Tale of Two Markets
Last night's session and the early morning futures almost caused a massive capitulation- by the bears. An almost perfect bullish consensus seemed to be underway, marred only by the persistent weakness in the US Dollar Index overnight. Despite a massive infusion of 11.25B via overnight and 5-day repurchase agreements by Al Green, the indices were unable to hold their opening gains, and spent the day headed lower.
Chart of the INDU
Chart of the COMPX
The day opened with the CPI and housing starts data at 8:30. The CPI data came in showing a 0.3% increase, less than the .4% analysts expected. This reading was down from a .6% gain in February. The core rate of inflation, which ignores food and energy prices, was flat. These low readings show that inflation is very tame, giving the Fed more room in which to manoeuvre with monetary policy, but then, the 4 year low on core rate and the decrease in the overall rate from February is also deflationary. I believe that this latter interpretation was at least in part responsible for Al Green's rather aggressive open market operations at 10AM.
Housing starts posted their largest gain in 6 months, rising 8.3% in March to a 1.780M annualized rate. Single family housing starts was up 7.7% to 1.4M annualized units. Permits for new construction fell however, by 7%, the largest drop in one year. The blowoff top in housing that many have been calling for months continues to advance, but the drop in permits clearly removed whatever elation that the otherwise bullish housing starts number might have inspired.
As the charts above show, today was a tale of two markets, with the INDU getting croaked for 144 points while the COMPX finished up by 3. This is attributable, other than for technical reasons, to carryover from the strong bullish reaction to INTC and MSFT the night before, and from some less than stellar results in the Dow components.
MER announced earnings of 72 cents a share, well above First Call estimates of 61 cents and up from 67 cents in Q1 2002. It cited gains in its fixed income business that offset weakness in its equity-related businesses. CAT also surprised to the upside, reporting 37 cents per share, 12 cents above First Call estimates and up from Q1 2002's 213 cents per share.
KO, however, got hammered for 6.18% on the day on analyst comments that while earnings were on track, the quality of those earnings was "poor", and that case sales were due to fall about 2% short of estimates. MMM was down 3.47% after seeing its earnings cut by J.P. Morgan. Altria (NYSE:MO) beat by a penny at $1.07 per share, down from $1.09 per share in Q1 2002. The stock sold off for more than 2% notwithstanding, not helped by the announcement that its stock buyback would be suspended.
The Nasdaq, as mentioned, was more resilient, actually finishing in the green and assisted by residual bullishness from the after-hours feeding frenzy yesterday on the earnings announcements from INTC and MSFT, which finished up 6.01% and 1.22% respectively. After the bell, SUNW reported a quarterly profit of $4M on revenues of $2.8B, meeting analyst expectations on profits but falling short on revenues by $100M. SUNW was trading down 8 cents in afterhours from its close at $3.32.
BRCM reported increased revenues of $327.5M and announced a narrower-than-expected loss of 25 cents per share, down from 63 cents per share a year earlier. It was trading 49 cents above its close of $14.05 in afterhours trading. AAPL beat by 2 cents, coming in at 4 cents per share, but down from 11 cents last year. Revenue dropped by $275M from $1.5B. The stock was up 11 cents afterhours. AMD was off 20 cents afterhours at $7.70 after announcing wider losses on a decrease in demand for CPUs. Nonetheless, QQQ was trading $26.28 afterhours, up 6 cents from its close.
Stocks received a lift around 10:30 when Tom Ridge announced that the National Threat Level was being lowered from Orange ("high") to Yellow ("elevated"), citing a fresh assessment of ongoing threats by the intelligence community and the continued protective measures in place domestically. Ridge added that he felt that the US is safer under a yellow alert today than it was under the same alert one year ago, due to the extensive security practices that have now become routine.
President Bush spoke in St. Louis today, and said that while the work in Iraq is far from over, Iraqis can look forward to a brighter future, and that Saddam Hussein's regime is finished. This followed his signing a $79B appropriations bill covering the initial cost of the war, reconstruction and humanitarian aid.
It was also announced that the US and North Korea will hold diplomatic talks for the first time in 6 months. The multilateral talks will include China as a full participant, and will be held in Beijing. The Bush administration had refused to engage in talks that did not include other concerned nations in the regions, stating that it would not give in to "nuclear blackmail." The talks in China actually represent a concession by North Korea, which had initially insisted on holding talks with the US in Washington.
While news was plentiful today, the markets appeared to trade more on technicals than anything else. The major indices found a wall of sellers in the area of the 200 day exponential moving average. Amid the hysteria of the open following a strong and sustained rally in the futures yesterday afternoon and overnight, we saw the put to call ratio hit a multi-month low at .43. Breadth was tilted so far to the bullish side at the open, following an extended advance all this week, that there was simply insufficient energy to sustain the move.
While the Nasdaq closed in the green, its gap open above the 200 day EMA felt the real thing, and even tech-bears considered today a victory. However, the bullish case cannot be dismissed. The Dow gave back nearly all of this week's gains, but the Nasdaq barely filled today's opening gap. While weeks and months' worth of bad economic news has been discounted by attention to the war, we saw last night with the reaction to INTC's and, to a lesser extent, MSFT's earnings report, that there is still a great deal of enthusiasm for good corporate news. The deep pullback in the INDU stopped at solid support, and while the COMPX is at loftier heights, the 1380 level is strong support as well.
I believe that a great deal of the weakness seen in the INDU today can be attributed to the selloff in the US Dollar Index as depicted in today's bearish engulfing print.
The selling of US dollars today occurred despite treasury bonds closing in the green, with the thirty year yield down 3.1 basis points, the ten down 3.3 basis points, and the five year down 2.3 bps. The Fed's 11.25B in overnight and five day repos no doubt helped keep bonds in positive territory, as Governor Bernanke has stated it intends to do. However, it looks like little was left over to support blue chip stocks, the other asset class in which foreign money tends to reside. If this analysis is correct, then the selling in the Dow should continue, or at least follow the moves in the US Dollar Index.
Direction for tomorrow is anyone's guess. The indices closed near their lows of the day with little show of strength after the first hour. However, with support nearby below and volumes thinning ahead of the long weekend, with Good Friday and Passover this week and the majority of options expiring tomorrow, it promises to be an interesting session. Traders should continue to exercise great caution and underleverage. We can all remember easier markets in the past, and until the market gets easy again, capital preservation remains our top priority.