Right On Schedule
Two days left in June and the markets continue to rise as expected. The gains today bucked the normal trend for the day after a Fed meeting to be down. The Dow was the laggard and gave indications of weakness numerous times but closed with decent gains in the end. The Nasdaq tacked on +31 points after coming close to 1600 once again. Right on schedule, so far.
Dow Chart - daily
Nasdaq Chart - Daily
The day was packed with economic reports although none really rocked the markets. The Jobless Claims came very close to breaking the consecutive streak of 21 weeks over 400,000 claims with only 404,000 for the week ending June 21st. Claims for last week were revised upward by +5,000 to 426,000. The four-week moving average fell to 428,000 and a four week low. Unfortunately continuing claims rose to 3.741 million and only slightly below the recent high of 3.78 million in May. Fewer people filed for claims but fewer jobless are finding work.
Unfortunately the Monthly Mass Layoff report showed 173,784 worker layoffs were announced in May. This is a lagging number but it is also an announcement of future layoffs so the impact could have been felt in June or could still occur in July. This was up from the 161,095 announced in April. Manufacturing is continuing to be the biggest loser. There were 1,699 mass layoffs announced in May.
The Chicago Fed National Activity Index improved significantly to -0.39 from -1.04 in April. This was also a lagging number from May and the market ignored it. This was the ninth consecutive week of declines with April being the worst. This could be seen as an improvement that the rate of decline was slowing. With all other components improving it was the labor component that held it in negative territory. If the labor market is improving, which could be seen in the drop in Jobless Claims to near 400K this week then this index should be in positive territory for June.
Despite the near sub 400K Jobless number there is no real evidence that the job environment is improving. The May Help Wanted Index today was unchanged at 36 which is a cycle low. In reality it was an improvement as the April number, the previous low of 35, was revised up to 36. Is that an improvement or not? It is still the low either way you count it. On the bright side the number of markets reporting an improvement in advertising jumped to 37% from only 20% in April. Using your optimism microscope you could decide that the trend had changed and look forward to next months report for confirmation. Countering this view was new lows in the Midwest, West South Central and the Mid Atlantic regions. Also, the bounce in the Mountain and New England regions is failing.
The final GDP for the first quarter fell unexpectedly to only +1.4% growth from +1.9% growth in the last revision. Weak investment was the critical component that failed. The inventory component fell when the numbers came in weaker than expected. Computer equipment and software fell -4.8% and the first decline in four quarters. Good news came from corporate profits that rose more than double the prior estimate to +$20.4 billion. Analysts reviewing this report claim it is clear the economy was contracting in February and most of March. The question now is what happened in April and May as the war ended?
The minutes of the May FOMC meeting were released and it was clear the committee was strongly divided about the need for a rate cut and the chances for deflation. The war confused them and they were unwilling as a group to make the cut but there were several members suggesting the war was NOT a reason to delay a needed cut. The most revealing comments were on how to word the release to mention deflation without causing a deflation panic. They decided to wage a verbal war on bond rates rather than actually cutting rates in May. You should remember the flurry of Fed heads all commenting on the "other methods available" and the Fed's commitment to "do whatever was necessary" to pump up the economy. Evidently the strategy worked as bonds soared to a 45 year high with no May rate cut.
Stock news was fairly thin today with a ruling in the MSFT/SUNW Java case the major news. The judges reversed a lower court ruling that forced Microsoft to carry Java in its products because of its anticompetitive actions. That is the MSFT version of the story. The SUNW side is that the judges left intact a ruling that said MSFT must abide with the previous agreements with SUNW if it did distribute Java. While the announcement sounded positive for MSFT and negative for SUNW on the surface it really did not change the climate or the deal. SUNW claims there are currently three million Java programmers and they are attempting to boost the number to ten million. It does not seem likely that MSFT will be able to delete Java support from its products or it will risk pushing those applications to other operating systems. Support is different than offering Java as a product so the battle is far from over.
Speaking of battles RIMM was the focus of a broker war. Before the open today Needham downgraded RIMM to sell from hold on news that Dell was going to release a competitive product with superior technology. They expect it to significantly impact RIMM's market share and future growth. They have a price target of $8.43 on the stock which is trading at $22.50. On the other side of the table an institutional investment firm called ThinkEquity raised its rating on RIMM to overweight from equal weight due to strong sales of its current products. CIBC also praised the companies performance and raised its price target to $27. RIMM lost -34 cents on the day. They look very top heavy at this level.
The real news today came from the bond market where selling was heavy. The concept that the Fed "might" lower rates again or "might" buy long term bonds to keep the interest rate low was evidently ignored. The FOMC notes suggesting a verbal war on long term interest rates did not carry much weight with current bond holders. The yield on the ten-year rose to 3.53% from yesterday's close of 3.36 and well above the Wednesday low of 3.20%. The 30-year yield rose to 4.56% from yesterday's low of 4.29%. This is a huge jump in yields and it suggests the rate cut already priced into the bond market was 50 points not 25. Both treasuries broke out of prior resistance and closed near the highs of the day.
While the buying in the stock market was concentrated in techs instead of the Dow there was not a flood of cash hitting the markets. There was subtle upward pressure on the Nasdaq but the Dow actually struggled to gain ground most of the day. This is not the picture of a major asset shift out of the bond market. The volume during the day was very light and it did not pickup until the last 30 min of the day. It looked like a standoff with nobody wanting to be the first to step up to the plate. Friday could be a different story if the pattern remains the same.
The Dow closed just below next resistance at 9100 and stronger resistance at 9150. If Europe/Asia trades up overnight on our markets then we could open strongly positive tomorrow. Futures are up in after hours and approaching the highs of the day. It appears the historical first week of July rally is about to take place. The S&P has very strong resistance at 988-990 but then a free pass to 1000. The Nasdaq already broke its corresponding resistance at 1630 today.
What is powering this is the end of quarter and end of half cash from retirement contributions and the cash moving out of the bond market. This inflow into stocks should last another week and peak around July 7th-10th. If you read my Tuesday market wrap then you know what I am expecting. I suggest you do so because it is critical you understand the historical trends in our near future.
The game plan for the next week should be to go long the market over SPX 990 and stay long until the 10th. This assumes the July historical trends I discussed on Tuesday remain in place. The S&P bounced off its lower uptrend support today and could actually move up to 1050 before July 10th. It will not be an easy road but if the July trend remains in place it is not impossible. 1010-1015 is going to be monster resistance but if the bond bulls turn into bond bears that cash has got to go somewhere.
SPX Chart - Daily
SPX Chart - 30 min
Before you think I have lost my mind I suggest you read my Tuesday wrap. The historical trends are clear and the bond market is poised to release a lot of cash if the selling continues. The drop in bonds today pushed them to a seven week low. There is probably a lot of number crunching underway tonight in bond rooms around the country. IF and I repeat IF in capital letters, the bonds continue bearish and that cash adds to the retirement flood over the next week we COULD have a very strong market. Did I qualify that enough? We are poised to repeat the normal July trend. That does not mean highly profitable funds will not sell into the trend to capture profits since the trend is so well defined. Either way the second trend beginning after the 10th is probably alive and well so be prepared.
Enter Very Passively, Exit Very Aggressively!