Markets Receive Pink Slip
Job worries finally took hold of Wall Street and the indexes succumbed to some profit taking on multiple reports of weak labor conditions. Serious economic reports looming in our future may have hastened the exit. The drop did not occur until news highs were hit on all the major indexes.
Dow Chart - Daily
Nasdaq Chart - Daily
S&P Chart - Daily
The morning started with the sixteenth consecutive week of Jobless Claims over 400,000 with a higher than expected 424,000 workers filing new claims this week. The continuing claims rose to 3.76 million with total unemployed reaching 9.2 million. There are currently over 2.0 million workers whose benefits have expired. The remaining workers were not eligible for benefits. This is a huge number of unemployed and the odds are good for another negative Jobs Report for May when announced next week. The Jobs survey is conducted during the third week of the month and the same week for today's Jobless Claims. This does not paint a positive picture for those nonfarm payrolls. The continuing claims are now far above the levels reached in the 1990-91 recession.
Adding to the negative jobs outlook was the April Mass Layoff report which showed a 40% jump in announced mass layoffs. The April report showed 161,095 jobs cuts were announced by major companies. This was up significantly from the 112,914 announced in March. The manufacturing sector showed a 50% increase in the layoff rate. This is April data but it is announced layoffs over the next 90 days not layoffs in April. This is a leading indicator for Jobless Claims and the Nonfarm Payroll numbers. This is not a positive trend and it was the highest level since January.
Ok, we saw that new jobless claims are high and there was a 40% increase in announced layoffs. Those new job hunters are going to face a daunting task. The Help Wanted Index, a survey of job ads in 51 of the nation's largest newspapers, showed a drop to 35 from 38 in March and a new low. The index declined in all nine regions. This is the lowest level since the great depression. The index peaked at 93 in 1999. Of the 51 cities only 20% (10) reported a rise in job ads. In March that number was 43% (22). To compare the current 35 level the index was at 47 at the end of the 2001 recession when jobs are supposedly the hardest to find. That means it is 25% worse now than it was then.
The three reports above all failed to show any improvement in the business conditions after the end of the war which is nearing eight weeks now. The rally on the expectations of a relief bounce in the economy is getting shaky since that bounce has failed to appear.
The GDP for the 1Q was revised upward to +1.9% from +1.6% but was slightly worse than expected at +2.0%. The difference was not material and I know many traders were relieved to see any bounce from the initial number and not a downward revision. This was the reason for the initial market gains at the open. Despite the barrage of terrible job news traders felt they had dodged the recession bullet and were now simply waiting for the stimulus to filter though the system. Quarterly profits only increased +1.0% in the 1Q compared to +3.3% in the 4Q. Many analysts were rushing to spin it as "the second consecutive monthly increase", which it was but it was still a 70% drop from the prior quarter. I guess it depends on whether you are seeing the glass half empty or half full. Equipment and software spending fell -6.3%, which was the first decline in four quarters. In reality had it not been for the +11% gain in fixed residential investment the headline numbers would have been much different.
Adding to the confusion was the Chicago Fed National Activity Index which fell to -0.85 in April and March was revised down to -0.69. These readings have been negative for 7 of the last 8 months with only January being slightly positive. The 3-month moving average fell to -0.90. A headline number below +0.20 indicates an increased risk of recession.
With four of the five economic reports negative today it is not surprising that traders decided to take some profits before the even more critical reports over the next two trading days. Friday has Chicago PMI, New York NAPM, Michigan Sentiment and Personal Income/Spending. Monday has the critical ISM report. We saw a bounce in sentiment last time due to the war's end but the odds are good that it will fall slightly due to no economic bounce. Based on the CFNAI today and the huge drop in Durable Goods yesterday the ISM is likely to be bearish. It has been steadily declining since January and last month was not exciting. This report covers the May period and is the first major look at May numbers. The negative NY-NAPM could see a bounce as the area is very influenced by the financial markets. With the current rally the resulting financial services sentiment could help lift it out of its steady decline.
Mutual fund flows for April showed a strong surge when the war ended. $16 billion flowed into stock funds and $10.6 billion into bond funds. We are all aware that those funds powered a significant bounce in the markets. There was also a report that the State of Illinois would be shifting $4-$6 billion from bonds to stocks in the week of June 2nd and several other states would be following suit in early June. Could it be that the long awaited asset allocation event is about to begin? You could not tell it from the buying in bonds since noon Wednesday. We had two days of selling but those losses have been almost entirely erased with the yield dropping to 3.34 at the close today.
After the bell today NVLS reaffirmed its lowered outlook for the 2Q. It lowered estimates in April due to the economy and the impact of SARS. NVLS said visibility was still poor and they expect bookings to be down -23% from the 1Q. TECD warned that profits would fall in the 2Q due to continued weak global demand especially in the Americas region. IDTI also reaffirmed guidance but for a gain of 2% to 4% in revenue for the 2Q. While these companies were mixed the performance of Intel stock has been stellar. It is up over +$2 since Tuesday morning and pressed $21 twice today. It traded over 122 million shares on no real news. MSFT on the other hand remains weak and is closing in on $24 once again. The volume over the last two weeks has been extreme and traders have begun to wonder if there is another big seller besides CEO Steve Ballmer. MSFT and AOL settled an antitrust suit after the bell with MSFT paying AOL $750 million and agreeing to license the Explorer browser to them for seven years.
The chip sector rose once again and finished near its high despite the expected NVLS update. At 375 the SOX is very close to strong resistance at 400 and with mixed news after the bell it may not be the leader on Friday. Techs did finish strong despite the -81 drop in the Dow. The real reason for the drop in the broader markets today may not have been entirely due to the coming economic reports. The S&P rose to a high of 962.08 today and only 62 cents below the August 2002 high close. This may have been a technical sell signal for a market that has been moving up steadily since March 12th. The S&P has rebounded +22% since that March 12th low of 788. The Dow also failed again today right at the same 8850 top from January. The double test and double failure of the Dow/S&P was just too much for technicians to ignore.
The good news for the bulls is simply more bad news in the economy. This increases the chances for the Fed to make a rate cut at the June meeting. The Fed Funds futures are showing a 68% chance of a 25 point cut. There are several analysts now projecting a 50 point cut at that meeting to send a firm message that the Fed is willing to go the limit to combat a potential deflation. I personally think 50 point cut would be extreme with money market funds paying so little already. The Fed is worried about the economy but they are also worried about the trillions of dollars in money market accounts. Sending those companies into the loss column or risk investors being charged to deposit money is not a risk the Fed wants to take unless they are forced. That means the Fed will likely cut rates a quarter and then move to add additional stimulus in another way if needed. At some point the bad news bulls may become allergic to more bad news if it becomes apparent the economy is really headed down despite the Fed's tough talk.
Friday is the end of the month and if today is any indication there could be some profit taking by funds with big gains. However, there are still funds that are heavy in cash that could be looking at the dips as opportunities. One fund manager on CNBC today said his fund was sitting on a 40% cash position. That has to be a painful position today with the markets up +20% since March. The mixed markets provided some very strong volume with 2.2 billion each on the NYSE and the Nasdaq. Dip buyers met sellers and the high volume could be a critical sign.
Traders will probably be buying the dip again on Friday because the first two days of June are historically bullish. Considering June is the second worst month of the year for the Dow since 1950 and the 5th worst month for the S&P, those first two days could be high volume if traders are looking for an exit. The dip today could have been traders thinking I will exit on the June opening bounce or the 12-month highs, whichever comes first. With the indexes stalled at the highs at noon today the final decision was easy. Make no mistake there is a risk of being long at these levels next week and should the economic reports be negative tomorrow that risk could accelerate.
Enter Very Passively, Exit Very Aggressively!