Not Over Yet
The war is not over and the bulls are not done. The markets pulled back from the brink of disaster one more time despite news from Iraq about new battles and more deaths. The Dow dipped to support at 8150 and then slowly battled back to close positive by +23 points. After Wednesday's thrashing we will be happy with any gains we can get.
Dow Chart - 240 min
Nasdaq Chart -240 min
Saddam is doing his imitation of "where's Waldo" but nobody cares. There was another new wave of jobless added to the rolls last week when their luck ran out while waiting for the war to be over. 405,000 new jobless claims were filed making it the eighth consecutive week over 400,000 claims. The four-week moving average fell slightly to just under 420,000. 802,000 workers filed for extended claims after their initial 26 weeks of benefits expired. This gives them another three months to find a job after being out of work for more than six months already.
Those out of work consumers are not rushing to the malls. The Chain Store Sales report showed a drop of -0.2% in March. This was the first decline since March 1995. Wal-Mart managed only a +0.7% increase which was their lowest increase in seven years. Apparel stores fared the worst with FD, JCP and the LTD losing ground. CHS, PSUN beat the trend with large gains as did COST and BJS both wholesale club stores. Shoe stores as a segment did the worst with a -10.7% drop followed by furniture stores at -6.3% and department stores at -5.5%. A late Easter, bad weather, war, unemployment and a decline in equity wealth were given as reasons. Friday the same data will be reported in a different format with the data adjusted for Easter and using only existing store sales. This could show a gain instead of a drop.
The MAPI Survey showed some positive sentiment in the manufacturing sector. The overall headline number slipped slightly from 67 to 63 but several key internal components improved. The new orders index rose to 67 from 60 and the order backlog rose to 54 from 52. These might not be soaring but it shows the expectation for future improvement.
News Corp acquired control of DirecTV from GM after a multiyear battle to get a satellite network. This is a killer deal for NWS and allows them to compete directly with the other satellite channels. This gives NWS the capability to reach 100 million households around the world. Unfortunately for FOX shareholders the acquisition came with a price. NWS is going to put the new acquisition in its FOX subsidiary along with $4.5 billion in debt that came with the deal. Also they announced creating 74 million new shares to help pay for the deal. FOX dropped from $27 to $22 on the news. The new combination of assets will give NWS a huge jump in the marketplace but shareholders got a nasty surprise.
USAI announced it was buying the rest of Hotels.com that it did not already own and would issue another 45.2 million shares to cover the acquisition. ROOM jumped from $53 to $63 on the news. USAI also jumped +6% on the news despite the 45 million new shares. Obviously investors thought this was a good deal.
DNA dropped on news that sales of Rituxan were slowing despite a strong +59% jump in earnings reported yesterday. IDPH which co-markets the drug also fell. Also weighing on the biotech sector was the potential delisting of IMCL which dropped -1.09. While these two events were company specific there was weakness across the sector.
The supersonic Concorde became the latest casualty of the weakness in the airline industry. British Airways, BAB, announced they would retire the airplanes at a cost of $130 million and Air France said they would write off $65 million. The last Air France flight will be on May 31st. There are 12 existing planes and they have not shown a profit in a long time. They are aging and even when they are 100% full they only operate at breakeven or small loss. With current traffic on these flights running at 20% or less they are burning cash. Boeing says there will not be any supersonic airliners anytime in the near future as there is simply no demand. Boeing also fell on news that the US may want to change the terms of a 767 tanker deal for 100 planes. Rumsfeld said he wanted to review the terms and decide if he wanted to lease or purchase of some combination of the two. Either would be fine for Boeing but anytime the government wants to review anything it sounds like a long delay.
The war droned on today with Kirkuk falling to the Kurds without a fight. Iraqi troops in Mosul were also reported to be trying to negotiate a surrender with the coalition troops in the area. The US said that the majority of the top 200 Iraqi leaders have been killed or are missing. There was also a news report on FOX that marines had found weapons grade plutonium in an underground bunker. Marines also captured what appeared to be a mobile bioweapons lab when the driver tried to run a checkpoint. All of these events did appear to put a bottom under the market in late afternoon. When the plutonium story broke there was a quick bounce which continued until the close. The assumption was the discovery of nuclear material justified the entire war and proved the larger threat to the US and the world.
Despite the fact the Dow only managed +23 points the internal indicators are showing clear signs of bullishness. The VIX closed at 28.96 and a three month low. While this is a bullish sign of lack of fear in the markets it is also eventually a bearish sign from a contrarian viewpoint. Lack of fear means all the traders are lining up on the same side of the market. Historically the VIX has tended to drop just before earnings as investors enter positions and then go vertical after those earnings disappointed. While the indexes did not show it today the end of day bounce may be setting us up for another retest of the recent highs. With multiple levels of strong resistance above us it will take a strong buying binge to breakout.
Traders hope earnings, which are starting to flow in volume, will help convince investors and funds to lighten up on the selling and switch to bullish positions. GE is going to lead the earnings list on Friday and could give the markets a boost. Next week the earnings ratchet up significantly. Next week is a critical week for earnings and more importantly guidance. Monday has IBM, NVLS and RMBS as the tech barometers. Tuesday we face the back to back giants of INTC and MSFT. After IBM on Monday and INTC/MSFT on Tuesday we should know the fate of the tech sector. Tech bulls hoping for a positive surprise could bid up the markets in anticipation of a positive guidance surprise.
For Friday the Dow has strong resistance at 8265 and then again at 8330. Support is where we bounced today at 8150. This gives us a narrow trading range while we wait for those tech earnings. The Nasdaq bounced off support at 1350 today and recovered to close at 1365. It was the strongest index this afternoon with either short covering or tech bulls buying the dip. This is a good sign considering the chip stocks are expected to report a -70% drop in earnings over the next couple weeks. Almost all the chip and software stocks have warned so there is the potential for a positive surprise. The worst news possible is already priced into the techs so any positive comments could cause a bounce while negative guidance may have little impact. This could be wishful thinking but that appears to be what is on the mind of tech buyers today.
Economic reports on Friday could help or hinder this concept. We have the PPI at 8:30 but that is not expected to move the market. Retail Sales will also be announced at 8:30 but after the Chain Store Sales today it is not likely to be a shock and because of the reporting differences could actually be positive. The big news tomorrow will be the Michigan Consumer Sentiment for April. This is the first look for April and there are some analysts that think it could improve from the 77.6 in March. The positive war news and the appearance of a quick end could have lifted consumer attitudes over the last two weeks. This along with the positive war news tonight could provide an added incentive for anyone still short to cover before the weekend. This should provide for an interesting Friday.
Enter Very Passively, Exit Very Aggressively!