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Market Wrap

Sell The News?

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        WE 6-06         WE 5-30         WE 5-23         WE 5-16 
DOW     9062.79 +212.53 8850.26 +248.88 8601.38 - 77.59 + 74.37 
Nasdaq  1627.42 + 31.51 1595.91 + 85.82 1510.09 - 28.44 + 18.38 
S&P-100  495.67 + 12.47  483.20 + 13.45  469.75 -  5.97 +  3.47 
S&P-500  987.76 + 24.17  963.59 + 30.37  933.22 - 11.08 + 10.89 
W5000   9452.54 +233.65 9218.89 +302.66 8916.23 - 73.62 +106.51 
RUT      453.94 + 12.94  441.00 + 22.60  418.40 +  3.73 +  1.14 
TRAN    2481.54 -  4.81 2486.35 +102.99 2383.36 - 35.95 - 42.87 
VIX       23.43 +  1.73   21.70 +   .32   21.38 +  0.37 -  1.03 
VXN       36.13 +  4.47   31.66 +  1.93   29.73 -  1.29 -  1.07 
TRIN       1.06            0.92            1.09            0.93 
Put/Call   0.78            0.67            0.74            0.52 

Sell The News?
By Jim Brown
Click here to email Jim

What the heck happened? That is what bulls wanted to know as the +170 point Dow rally on good Jobs numbers fizzled into only a +21 point gain. The Nasdaq did even worse percentage wise by dropping nearly -60 points from its high of 1684. Friday was a major reversal day by most standards but the Dow did manage to close positive and over 9050. It was not a bad day despite the results.

Dow Chart - Daily

Nasdaq Chart - Daily

The major report for Friday was the Nonfarm Payrolls, which came in bristling with surprises. The decline in the headline number to only -17,000 job losses was significantly better than expected. More important was the revision to April to flat from -48,000. The January jump in employment was cut but the huge Feb drop in jobs was cut by almost two-thirds. Going into Friday's report we were looking at a drop of nearly -550,000 jobs since January. After the giant revisions that same period accounted for only a -272,000 job drop. This 50% haircut in bearishness should have been a clear sign of better than expected business conditions.

There were some negatives with the unemployment rate rising to 6.1% and manufacturing losing -53,000 jobs in May. Also, and this is a big one, they changed the counting process to something called the benchmark process. As a result of the change in the counting process the actual employment shifted lower by 264,000 from April. 2002 jobs were revised down by another -650,000 to -2.5 million. Where those jobs went and why is unknown. The actual total unemployment rose +212,000 in May to nearly nine million. 43% of those who received unemployment have dropped off the roles and are no longer receiving checks. The employment picture is improving although we are not to the point where jobs are being created. The market should be thankful for small favors, even if they were doled out by sharp pencils. Unemployment gains going into the summer will be more difficult as high school and college students that graduated will be entering the already decimated workforce.

Consumers went on a credit spending spree in April with a $10.7 billion rise in credit. The consensus was for only a gain of +2.0 billion. This gain was largely in the nonrevolving category which is highly volatile due to how changing auto incentives attract buyers. After you average the losses in the same category over the last two months the rate of increase is actually down to the lowest level since 1993. The low interest rates have prompted many consumers to refinance their homes and pay off normal consumer debt.

The combination of the Jobs numbers and the credit numbers spiked the market at the open as bond traders sold on a knee jerk reaction to a reduced possibility of future cuts. The chances of a premeeting cut or a 50 point at the June-25th meeting decreased with the jobs revisions. There is still a 100% chance of a 25 point cut to head off deflation and match the ECB but the chance for a 50 point went to zero. Or maybe I should say almost zero. Of 25 dealers surveyed on Friday 21 thought the Fed would cut rates at the June meeting. Seven of those 21 still think there is a chance of a 50 point cut. The Fed fund futures are only showing a 2% chance of that coming to pass. That chance increases to 29% for another 25 points at the August meeting. With economics taking a sudden turn upward the ten-year treasuries, where yields dropped as low as 3.25% on Thursday, spiked to 3.41% on Friday. In bond terms this is a big move. There was a little buying just before the close but the early dump fueled the stock market with rocket fuel.

The second stage of that rocket failed to ignite and it never broke free of the earths gravity. The Dow soared +170 points to 9215 before quickly rolling over once the internals of the jobs report filtered through the trading desks. Bonds quit selling and the extreme volume of the first hour dropped off sharply. There were simply not enough buyers, even with the flood of bond money, to sustain the rally at that rarified altitude. The selling was concentrated in the previous leaders which indicated traders were simply locking in profits not a broad based correction.

The internals were still very strong and very broad. The new 52-week highs hit a new 52-week high at 1305 compared to only 13 new lows. Even after the sell off Friday afternoon the broader market was almost evenly split on advance/declines. NYSE volume was over 2.3 billion shares and the Nasdaq traded 2.996 billion shares. That totals nearly 5.7 billion shares when you include all markets. This is huge volume in what was basically a down day. The Dow did finish higher but the Nasdaq did not on very heavy volume.

I am not trying to make a bear case. On the contrary I think the market needed to sell off to relieve some of the excess. The Dow has serious resistance at 9053. The opening spike shot it to 9215 and well over that resistance. However, when the selling ended the Dow came to a dead stop at 9053 which is now acting as support. This was a major victory in my opinion and the positive close is a bonus. The Nasdaq dropped -60 points from its high and ended up nearly -20 negative. This was not a sterling performance. I am still positive despite the drop. We needed the drop. We needed the profit taking. Getting it from a +170/+40 point spike and ending close to even is a plus. The high volume shows that there were willing buyers for every seller.

Technically this was a reversal day. The extremely high pole on Friday's candle is normally a clean sell signal. Especially if it comes at the end of a rally. Check out the candles on 9/11, 12/2, 4/7. In candle stick charting the candles from Friday and April 7th are called a Gravestone Doji. The market gaps open above the previous day's close in an uptrend. It rallies to a new high then loses strength and closes near its low. This represents a bearish change of momentum. Confirmation of this reversal is an open below the candle body on Monday. That would be under 9040 for the Dow.

Dow Chart with candle examples

The candle on the Nasdaq Compx can be viewed as several things including a Dark Cloud Cover but they are all bearish and represent a reversal.

Ordinarily I would be bearish based on the market action today but I have been expecting a couple consolidation days. The fact that we may have started with the very high volume from a very high gap open could have mitigated much of the damage already. The nearly six billion shares traded gave anyone the chance to exit at the highs if they desired. I am not na´ve enough to believe that the selling is over. That would be nice but I think we have come too far too fast. We need several days of consolidation to appease the bears. The first three days of next week are very light in terms of economic reports. There is a very good possibility we could see some more selling with nothing to fixate on for guidance. This has been the pattern in the recent rally. No reports, no progress. We could also see an increase in earnings warnings beginning next week. These events could provide a couple days of retracement.

That is fine if you are a bear and are short. However, if you are looking for an entry point then Monday/Tuesday could be your cup of tea along with several million others. Look at the facts. TrimTabs said investors added $1.52 billion in new cash in the last week. Not a truckload but a continued positive flow. Many bond holders may have been reluctant to dump at the open Friday and are waiting for next week to make a more orderly exit. The 25 point cut is already 100% priced into the market and the odds of the second 25 points are now at only 2%. Do you hold for the long shot while everyone else is leaving? Probably not. It was also confirmed again on Friday that the State of Illinois was going to sell $10 billion in bonds and 60% of the proceeds would go into stocks to help heal their pension funds. I heard two reports on the topic and depending on who you heard there are between 17 and 29 other states planning on doing the same thing in the month of June. This represents a huge influx of cash. We also have a tax cut in the works with stock favorable terms and 25 million checks going directly to consumers over the next 90 days.

It is also the end of the quarter. Those mutual funds that have extra cash and have been waiting for a pullback are probably chomping at the bit to invest it before month end. Next week is also the week before expiration week. This week has been trending positive for sometime while the actual expiration week has been less exciting. Lastly, the economics are improving. Slowly but surely there is a glimmer of hope on the horizon. If we get some positive earnings guidance begin to appear from those companies that over warned due to the war then things could heat up fast. 54% of the S&P warned for the 2Q during the last earnings cycle. That sets up the potential for some better than expected numbers. With the Sarbanes-Oxley Act there is no reason for any company to give optimistic or even mildly uplifting guidance when any outside event, like the war, could make them subject to suit or worse. I suspect we will see more upside surprises then previously expected.

Obviously this is all conjecture. The markets have literally refused to go down for so long that the easy prediction would be for a fall. I just do not see it in the internals. I do believe we will see some selling but I believe the dip buyers are alive and well and will be softening all the blows. The Nasdaq has minor support at 1620 and slightly stronger support just below 1600. Neither of these levels represent a major bout of selling. 1535 and 1485 are the real support levels if there is a real change in the trend. We could easily retreat to there but it would take a serious change in sentiment just when economic conditions were improving. The Dow has clung to 9000 for 3 of the last 5 days and it is likely to cling to that level for several more. That does not mean we cannot go lower. The dip last week to 8900 was bought in a rush and it would probably happen again.

In short, look for some more selling on Monday/Tuesday but also look for willing buyers to appear on every dip. Until that trend is broken the longer term rally will remain intact.

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Enter Very Passively, Exit Very Aggressively!

Jim Brown


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