Tale of Two Markets
If you had taken a short nap at 1:30PM you would have missed it. You would have gone to sleep at 9235 and -85 and could have awakened at 9350 +30 only 90 minutes later. The morning was full of gloom, doom, rumors and selling but the afternoon shocked traders with several strong buy programs and a flurry of short covering. What changed?
Before we get to the Jekyll and Hyde reversal we need to look at the morning factors. The Weekly Chain Store sales report was uneventful with a +0.2% gain but it was the third gain in the last four weeks. Tax checks are being cashed and back to school specials are benefiting. Wal-Mart raised estimates for August again on the strength of those sales. All is well in the retail world it appears. Even Sears raised estimates after the close. Consumers are not ripping the doors of the stores trying to get in but they are continuing to spend money.
The Durable Goods numbers for July rose +1.0% and posted the second consecutive monthly gain. The gain was much slower than the +2.6% gain in July and that produced a muted acceptance of the numbers as positive. There was a remarkable change in the communications component which soared to 11.8 from 0.6 in June. The communications sector has been the technology black hole and any improvement there could be a leading indicator for a real recovery. Inventory levels fell again to 0.9%, which could be the result of stronger than expected demand. Once that replenishment cycle begins it could be strong.
New Home Sales declined -2.9% from an upwardly revised 1.2M in June. That is still a record for June and the drop to 1.165 in July was barely a dent in the pace. Expectations were in the 1.145M range so they were able to beat that slightly. The current thought process is that any remaining buyers are rushing to buy something to lock in interest rates on the worry that they will continue up. This rate bounce has a historical precedent and this is typically what happens to those who have failed to act in time. Analysts expect sales to slow as we move into fall and rates continue to rise. The available inventory of houses for sale also fell on a year over year basis.
The most critical report for the day was the Consumer Confidence which came in at 81.3 compared to estimates of 80.0. This was a rise from the 77.0 level in July and but there were some real concerns. The present conditions component fell to 61.6 compared to the futures expectations component rising to 94.4. Clearly the consumer is becoming concerned about the next several months but expects the beginning of 2004 to be better. The current index of business conditions is still flat at only 30.9 and showing only a minor improvement since the 28.4 in May. Those thinking jobs are plentiful ranked only an 11.1.
The markets did not know which way to jump this morning with the conflicting data. On the surface it all appeared good but each had a negative component. Traders were not helped by the JPM comments that they were not seeing any PC upgrade cycle. Michael Dell said that despite their market share gains he was not seeing any significant increase in business spending. And for the fourth consecutive day an Intel executive cautioned that their guidance improvement may only be temporary. Craig Barrett went on record yet again that the sales rebound may only be temporary and the small increase they saw in July may not carry through the current quarter or extend into the 4Q. He said the gains could have been SARS related because overall the global economy was still weak. Sales delayed in Q2 due to SARS concerns were lumped into the first month of this quarter. Ok, we got it. You have filled the airwaves with the cautions for four days, now go sell some chips. The SOX, which hit a high of 459 on Friday after the Intel guidance fell to hit a low of 425 today before the end of day rebound.
The government announced today that the deficit for 2004 would be $480 billion but many analysts expect it to be well over $500 billion before it is over. The deficit for 2003 is now expected to be $401 billion. Comparing this to the last post war deficit in 1992 of $290 billion there is a lot of red ink in our future. The bond market sees this as a lot of supply coming to market. Bonds crashed on the news and yields on the ten year note rose to 4.60% again at midday but the rebound in the equity market produced a rebound in bonds as well. Still today ranked as the sixth highest yield close since the bond implosion began.
So what happened to the markets? The morning started off with a rumor that there was going to be a big sell program released and traders were cautious about buying the initial good news. There was a cloud over the market from the open and everybody kept waiting for the "event" whatever it was. At 10:AM the good news from New Home Sales and the Consumer Confidence prompted a huge volume spike to the upside and it was met with an equally huge sell program. The Dow dropped from 9318 to 9257 in less than 10 minutes. Ok, it is over now let's go back to work. Sorry but that is when the next rumor hit that Alan Greenspan had been killed in an accident. Knock off another -35 points and the Dow is down -85 and the Nasdaq looks like it is headed for 1700 in a hurry. The negativity eased somewhat over the next four hours but the trend is still negative.
In reconstructing the day it appeared the bears were trying hard at the open to crack the support. Tuesday was technically the end of the month for those funds who operate on a "settlement" basis. If they wanted these trades on their August end of month books they had to be made today. Now, if you were going to buy a lot of stock today and the markets started off in free fall you would probably want to wait to see if the drop was going to continue before pulling the trigger. The trend continued weak until about 1:PM. There was no confirmation of the Greenspan rumor and no more massive sell programs. At 1:PM there was a rumor that Saddam had been found. The Dow was only one point away from the low of the day and it quickly bounced about 30 points and while the bounce was not spectacular the result was. It bounced and then held its gains. Suddenly a panicked trader somewhere decided he was not going to buy them any cheaper and the first buy program fired at 2:21. Chalk up another +35 Dow points. That gain also held despite attempts by many bears to short the bounce. About 2:42 the final buy program triggered and it was strong enough to drag quite a few shorts with it. With volume on Monday the lowest for the year and the -270 point drop from Friday's highs there were a lot of shorts. The short covering was quick and triggered more buy stops in rapid succession.
The markets reversed an -85 point drop into a +23 point gain in about 90 minutes. Was it a return to the bullish market from last week? I doubt it but there are those who believe we will see another test of resistance tomorrow. That resistance is very strong between 9350-9400. We closed at 9344 after struggling to break 9350 for an hour. With no material economic reports on Wednesday it could be a listless day. It is still August and volume is still going to be a challenge. Without volume it may be tough to break this resistance. The S&P has traded under the 50 DMA (990) twice this week and is resisting the attempts to close there. The last time it broke it took two weeks to recover. The Nasdaq rebounded nearly +30 points from its lows but failed to break strong resistance at 1772. Everywhere you look there are challenges for the bulls.
On Friday Greenspan will speak at the conference in Jackson Hole, Wyoming. He has used this platform in the past to make more forward looking statements and the markets are not likely to ramp up into the speech. Also a potential problem is the economic reports on Thursday. We have the GDP revision for Q2 and if you remember it surprised to the upside at +2.4% when it was only expected to be +1.4% on July 31st. Everybody was shocked then and almost everyone is expecting downward revision of some sort. How bad is anybody's guess. We also get the Chicago Fed National Activity Index, Jobless Claims, Monthly Mass Layoffs and the Help Wanted Index. Not exactly a passive day. Traders will have to decide tomorrow if they want to be long or short going into the close with those reports in front of them. Fortunately only two, GDP and Jobless Claims are before the bell but the GDP could be the killer. I would not want to be long over that report with a potential downward revision in the wings. Choose your direction carefully and wait for volume to confirm your plan.
Enter Very Passively, Exit Very Aggressively!