What a difference a week makes. I was rereading my commentary from last Sunday and realized we were just approaching Baghdad when I wrote it. This week the war is almost over. What were your expectations a week ago? War over? Positive economic reports? Market rally? Iraqi invasion of Washington? I doubt very few investors expected what we got and there are likely a few bulls scratching their heads this weekend.
Dow Chart - 120 Min
Nasdaq Chart - 120 min
The week ended with an economic surprise, actually a couple of surprises. The PPI report rose by +1.5%, much more than the consensus of only +0.4%. This was due almost entirely to higher energy prices which are already beginning to fall. This report will be discounted completely and inflation will be deemed to still be nonexistent. Excluding energy, prices rose only +0.7% and most of that increase can be attributed to autos (+3.3%) and trucks (+5.2%). You did not think those massive incentives were free did you? Mark prices up so you can cover your free interest loans. There is no free lunch.
Even more surprising was the jump in Retail Sales by +2.1%. I mentioned on Thursday that there was likely to be a big discrepancy in the Chain Store sales on Thursday and the government Retail Sales report on Friday. First this report is based on store sales open over one year. This takes out volatility of new stores and closed stores. Also this report compares March to February and is adjusted for the late Easter week. February was very bad for retailers with sales falling -1.3% due to terrible winter weather. Adjusting for Easter falling in mid April and comparing against blizzard conditions it is not surprising for sales to rise in this report. It is all in how you manage the numbers. Remember most major retailers warned that sales were below plan and lowered estimates in the last couple weeks. Look for these numbers to average out in the April report.
The last economic surprise was a jump in Consumer Sentiment to 83.2 from 77.6 in March. In reality this is not much of a surprise to anybody who thinks it through. In March we were still in the uncertainty of the initial war and consumers were concerned about the change in the terrorist alert to orange and the potential challenges in the weeks ahead. Now two weeks into April with the war almost over according to most reports it appears consumers are breathing a sigh of relief. The March levels were a nine-year low and a relief bounce on good war news is only reasonable. With the potential for lingering problems in Iraq and potential earnings problems in equities this indicator is not going to rocket upward.
The markets gapped up on the economic news but quickly faded despite some good news from some reported earnings. GE reported earnings for the first quarter of 30 cents a share on lighter than expected revenue and affirmed the outlook for all of 2003. However, they also said the 2Q could drop -15%. With 30 cents for the 1Q and estimates of 38 cents for the 2Q they will need a huge bounce in the second half to make the consensus of $1.63 for the full year. Immelt said on the conference call they are expecting a favorable comparison in the 4Q due to charges in the same quarter of 2002 but I fail to see how that will raise 4Q earnings.
GE is a proxy for the economy with 13 diverse businesses from manufacturing a wide variety of products to insurance to airline maintenance and leasing. How GE sees the business environment is a good read on the rest of the economy. GE may be insulated to some extent from economic forces due to its monster scale. GE said the cost for raw materials was down due to economic factors and their buying power gave them added leverage. With the worst over in the airline sector and lower oil prices helping with their future plastics costs, GE may be in the best position to profit from any recovery. Still Immelt said things were tough and cost cutting would still be a priority. They made the numbers but the outlook, while positive, was definitely not rosy.
On the brighter side Foundry raised guidance for the quarter on strong equipment sales to the government. Juniper also reported a net profit for the quarter and said revenues would be flat to up slightly for the 2Q. Is this a glimmer of hope? Even networker ETS rose despite a warning earlier in the week. Analysts said sales of communication gear remained flat to down and telecommunication spending remained the worst area for capex. Enterprise customers, large corporations and government agencies, are upgrading networks but only in small increments. The positive comments from JNPR and FDRY are welcomed and it may be the light at the end of the tunnel but it is still a long tunnel.
Earnings this week were scarce but the same cannot be said for the week ahead. IBM will be the cloud on the horizon on Monday as traders wait for the company to announce earnings after the close. INTC and MSFT both announce on Tuesday and once those three companies report the rest of the tech sectors fate should be known.
Next week should be hectic. It is a short week with the holiday on Friday and it is an options expiration week. It is also the biggest earnings week for the quarter in terms of the number of blue chips reporting. The economic calendar is full with Business Inventories on Monday, Industrial Production on Tuesday, Housing and Permits and CPI on Wednesday. Thursday closes with the Jobless Claims and the Philly Fed Survey. It is going to be a very busy week.
Working against us next week is the melt down in Asia. The Nikkei closed at 7816 on Friday and there appears to be no end in sight. There was another 161 SARS cases on Friday bringing the total to more than 2700. The region is in serious economic trouble. With the focus off the war the potential for a more inward focus is good and that focus will not find anything to cheer about. Our U.S. economy will continue to be impacted by events in Asia.
The war is over. Or is it? According to everyone the Saddam regime is gone and there is a growing feeling that so has Saddam. The day after the last decapitation attempt the government disappeared. Despite conflicting intelligence about several Saddam sightings in various parts of Iraq the scuttlebutt is growing that he bought the farm last week. With only two towns still fighting as I write this on Friday night the large scale battles are almost over and they could be over by Monday. That means the positive news from Iraq is almost over as well. The only news we will be getting will be negative. Suicide bombings, car bombs, failure to exercise population control and the eventual infighting between factions for control of the new government. In short the positive impact on the market should be over. Traders should start looking at earnings again and those earnings will be flying fast.
Most analysts think the earnings for this quarter are a non-event. Everyone thinks they will be bad, very bad but they are a result of the pre-war freeze in the economy. Actually since nearly 60% of the S&P warned for the quarter the expectations are so low a child's sidewalk Kool-Aid stand could beat them. The potential for some earnings surprises is good. However, it is not the current earnings that will govern our future. As we all know it is the guidance. Yes we know the last quarter was bad but what are you going to do now that the war is over. Unfortunately nobody is going to be able to tell. It is the third week of the quarter and the war has been over for a day or two. Nothing has changed. Companies will probably be hopeful but they will have nothing concrete to point to for guidance. They are probably not going to be glowing with optimism.
Traders are so confused they don't know whether to buy or sell. The result is they are doing nothing. The NYSE only traded 1.3 billion shares on Friday with 1.2 billion on the Nasdaq. Remember this was a Friday before a short options expiration week, with a huge number of earnings in the wings and on positive economic data. Except for the opening irrational exuberance spike on Friday the Dow has traded in an 80 point range for the last two days. After the spike it traded in a 50 point range from 10:45 to the close on Friday. Does this strike you are strange?
There are so many factors pulling the market in different directions that it is going nowhere. Remember the post war rally everyone expected? Where is it? The Dow hit 8388 as the statue was about to fall. That was three days ago. We closed at 8200 on Friday with no real threat to holding stocks over the weekend. The lack of interest in the markets appears to be growing now that investors have nothing to look forward to. While everyone has been begging for a return to a normal market the prospect of actually getting their wish has made them nervous.
The post statue performance was not that dismal. It was just that most traders had such great expectations. Therein lies our problem. Expectations have been so bloated for weeks that professional traders were ready for a sell the news event. If -200 Dow points were all they could manage to sell then things might not be as bad as the bears think. I won't bore you with all the market technicals because Leigh Stevens does a much better job in the Index Trader Wrap elsewhere in the newsletter. Suffice to say we are still in the trading range between 8150-8350 that I have been pointing to all week. The Nasdaq is fighting to hold the lower end of its trading range at 1350 and with IBM/INTC/MSFT earnings in the next two days it is doing well under the pressure.
The one thought I will leave you with today is the VIX. I know everyone gets tired of hearing about the VIX analysis. Anyone wanting a full understanding of this indicator need only look in the Traders Corner archives for Mark Phillips great series of VIX articles. The bottom line remains it closed at 28.27 on Friday. It set a new three-month low at 27.77 intraday and it is only two points away from a low not seen since June 2002 at 26. The low for 2002 was 18.87 on March 28th. Just before earnings began. There is a pattern here. The VIX tends to hit lows just before key earnings weeks only to rocket a week or two later when those earnings disappoint. Note the following charts. The first one compares the DOW/VIX for March or 2002. The second is the current chart. Compare the similarities. Also, note the market relationship in December and January. What would your conclusion be?
Vix/Dow Chart - daily (March 2002)
Vix/Dow Chart - daily (current)
On the last chart we still have the downtrend line from November and the 200 EMA. I am not predicting a rally or a dramatic crash. I am only pointing out that traders had great expectations and many still do. Those expectations may have been filled by that giant spike in March and a lack of positive guidance over the next two weeks could deflate those expectations. This does not mean we are going to retest March lows. It may just mean we may not rocket back above 8500 anytime soon. Traders next week should be on the lookout for weakness and be prepared to protect long positions. Should we get some positive earnings surprises I would look for a critical resistance test at Dow 8520. This has been the high for March and April and a critical level any rally must conquer. Load up on the caffeine on Monday. You will need it to keep up with the frantic pace in the holiday shortened expiration week.
Enter Very Passively, Exit Very Aggressively!