Going, Going, Gone?
What a difference a week makes! Just a week ago the chances for a 50 point rate cut next Wednesday were near 75%. Since then the odds have dropped substantially and some are even saying no cut at all. Whoa there boys, let's not get too carried away with this pessimism. Or is it optimism that the economy is doing so well that the Fed can take a pass?
Dow Chart - Daily
Nasdaq Chart - Daily
Today began with Jobless Claims falling to 421,000 and below consensus estimates of 428,000. Before you start thinking the job market has turned around let me also tell you that this was yet another consecutive week over 400K and a streak that has not been broken since mid February. The four-week average of continuing claims rose to 3,726,000 and a 20-year high. Also 43% of the jobless are running out of benefits before finding a new job. This is also the highest level on record. Unemployment getting better? The longer term trend is definitely not showing it.
The Philadelphia Fed Survey came in at 4.0 and inline with the consensus estimates. Unfortunately the whisper number was 11.0 and the market did not like the 4.0 number. It was not enough that the new orders and shipments grew from last month by a decent percentage, traders wanted a blowout similar to the NY Empire Survey earlier in the week. They did not want to hear about a slow recovery. They either wanted a blowout to justify the current market rally or bad numbers to justify a big rate cut. Steady growth was not on the menu.
Adding insult to injury (if you are looking for a rate cut) was the surge in the Leading Indicators from 0.10 in April to 1.0 in May and was the second consecutive month in positive territory. This is a huge surge in this Conference Board Index and shows that the economy is really improving. Eight of the ten indicators that make up the index actually increased in May. What is a rate cut bull to do with positive signs breaking out all over?
Help came from an unexpected source today but not the kind of help the bulls really wanted. GE warned that their short cycle plastics orders for May had dropped between 15% and 20% from last year. This GE business is normally seen as a leading indicator for the manufacturing sector. If the raw materials orders fell 20% then manufactured goods will likely fall as well. GE lost about $1 on the news to $29.80 but the real damage was to the confidence in a recovery. GE is now expected to warn about earnings for the quarter in an analyst meeting scheduled for Friday. Morgan Stanley continued its fall after JPM and UBS cut their ratings after MWD reported a 25% drop in earnings.
This was a day filled with mixed messages on the economy. It started with a high profile article in the Washington Post that said the Fed would take out an insurance policy against deflation with a 50 point cut next Wednesday. Considering those odds had dropped significantly after the NY Empire Survey and other good news this was music to traders ears. That ray of sunshine was quickly lost in the clouds of mixed news after the open. CNBC had alternating views all day as commentators argued for 50, 25 or no cut next week. Total indecision and you know how the market hates indecision.
With Friday a quadruple witching expiration after three months of rally there was plenty of sellers squaring positions and taking profits. The Dow failed early at 9300 and then held 9200 for the majority of the day. Even the Philly Fed report at noon failed to break the 9200 level for more than a few minutes. This battle line held until after 3:PM when the bond market no longer helped to support stocks. The drop was swift and it pushed the Dow to 9154 before late day short covering and bargain hunting softened the blow. The Nasdaq dropped to close under 1650 for a loss of -28.50.
Neither of these numbers are really critical and the markets can fall a lot farther and still maintain the current uptrend. The problem as I see it has many parts. We are still grossly overbought and heading into the summer slump and the July earnings period. Those earnings are not shaping up as positive as many had hoped. Earnings warnings from several high profile companies this week have raised a cloud over the optimistic outlook for the quarter. If GE warns tomorrow that will be a major blow to earnings confidence. That blow was softened somewhat with the plastics news today. The Fed is the other wild card. The confusion about 50, 25 or even no cut has traders running in circles. They are all geared up to buy the rumor but can't tell which rumor to buy. Add to this confusion the end of quarter/end of half mutual fund portfolio adjustments and traders are standing still with that deer in the headlights look. When in doubt, get out is probably the investing path that will be chosen. Many individuals and funds have large profits and they will be glad to sell into any end of quarter buying.
On Tuesday I warned that there would be some big swings over the next two weeks. With very strong resistance at 9350-9375 the odds are slim there are any big up moves left. That leaves more risk for traders to the down side. Another earnings warning or two and a little more Fed confusion and we could see the Dow testing support at 9100 or even 9000 once again. The corresponding Nasdaq support would be 1600-1625.
I would say the risks are neutral when we consider the money flow into the markets and the end of quarter buying. Funds know there is a large influx of retirement cash in the first week of July and they would like to get in before that influx. Sellers are looking for that bounce to sell into. The bottom line is a market that may move more sideways than up or down for the next two weeks. The news event wild cards are still in play and the Fed is the joker in the deck. About the only sure thing is that a 50 point cut was already baked into the cake and the odds of that happening are much slimmer now than they were a week ago. That lack of incentive should cool any buying hysteria. Keep those stops in place and tread carefully for the next three weeks.
Enter Very Passively, Exit Very Aggressively!