That is the win/loss percentage for the day after Labor Day for the last eight years. Seven of those years have finished positive. With the market trading near its recent highs it will be a challenge to continue that streak. Greenspan did not give the markets anything to hang their hat on and the earnings warning season is just ahead. Conditions are no different than any other year except that the markets are at 52-week highs.
Friday was economically challenged with a mixed bag of results. The NY-NAPM fell to 221.7 from 224.9 and ninth consecutive monthly decline for business conditions in New York. The current conditions fell to 43.6 from 46.2 and future expectations fell to 57.1 from 62.5. Every material component declined. New York remains in recession the rest of the country appears to be keeping its head above water.
The Chicago PMI rose to 58.9 from 55.9 and handily beat analyst estimates of 56.0. Order backlogs increased to 51.0 and the first month of expansion in over seven months. Employment also rose to 51.2 and the first expansion in seven months. Production fell to 51.6 from 58.4 but remained in positive territory over 50. Overall this is the highest reading for this index since May 2002 and the best reading for payrolls since March 2000. While output growth slowed it was attributed to the summer doldrums more than a deterioration in conditions.
Personal income growth slowed in July to +0.2% and less than consensus estimates at -0.3%. However, disposable income rose strongly by +1.5% due to the tax rebate checks and the drop in the tax rate. This prompted a jump in personal consumption of +0.8%. Overall the +0.2% headline number was down from the +0.4% for May and June and would indicate the continued rise in unemployment is putting pressure on wages. With nearly nine million people out of work there is no need for employers to pay a premium for new hires. Signing bonuses have disappeared and the shrinking work week is reducing overtime pay and extra hour pay for part timers. This was the second time this year that wages did not rise. That pushed the annual growth rate for salaries down to +2.1% from 3.3% in January. The shrinking wages indicate no danger of inflation and no fear that the Fed should tighten in the near future.
The Risk of Recession fell to 5.7% in August and the lowest level since the index was created. This is down from 27% in January. The impact of the yield curve and the rising stock markets continues to push the chances of an economic event into obscurity. The risk of deflation is also waning and inflation is at zero. With risks muted on all sides it would appear we are in the sweet spot and ready for a monster recovery. Unfortunately it just means the economy is flat and while all the lights are green there is no gas in the tank. The economic outlook is actually the best it has been in over a decade and the path of least resistance is up. Only the mountain states plus Texas, New Mexico and Arizona are still showing a higher risk of recession. (26,500 homes for sale in the Denver area compared to only 8,500 a couple years ago)
The Michigan Sentiment came in at 89.3 and below expectations of 90.5. This was also below the initial reading for August of 90.2. While it may seem like we are splitting hairs here that drop put us right back into the lower end of the range for the last four months. This was the lowest reading since April. Both the current conditions and future expectations components fell. This is the lowest reading since the war but it is not clear if it is due to a real drop in sentiment or a result of the blackout on 54 million consumers. That makes it another throw away number.
Next week we will not only be faced with a return of traders from their vacations in a house cleaning mindset but we have a flurry of serious economic reports. Tuesday begins with the ISM, Challenger Layoff Report for August, (the Mass Layoffs we had last week was for July) and the Semiconductor Billings. Wednesday has Construction Spending, Beige Book and Vehicle Sales. Thursday has Jobless Claims, Productivity, Factory Orders and ISM non-mfg. Friday closes with nonfarm Payrolls. Next week also starts the earnings-warning season for the 3Q and as yet we have not really seen any rapidly expanding recovery. Many of the earnings last quarter prefaced their guidance with "based on expectations of a 2H recovery" and that has not happened yet. Most importantly we will get another mid quarter update from Intel on Thursday. Yes, back to back updates. We will get to see if the positive guidance or numerous cautions that followed the guidance will prevail.
The ISM is the most critical report on Tuesday with the reading for July at 51.8 the first sign of economic expansion since February. Traders will be very intent on seeing if that number continues to increase or falls back into negative territory under 50. With much of the July ISM a result of defense orders everyone will want to see if the trend can continue.
The bottom line on the Greenspan speech was "if you want a formula, you are out of luck." Analysts were looking for some clue to the future moves by the Fed and Greenspan rejected the idea that the Fed would give anybody a roadmap to economic stability. He said external factors precluded a solely economic set of triggers. He repeatedly mentioned the Russian debt default as an instance where the Fed stepped in to increase liquidity when the US economy really did not need it. It was a protective action designed to head off any reaction to the event. He stressed that only a very few economic conditions were quantifiable and then it is based on an assumption that the future will replicate the past. He said this requires a risk-management paradigm attitude to policy making. Ok, Alan, why didn't you just say, "It is my Monopoly game and I am the bank. If you don't like it you don't have to play." The most surprising thing was the lack of a sell off on the news after all the posturing that this was the showdown at the OK Corral by the bond junkies. I assume they decided even if the rules had not changed for the better, at least they had not changed for the worse.
Friday started out slow with a bounce at the open on the positive PMI but then slowly lost ground after the Greenspan speech. About 2:30 the indexes broke out of their range and wandered higher with the Nasdaq posting a new 17-month closing high at 1809. The Dow closed over 9400 and the S&P managed to add +5 points and hold well over the psychological 1000 level. In all a fitting close to a bullish rebound from the Tuesday drop.
Have you seen the 1999 pattern returning? We have been opening higher, slipping intraday but then rallying into the close in the last hour. This was a cash cow in the 1999/2000 time frame as bears in denial of the bubble shorted the bounce at the open and then were forced to cover at the close, which pushed the indexes to another gap open. I could stand to see this pattern stick around until January.
I am not going to dwell on this because it has been beaten to death in the press for the last couple weeks. The VIX closed on Friday at 19.49. It has traded under 20 several times over the last two weeks and is trending very close to its current historical lows. That should raise some eyebrows. Actually "the" historical lows are in the 10.0 range. The debate over when the VIX is in sell territory has taken on a new view over the last week after a prominent analyst speculated in print that we could see the historical lows soon and he was talking about the 10.0 range. I contend that the pre-Internet trading era was as different from today as horses and cars. Just because your grandfather walked barefoot in the snow seven miles to school uphill both ways before there were cars does not mean your children are going to repeat that. Times have changed. Before 1997 there were 50% fewer investors than there are now and about 80% fewer traders. To buy a stock you had to call your broker and verbally give him the order. There was no such thing as day traders. There were not 20,000 boutique hedge funds trading tens of thousands of shares of exchange traded funds at the click of a button. If you wanted a chart you got out your graph paper and plotted it yourself or waited for the Investors Business Daily to pick your stock to highlight. Futures trading was reserved for currency and commodities and you had to be wealthy to trade them. Now anybody with $2000 can daytrade them to his hearts content. This is not your fathers market. A VIX of 10 was based on stocks like IP $30, S $12, WY $25, BS $8, TX $30 and the leading tech stock was IBM at $12. It is tough to get a lot of volatility out of IBM at $12 and MSFT at $5. (split adjusted) Just my two cents on the controversy but unless hackers finally shutdown the Internet I think the only way we are going to see 10 again is after a depression crash to market levels your father would remember. Until that happens I will continue to project 17.50 as the backup the truck put signal and anything below 19 as a significant warning to observant traders.
Long-term Chart of the VIX:
On a purely technical basis the markets ended right at strong resistance. The Dow has strong resistance at 9450, Nasdaq 1812 and S&P 1010. The close has set up a potential gap open on Monday and a gap over these resistance levels. All the indexes are threatening to break out to new highs and Monday could be critical. If we do break out we could trigger a new wave of short covering and a new wave of pure buying if the breakout is seen as confirmation of a new up leg in the markets. As in most cases of seemingly impending breakouts the economic news on Tuesday will control our eventual fate.
Chart of the S&P 500 Index:
Moving into next week we have some nice historical patterns working for us. The first two post Labor Day trading sessions typically are strong with Tuesday up 7 of the last 8 years. That statistic and $4 will get you a cup of coffee at SBUX. Trends are trends until they are recognized as trends and then the institutions devise a way to capitalize on them. If you knew that a specific day was going to be bullish just before a normal period of weakness then odds are good you would target that day to unload stock in front of that weakness. That is unless you thought we were about to break out to a new high. See how confusing it gets? Bullish sentiment is almost off the scale despite analyst after analyst saying there could be some weakness ahead. It is because they say in the same breath that the target for the end of the year is +10% to +15% higher than we are now. The "potential weakness ahead" is their insurance against seeming irrational if their +15% prediction does not come to pass. How all this play into next week is unknown.
The new bullish reality is faced with that ISM on Tuesday and it should control the week. If it is up again then the bears may have to head for hibernation early. We can just agree to skip the September/October crash and just move right into the November rally. I say all this in jest but with the Nasdaq setting new highs on a daily basis it may not be far from the truth. There has got to be another round of profit taking in our future, several rounds in fact but they could only be nuisance dips like we saw last week. Swing traders will be looking to short any new highs on Tuesday but they operate on a different set of rules. Buy the dips until the trend changes appears to be the current game plan for everybody else.
Enter Very Passively, Exit Very Aggressively!