Over the Backs of Bears
Most of the major indexes closed at new 52-week highs and it was done by climbing over the backs of screaming bears. Well, maybe sleeping bears. The volume was still light and the gains were not strong but those bears who were run over were in denial. I know I was there. The Dow hit a new high at 11:00 of 9445 and then traded down the rest of the day until the low of 9351 was hit at 2:40. Bears were backslapping each other that the long awaited failure at the top had arrived when the market suddenly reversed. No problem. Just like the three lower highs since 11:00 they hit the short button again, and again, and again, only to see a strong ramp into the close. The Dow did not return to its high of the day but did close at a new 52-week high.
Dow Chart - Monthly
Nasdaq Chart - Monthly
The morning started off bad with the Retail Sales falling -0.5% from last week but that was written off as blackout related. Also the end of sales tax holidays in several states made the prior week comparisons hard. Helping hold the line were more tax checks and good weather for back to school shopping. WMT said unit sales of school supplies were up but dollar volume was down due to discounting and competition. ShopperTrak said over two-thirds of sales lost due to the blackout were recovered before the weekend was out.
Residential Construction soared to 18-year highs at 1.87 million on an annual basis as builders race to complete houses before the interest rate rises any further. The housing permits fell, which indicate a future slowing but for now they are racing weather and interest rates to complete available units before the fall rains. The June starts were revised upward to +5.7% from +3.7%. This was another shot of speed to investors looking for signs of economic strength. Futures soared in the premarket and setup a gap to new highs despite the impending Michigan Sentiment report 15 min later.
The Sentiment report for August fell to 90.2 from 90.9 and was less than the expected 91.2. Ho-hum. Traders completely ignored it and continued to push the Dow higher. The sentiment has moved sideways in the 90 range since its high of 92.1 in May. For those that have jobs things are improving with lower taxes, tax rebate checks and retail prices dropping on everything but energy. Despite the interest rate gains they are still low when compared to levels seen over the last ten years. When this number is updated later this month the blackout is sure to lower it significantly but the new market highs may be an offset.
After the bell tonight the Semi Book-to-bill number of 0.97 was released. This was an improvement over the 0.93 in June and should help the semiconductor index explode even higher. The index broke strong resistance already this week at 400 and closed on Tuesday at 425. Despite the level of orders still flat for the year the +5.7% increase for the month broke a 3-month downtrend. Orders are down -21% from last year and shipments are down -19%. While .97 is better than .93 it just means the rate of decline is slowing. Until the number climbs over 1.0 the chip companies are receiving fewer orders than they are shipping. The numbers are much better than the three month slump to .90 in Mar-May and traders will get high on semi again tomorrow.
Also impacting tomorrows trading will be the Hewlett Packard earnings after the close. They missed earnings by -3 cents and lowered guidance going forward. They said the PC sector was still weak and only laptops were seeing any gains. HPQ said it was a tough quarter despite losses being erased in several divisions. The CEO said aggressive pricing and weak demand contributed to the earnings miss. Personal system sales saw a loss of -$56 million for the quarter but that was still better than the -$140 million for the same quarter last year. They said volume had declined in Unix servers and that was one area of strength before. While HPQ dropped to $19.76 from its close at 22.12 the futures were not showing that much impact. Many analysts claimed the HPQ results were specific to HWP and should not be taken as an industry wide problem.
The Dow managed to close up +16 points after spending much of the day in negative territory. The Nasdaq was never in doubt and rebounded +21 to 1761. The big winner however was the Russell-2000, which gained +1.61% or nearly +8 points to close at 488. This was an explosion over downtrend resistance at 480. The S&P closed at 1002 for a gain of +2.61 and a close over the 100 DMA for the second day. The Wilshire 5000 was the party pooper with a +40 point gain to 9683 but still under strong resistance at 9700.
With the only economic reports tomorrow the Mortgage Application Index and the Monthly Mass Layoff report traders should be taking their cue from the book-to-bill and pressing their bets to the long side. The wildcard is the HPQ earnings and their impact on the sentiment. After today I am not sure if anything will damage sentiment but that is normally when the worst events happen. The two bombings in Iraq and Israel today had little or no impact on sentiment so it is doubtful the HPQ news will either.
Bonds closed near the highs of the day and yields dropped impressively. The stock market failed to take money from bonds and with positive economic numbers they performed very well. Is there anything that can derail this train?
The challenge now is the downtrend resistance on the Dow from April 2001, which intersects at just over 9500. Nasdaq resistance is the July high at 1776 then it is pretty much clear sailing to 1900. If all this sounds a little like the Twilight Zone it is probably because it is. With the September/October period in front of us the concept of a rally that reaches 1900 on the Nasdaq is about as foreign as sauerkraut on strawberries instead of whipped cream. If you are long, congratulations and keep those stops tight. If you are flat, hold your nose and go long and definitely keep those stops tight. The VIX put in a nearly sub 19 day and the VXN traded at a new all time low. VIX at new lows, markets at new highs? Just keep looking around every corner as the bulls climb the wall of worry because that is a recipe for eventual disaster. The VIX can go lower and many times does. Something in the 17 range would be my storm cellar warning but until then hang on to your parachute as we move higher.
I apologize for the short wrap and the lateness tonight. I got the blue screen of death about 2 hrs into it and spent another 2 hrs trying to recover before giving up and starting over on another PC. Thank you Microsoft for another wonderful evening.
Enter Very Passively, Exit Very Aggressively!