked a positive market for an instant -60 point loss. After three years of consuming high profit meals of prime beef the bears appear to be too fat to get up from the table. Bulls slimmed by a three-year diet and seeing light on the horizon that could signal a new economic cycle are pressing against the gate.
Dow Chart - Daily
Nasdaq Chart - Daily
What a difference a day makes. Just Thursday night we were fighting to hold on to 7900 and looking very heavy. Economic news was about as grim as it gets and nobody wanted to own stocks. What changed?
The CPI came in as expected at 0.3%. Break out the champagne! Not worse than expected, not bearish, not a disaster, just inline with estimates! I know we are grabbing at straws here. After taking out food and energy the increase was only +0.1% or completely irrelevant. This counter balanced the soaring PPI number from Thursday. Of course the PPI is a forward indicator which could ripple through the CPI over the next couple months. Still investors cheered.
The ECRI Weekly Leading Index fell to 119.5 from last weeks 119.9 with rising unemployment the culprit. This was the second week of declines but investors ignored the indicator as old news. This indicator is a compendium of other reports and includes things like equity prices, mortgage applications, consumer sentiment and unemployment in an effort to provide a single broad based indicator.
Early Friday morning an explosion and fire at a refinery just outside Manhattan knocked the legs out of a rebounding market and for a few anxious moments it appeared the bears had won the battle and the October lows were in our sights. The strength of the drop was very strong as traders pulled bids and hit the sell button when they thought there had been a terrorist attack. The barge that exploded had 100,000 barrels of unleaded gas and it made quite a smoke cloud over New York. Once it was determined that it was just an accident instead of an attack the bids returned and traders in cash rushed to buy the dip.
Economic conditions did not improve, Osama did not call a truce and Iraq is still being obstinate. It simply appears that traders are accepting as fact the lack of significant risk in their future. The bullish percent on the Dow is only 16%. It has only reached this level three times in the past three years and while it is strongly in bear confirmed territory there is not a lot of risk left or so investors hope. Investors expect a rally or even a new bull market once the shooting starts in Iraq. If we are only days away from that event then it is natural for buyers to be getting eager.
There were several reports during the day that caused investors to think it the shooting may be closer than previously thought. There was rumored to be a deal with Turkey as the cooperation blackmail drew into the final hours. The US announced it already had enough troops and equipment in the area to begin the war without the UN and without help. The message to Turkey was clear, take the current deal or our ships leave port and you lose $26 billion in aid. Several hours later vehicles were seen being unloaded.
Iraq offered to enter into talk with the US about total disarmament if the US would call off the war. Fat chance. However it was seen as a sign that Saddam is getting worried and could be exiting soon. Italy was rumored to have offered him asylum in an effort to avoid a war. Obviously Italy would be much more desirable an exile location than others previously mentioned. A dictator with $20 billion in stashed cash could live well in Italy for quite awhile.
The UN inspectors have reportedly been rebuffed by Iraq and are prepared to present a list of 30 demands to Iraq and the UN on Monday on items that Iraq refuses act upon. This is seen as an ultimatum for Iraq and Iraq is not expected to cheerfully comply. One of the items is the U2 flights whose unconditional approval had more conditions than Michael Jackson's prenuptial agreement. The planes are still not flying. Another condition is the complete and immediate destruction of all the illegal missiles and 380 brand new rocket engines that were smuggled in illegally. Millions of dollars of contraband that Saddam is not going to want to destroy immediately or otherwise. I could go on but you get the picture. It is not nice to fool the inspectors into thinking you are going to cooperate just before a critical UN meeting and then leave them standing at the gates empty handed the following week.
The dominoes are starting to line up on the side of the US. The Saudi ambassador put out a plea to other Arab nations to get in line and quit complaining. He said any nation not in the coalition of the willing would not have any say in what a post war Iraq looked like. That is totally unacceptable to the Arab community and when faced with a US and British occupation force the odds are good a democracy could arise that would endanger the status quo of Arab ruling families everywhere. Get in line, no pushing please, plenty of war for everyone.
There were also several reports that Special Forces were already on the ground in Iraq and had taken control of several of the smaller oil fields. I find this one hard to believe since Iraq would be protesting loudly.
Confirmed reports had 460 UN humanitarian workers leaving Iraq quickly to avoid the rush next week. Russia also extracted its people as well as several other satellite countries. Doors are being boarded up and roads to the borders are reported to be filled with cars. That thud you heard was realization striking home.
The US announced that a new resolution would be made on Monday and the rhetoric surrounding it was very strong about how this is the UN's last chance to be relevant. The implications are clear, approve it and let's get on with the project or don't come knocking on the US door the next time you need money or military power. The US and Britain have made it clear they are going to be the world's police force with or without the UN blessing. I know this is tough talk but that is the way they are playing it.
All this tough talk, Saddam's offer to negotiate, Turkey's acceptance of some kind of deal and ticked off UN inspectors coming back to retract their cooperation speech all worked together to convince investors that the time was near.
Nobody EVER picks the bottom exactly and the penalty for being late to the party is crumbs and no cake. Eager investors decided that the Friday dip could be their last buying opportunity. They were also bolstered by comments from Fed governor Ben Bernanke. Ben said the economy appeared to be in a position where many companies could boost hiring and spending and only a few industries were still suffering. Sure would like to have his crystal ball. He said there were a number of factors that suggest investment and hiring should pick up in the months ahead. In a very bullish speech he said the Fed would not raise rates until well after they were sure a strong recovery was in progress. This hands off policy statement seemed to encourage investors to put cash to work.
The rally off the morning dip was very strong and would seem to have been the signal that the February weakness was over. I did say "seem". Despite the 2:1 advances over declines across all markets the new 52 week lows over powered the 52 week highs for the 13th straight day. There was definitely some money coming to market but it was NOT a strong confirmation day that traders are always looking for. It was enough to put us back into the win column for the week and the close was only 55 points below the high of the week. There was obviously some short covering before the weekend just like we saw last Friday. Can't leave those positions at risk in case of a Saddam retirement event.
Considering this was an expiration Friday the action was even more interesting. Lately expiration Friday's have been boring and pinned to current strike prices without much movement. There is also the possibility that the morning panic dip and rapid rebound jarred traders out of their plan and therefore the bounce continuation is suspect.
While the rebound was nice to see it was not overwhelming. The high for Friday was still below Wednesday's high and the close was still -130 points from the top of our current range. This means we need a +130 confirmation day on Monday before we hit very strong resistance and there are several levels of decent resistance in that path. The bulls will have not only a wall of worry to climb but strong resistance and high event risk.
Everybody expects the shooting to start soon and the market to rally on successful press conferences. We tend to forget that in a war both sides shoot. Everybody expects Iraq to roll over in the face of overwhelming force. The wild card is the potential for a doomsday weapon from Saddam. He has nothing to lose. He knows they are coming for him and he will not get out alive. If he has nuclear, biological or chemical weapons most strategists expect him to use them even if it takes out his population as well. This may be smoke and mirrors or worst case scenarios to polarize the public. Nobody knows but the point I am making is that until we see those press conferences bragging about successful operations there is still event risk. We may move up from here but getting over Dow 8150 before the war is going to be a challenge.
The Nasdaq however closed near the high for the week and in the black for the year. Tech stocks and small caps are normally the leaders of each cycle and traders are definitely showing buying interest. That interest will face confirmation next week when it tests resistance in the 1360-1365 range. As the only index anywhere close to its 50 DMA (1361) it will be the first to really test the conviction of its buyers.
We look constantly at the earnings guidance of every major corporation and very few are saying good things about the future. We moan and groan with every negative prediction or lack of visibility statement. We should also remember that these same corporations did not see the top coming three years ago. They continually told us how great things were and there were endless profits ahead. If they could not see the future then why do we put so much credibility in their dire predictions now? It is because we are trend followers until long after the trend changes. Most investors buy at the top on excessive optimism and sell at the bottom on excessive pessimism. Many claim that the pessimism is not excessive yet. This may be true but when pain and suffering from this busted bubble is weighed I think you will find that pessimism has turned into total complacency. We have been told things were so bad for so long that we have finally become immune to the bad news. Instead of a capitulation bottom to the three year bear market we have seen an exhaustion or consolidation bottom instead.
S&P Chart - Weekly
Take a close look at the S&P chart. The drop to 806 on Feb-13th was only 38 points above the October low and 31 points above the July low. In a market that lost 50% of its value from the 1553 high, 30+ points is gimme and would count as a higher low triple bottom retest in most trader's eyes. I am not claiming we have seen the bottom. I am not claiming any divine gifts of prophecy. I am just reporting the market sentiment as I see it. The actual charts for the Dow and Nasdaq are still showing a down trend but the second bounce in a week has peaked the interest of eager investors. With 30% of the gains from major market rallies coming in the first five days I am betting that experienced investors are lining up at the door. In October the Dow rebounded +1058 points off the lows in four days. The only way you can be assured of not missing the train is to be aboard before it leaves the station.
Now where did I put that ticket?