Best Quarter Since 1998.
Three months ago the Dow Jones Industrial Average had just closed at 7992. It had just retraced one half of its rally from the March lows near 7416 to its monthly high near 8522. Some traders were concerned that the close back under 8000 might be forecasting a retest of its recent (March) lows. Oh what a difference three months can make. In the last quarter we've seen the end of the Iraqi war, the passing of a $350 billion tax cut, a revival of corporate and investor interest in dividends, another interest rate cut by the FOMC, and a loudly declared (and loudly contested) end to the bear market. Oh, and if you missed it, it was the best quarter for the markets since late 1998.
As of the close today the DJIA is up 7.7 percent for the year, the S&P 500 is up nearly 11 percent and the NASDAQ Composite is up more than 20 percent (YTD). However, at their recent highs two weeks ago both the S&P 500 index and the DJIA were up more than 25% from their March lows. Passing them both was the NASDAQ Comp with a 31 percent gain from its March low. Yup, it's been a pretty good quarter for equities.
What came as a surprise to many market watchers was the general lack of buying pressure today. Some suspected that the last day of the quarter would be a strong one as funds did some last minute window dressing to spruce up their portfolios before mailing out their statements soon. It looks like money managers have learned their lesson and did their buying early this year, hence the strong first two weeks of June. That's not to say there wasn't any buying today - just the opposite occurred. This morning saw the beginning of a decent rally, as well as a mid- afternoon rally attempt. Unfortunately, both were met with selling pressure that left the major averages virtually unchanged, albeit slightly negative for the day. Market watchers suspect that the temptation to sell recent winners coupled with fund managers selling stocks that are being kicked off all 21 of the Russell indices outweighed the need to buy any stocks being added to the same indices.
This index reshuffling contributed to the decent (summer) volume today with 1.8 billion shares trading on the NYSE and 1.96 billion traded on the NASDAQ. However, the market's indecisiveness is evident in its advance/decline numbers. The NYSE shows 1442 advancing issues and 1418 declining. The NASDAQ reported 1499 winners for 1568 losers.
Chart of the DJIA
Chart of the NASDAQ
Chart of the SPX
The big news today was the Chicago PMI report. Today's report was for June and showed minor growth, but it was growth nonetheless. May's number was 52.2 and June's PMI reading came in at 52.5, lead by an increase in manufactured goods. Numbers over 50 represent an expanding economic climate while numbers under 50 are recessionary. The New Orders section of the report showed a minor improvement from 54.6 in May to 54.8 in June. The last few months have shown a string of economic reports that indicate a very slow but improving U.S. economy. Today's PMI report merely reinforces that belief. Tomorrow investors get a chance to react to yet another economic report, this one being the ISM index due out tomorrow.
The challenge that traders must face today is how to juggle the rise in stock prices. The markets have run up on the expectation that a second half recovery will finally make an appearance this year after being stood up the last two years in a row. The domestic economy is improving but at this glacial pace, stocks may be too expensive. We obviously won't know how the third quarter will be until it gets here, but guess what the stock market is going to base its reactions on since it discounts future events, not past events? Corporate guidance. The direction for the next couple of months will be dictated by what corporate America has to say regarding their earnings forecast for the next quarter (or two). As always it will make for an interesting earnings season. Speaking of earnings, second quarter announcements will begin after the fourth of July holiday but they don't really pick up speed until Monday, July 14th. This week is still prime time for an earnings warning announcement, at least for anyone who announces in the second half of the month.
One earnings report a lot of tech investors will be watching is Intel Corp's (NYSE:INTC). INTC is expected to announce on Tuesday, July 15th, 2003 after the closing bell. Intel made headlines today as Clark Westmont, an analyst with Citigroup's Salomon Smith Barney, upgraded the stock from "in-line" to an "out-perform". Clark also added INTC to SSB's "recommended list" and predicted that INTC would raise their 2004 profit margins and dividends. Mr. Westmont's optimistic outlook for Intel included speculation that the company would meet or exceed Q2 estimates. He raised INTC's 2004 per-share earnings from 70 cents to 80 cents per share. Unfortunately, shares of INTC, which gapped up on the news, was unable to hold on to its gains and closed up just 24 cents or +1.16 percent at $20.81. The SOX semiconductor index added $0.23 to close at 359.69.
Traders need to be careful here. Traditionally, the shortened July fourth week is a bullish one for Wall Street. However, given the extreme ramp up over the last quarter and the position of several major indices hovering anemically above support one needs to be careful when evaluating bullish plays. We would not be surprised to see funds immediately begin undressing their portfolios, especially those money managers who have profits to lose. TrimTabs, the preeminent source on fund flows and stock market liquidity, stated that they have turned "aggressively bearish" on equities. The research firm cites the deluge of new corporate debt offerings and drought of stock buybacks combined with an extreme case of bullish sentiment by investors is a contrarian recipe for market weakness.
This is one time I'm apt to agree with them although my personal bias suggest the market top is either behind us or will be made in the next two to three weeks.
Watch those stops!