180 Point Rebound
you just looked at the closing numbers you would get a very wrong impression of the day's activity. The Dow's closing gain of a mere +55 was decent but that was nearly +180 points off the morning lows. Bad news abounded from ISM, Construction Spending and auto sales but the bulls were not going to be deterred.
Dow Chart - Daily
Nasdaq Chart - Daily
The day started off negative with the Chain Store sales which fell -0.5% shocking analysts. This was the largest drop in months and negated the +0.6% gains from last week. With the sun out in the north east consumers went back outside to play and avoided the stores for anything other than seasonal merchandise. Strong sales of swimwear did little for overall store sales. Most retailers are just trying to hang on until the tax cut checks begin appearing in the mail box of consumers. Those and the lower withholding will help put additional cash in store registers. Unemployment is still holding back gains in year over year sales.
Good news for those consumers came from the Challenger Layoff Report today, which showed the lowest number of announced layoffs since November 2000. Only 59,715 job layoffs were announced in June and the second monthly drop. This is only slightly above the rate which employers announced during the boom years of the 1990s. Challenger was very bullish about the coming prospects for the second half and said this was the first really positive signs of a recovering economy. For the first half of 2003 there were 630,532 announced layoffs.
The excitement was tempered by the ISM results. The ISM for June was a serous disappointment when it came in at 49.8 compared to the consensus of 51.0. While it did not reach the consensus it did barely eek out a gain over last months 49.4. Traders were not excited and the market tanked on the news to dip under 8900 before recovering. While the headline number was indicative of a continuing decline in the economy there were some rays of hope. New Orders, Production and Employment rose and inventories dropped. If production is increasing and inventories are dropping then it would not take much to deduce a potential pickup in demand. This is only conjecture but traders were ready to grab at any straw when trading below 8900. New export orders jumped to 54.4 from 50.8 and the highest level since February.
Construction Spending came in at -1.7% compared to estimates of +0.4%. This also surprised analysts especially when April was revised down from -0.3% to -0.7% as well. That makes this month's drop -2.1% from the previously announced April numbers. This is a huge number and it is the third consecutive monthly decline. This was the largest drop in spending in over a year. Private construction dropped -1.7% and public works construction -1.8%. The public sector may have topped out with state and local governments scrambling to raise taxes and cut services just to break even. There are no funds to expand in all but the rarest of cases.
Economics were not the only market movers today. JPM cut estimates on GE for 2004 to become the lowest estimate at $1.66 for the full year. The consensus is $1.74. AMAT was weak after rumors made the rounds speculating on an earnings warning. There is concern that they were scrambling to make the end of the quarter and weak chip sales in June were causing another delay in chip equipment orders. IDC also added to this overhanging gloom with comments that they would be revising their estimates of global PC sales down from the current +2% for the year. They said the lack of a tech rebound and the SARS scare was continuing to depress the tech sector.
There were also several mentions of technical sell signals being generated by weak performance in several Dow components. Those components were DD, EK, XOM, IBM, IP, GE, JNJ and PG. Also, cyclicals like CAT, IP and WY, to name only a few, were weak on a decreasing outlook for a second half recovery. Copper prices, a raw component in almost every electronic component and electrical device sold, has been dropping. This indicates there is no demand for copper and projects a weak cycle for manufacturers and retailers. Even the bulletproof homebuilders started the day off in the cellar.
Traders feared the vehicle sales numbers would fall off the cliff after the close after Ford announced a -7.7% drop in sales for June. When the AutoData was finally released it showed an adjusted rate of 16.4 million units, up slightly from the May numbers of 16.1 million units. Removing the seasonal adjustment and sales dropped -4.3% overall. In the brand wars GMC rose +18%, Cadillac dropped -17%, Oldsmobile fell -33%, Pontiac -8.6%, Saturn -20% and SAAB rose +6.7%. Ford -6.6%, Mercury -36%, Lincoln +5%, Jaguar -4%, Volvo rose +22% and Land Rover -16%. Jeep +2%, Dodge +6%, Chrysler +9%, Mercedes +6.7%, except that the M-class SUV dropped -33%. Nissan rose +22% and Infinity +43%. You could make a case that expensive cars were slipping but Porsche rose +27%. It is not an apples to apples comparison since Porsche only sold around 5000 cars. BMW sold nearly 25,000 vehicles for an +11% increase. While the headline numbers show gains across all the car companies there are clearly some mixed results in the details. The incentives are continuing and car makers are still holding to a hopeful outlook for the second half.
The most positive news today came from the financial sector. A 96-year-old judge threw out a class action case against Merrill Lynch. Investors had sued to recover losses which they said were due to tainted advice. The judge said investors were too na´ve and handed the big broker a win that could impact all the other class action suits currently in progress. He also said the ruling would apply to suits against MWD, GS and CSFB. The financial sector cheered with billions in potential liability possibly lifted from their shoulders. Citigroup gained +1.01, GS +2.10, MWD +1.44, LEH +1.25 and BSC +1.28. These gains are impressive only when you realize they were rebounds from significant early morning losses. These rebounds started exactly at 12:45 and you could easily point to an intraday Dow chart and see the beginning of the afternoon rally on the announcement.
When the market jumped initially the news was not attributed to the court decision and shorts tried to jump back in at a higher level but the deck was stacked against them. Not only did the financials spark the market but bonds began to sell off once again and early retirement cash was being put to work. Don't buck the bulls on the first day of July. The first day of July has been up 13 of the last 14 years including today. The influx of retirement cash and late buying by index funds, who missed the cutoff on the rebalancing, help to power the July bounce. Today historically begins a bullish ten day period despite July being the start of the worst four months of the year.
If the markets are going to rally they got the best possible start on Tuesday. The Dow dropped back to support at 8900, actually slightly below stronger support at 8950 but either way the weak holders were flushed at the open. The Nasdaq dropped back to very strong support at 1600 and rebounded strongly to close at 1640 and right in the middle of its trading range. Make no mistake. The economic news was bad regardless of how you spin it. There were positive internals but it came in below expectations. There were earnings warnings and downgrades to major estimates. There were repeated references to a second half recovery being weaker than expected or even AWOL one more time. Still the market rallied and rallied strongly bouncing +180 points off its lows. It is not a rally. It is just a one-day reversal but coming at the beginning of the strongest week in July it has all the earmarks of a potential bullish move.
I suggested on Sunday to buy any dip above S&P 950 and the S&P bottomed at 962 on Tuesday before rebounding to close at 982. Now we are in that confirmation stage. If we go up from here I would continue to remain long. I would use 960 as my stop loss. A drop under 960 for the rest of the week would be very negative and could break the historical July trend. Even if the market continues to rise we need to remember this is only a trading rally and not the next leg in a new bull market. Just like the first week of July is normally bullish the last two weeks of July are normally bearish. We will begin to see a flood of earnings and there are some serious concerns that they will not be good. The concern is that the earnings gains have come from continued cost savings and job cuts and not from top line sales. This will be key this cycle. If there is no sales growth and no improved guidance then the fears of a fourth year with no second half recovery will soar. We are approaching a very critical period in the market. The next two weeks will be key to direction and many feel that even decent earnings and guidance will not be enough to justify the gains from the last four months.
The July trends I have been discussing did not occur overnight. They have been created by innumerable cycles of hoping for a strong second half, even during boom years. The summer quarter is known for its tech depression cycle. That cycle comes from the earnings guidance in the July reporting. Tech companies look at the 2Q results, at orders for the 3Q and typically revise guidance for the rest of the year. They trade the first half of the year on hope and the last half on reality. That reality is about to appear, good or bad. The key this year is "will it be good enough" not just will it be good. The Nasdaq is up +48% from the October lows. That is not a good year, it is a good couple of years. How good will earnings have to be to sustain a continued rally from here? If the ISM had blown the doors off at 55 or 60 and showed a strong surge in orders then we could expect another quarter on hope. Instead it showed a continued economic decline.
The rest of the week, both days, have serious economic reports. Wednesday has Factory Orders and Mortgage Applications but Thursday is the killer. Nonfarm Payrolls, ISM Services and Jobless Claims. This could make or break the July trend. If the Jobless Claims come in under 400K and the Nonfarm Payrolls show any improvement over May then we could be ok for another week. In April jobs were revised to zero loss and in May the number came in at only -17,000. This was significantly better than the -151,000 and -121,000 the prior two months. Could we be in for a positive jobs report? Could be. The official consensus is for a gain of +1,000 jobs. Nothing like hedging your bets and not going out on a limb. That sets us up for a potential surprise in either direction. The bottom line is a potentially rocky road ahead but one that is typically bullish due to retirement cash flowing into funds. Once that cash tapers off the outlook could change substantially.
Enter Very Passively, Exit Very Aggressively!