A Round of Applause Please
The October rally continued to the consternation of bears everywhere. After the nearly +200 point gains on Wednesday the Dow shook off some early weakness and rallied to tack on another +18 points and close very near the 9500 resistance level. The indexes traded on both sides of zero several times during the day but the only score that matters is the one at the final gun. Chalk a big one up for the bulls because they held the high ground.
The Jobless Claims came in higher than expected but the pencil pushers managed to slip it in just below 400K at 399,000. The claims from last week were revised up +5,000 to 386k and that is where they are likely to stay. The storm week will be chalked up as an economic blip and this week will probably end up revised over 400K next week. I can't remember off hand a drop in a revision recently. They are all revised up. Continuing claims rose again to 3.67 million and the highest level since July. The multiple economic reports lately with declining employment components and the rising continuing claims would indicate future weakness in claims. The nonfarm payrolls on Friday is expected to be weak as well.
Factory Orders fell -0.8% and more than double the consensus estimates of -0.3%. Nondurable Orders fell -0.51% and Durable Orders fell -1.11%. Communications equipment fell to -4.89% from +11.78 in July and aircraft and parts to -2.50%, up from -13.89 in July. Computers dropped to +3.21 from +9.22 in July. Industrial machinery rose +5.78 from -8.31 and was the strongest component change. Still, a -0.8% headline number is a material change from the +2.0% gain in July. This report showed that the economy is still expanding from the late 2001 lows but the pace of expansion is very anemic. This report only represents orders to U.S. factories and with the change to overseas manufacturing it is hard to determine what the balance of orders really reflects.
For Friday the big report is the nonfarm payrolls. The official consensus estimate is for a drop of -25,000 jobs. The whisper numbers I have heard are as high as -100,000. This has set the stock market up for a positive surprise or at least a non event. If everybody expects worse than -25K then a -40, -50 even -75K number could be met with a yawn. Ok, we knew that, so what else is new? Basically we spend a week posturing in front of the release and then the outcome is ignored.
The only other material release on Friday is the ISM non manufacturing Services Index. The consensus is 62.8 and a decline from 65.1 in August and July. Services appear to have peaked in July/August and could be trending down if the consensus numbers are correct. Since July/August were the highest numbers posted since the creation of the index six years ago any decline is likely to be ignored unless it falls under 60. Any number over 60 represents a strong expansion and a strong contribution to the GDP for the balance of the year. If anything, the ISM Services represents the true state of the economy. With more and more manufacturing done outside the U.S. we are turning into a service economy. Unless there is a disaster I expect this release to be spun to the bulls advantage by analysts.
IBM announced today that it was cutting 720 jobs and initially lost ground in the market but recovered to down only -50 cents. PSFT announced it was cutting 7% of its staff after completing the merger with J.D. Edwards. That could be up to 1000 jobs in an effort to save $207 million in 2004. PSFT also got signs of a reprieve from the Oracle death sentence. The Justice Dept is reportedly preparing a challenge to Oracle's hostile bid for the company. This would end the attack and allow PSFT to breathe again. Many customers were reluctant to buy their software because they were afraid Oracle would end up with the company and force the customers into an Oracle solution.
Techs got another sunburn today after a Merrill Lynch analyst penned a scathing open letter to Sun Micro. The analyst said SUNW had reached a point of crisis and was bloated, unfocused and likely to suffer further loss of market share. He said the company would dwindle into irrelevance and eventually be bought for its installed user base. He said the SUNW CEO, Scott McNealy's brash and contrarian personality was getting old and he needed to clean up his act. He suggested SUNW cut 5-7000 jobs and quickly, spin off Java and narrow its focus. SUNW fired back that the analyst did not understand the SUNW business and if he had attended any of the Sun conferences he would know what they were focusing on. They called the attack a broken record and suggested the analyst try another tune. SUNW finished the day down a nickel.
There were rumors on the street today that the gains we saw on Wednesday were partly due to a very large buy program by Goldman Sachs. They were said to be accumulating big cap stocks all day for a large customer. There is no way to verify this rumor although it was mentioned on CNBC several times. Also helping the markets was growth estimates by MMM of +12% to +14% for 2004. 3M affirmed the prior estimates and said the economy was showing signs of improvement. A DB analyst said 3M was closer to the beginning of a high-growth transformation than the end.
These types of comments helped to maintain a bullish posture in the markets on Thursday. News of the big buy program helped to give bulls confidence that big bets were still being made at the beginning of the October tribulation period. This buying in front of the most volatile two weeks of the year smells of the plunge protection team at work but tracking them down is harder than getting evidence of aliens on the X-Files. The PPT exists but the secrecy surrounding their actions is better than that surrounding Area-51 in Nevada.
The positive mood is contagious and the bulls pulled off a real trick by posting additional gains for the second consecutive day in October. Last year the first day of October saw a +340 point Dow gain and the 2nd day a -180 point loss leading to -743 points over the next seven days. We have successfully evaded the reversal drop so far but a two day string of gains is hardly a string.
Regardless of the reason or the season the Dow did manage to test strong resistance at 9500 a total of four times on Thursday. While it failed each time it did not fail far. The Dow closed at 9488, only -12 points from the critical level and stretching its move over the 50 DMA to +22 points. The Dow closed less than 200 points from the September high of 9686. A pretty convincing performance all things considered.
The Nasdaq was far less exciting but still clung to positive territory. After bouncing off the 50 DMA earlier in the week it rallied to close at 1836 with a +4 point gain but still well off the 1913 52-week highs. The Nasdaq traded in only a 19 point range and much of that range was early in the day. The SUNW attack and an earnings warning from NTIQ helped to restrain the eagerness to buy. Ironically there were numerous upgrades to tech stocks and many with new coverage started. Helping to restrain the gains were technical considerations where stocks bouncing over the last two days were nearing resistance again. With the high profile SUNW warning this week there may be some rethinking of the lofty expectations.
The major hindrances to the current market are jobs, bonds and valuations with many stocks at new highs on hopes of strong earnings. On Thursday 516 stocks hit new 52-week highs. That was the highest level in over a week. While the jobs number tomorrow is likely to be ignored it was a cloud over the market today. Bonds sold off sharply at the open and gave back all the gains from the last two days. They did improve slightly on the day but the continuing confusion on foreign currency challenges, conflicting economic data and tomorrows Jobs report had them on the run. Fed President Moskow gave them the afternoon boost after saying the "job market was weak despite an upturn in household data." Another Fed President Santomero added to the worry saying "structural unemployment was an ongoing worry." In the war of words Dallas Fed President McTeer while acknowledging weak jobs said "We can't keep having growth that fast (3Q) without producing job growth pretty soon." This positive outlook was the primary cause for the spike in yields at the open. Not to be left out Ben Bernanke also said that "employment was a major concern" for the Fed.
The September Jobs report will be the first look at a massive revision to previous payroll numbers as the Bureau of Labor Statistics attempts to include data that falls outside the normal payroll sample. The revision is made each June but we could get the first clue with the Sept report and the initial revision data. Economists are hoping for an upward adjustment of +200,000 jobs over the 12 month period ending in June. The adjustment comes from matching federal data with state unemployment filings.
Personally, I think the barrage of Fed heads all speaking out on employment on a single day was an attempt to cushion the blow for Friday's report. The Fed gets a 24-48 hour advance look at most reports and this literal barrage of employment comments on the same day sure appears to concentrated to be coincidental. Either way the report has been filed and the numbers will hit the wires at 8:30 tomorrow morning. The overnight futures are flat and it appears there is a lack of concern. Traders have either gone flat or placed their bets and we are waiting for the cards to be shown.
The problem that concerned me on Thursday was volume. The combined volume was only 3.4 billion shares across all markets. This was the lowest volume on record since Sept-15th and the day before the FOMC meeting. Just like that Monday we are not seeing any rush to place bets. Traders are either confident in their positions or flat. The lack of volume is a problem for the bulls as it takes lots of volume to overcome upward resistance. Tuesday and Wednesday were examples of a complete direction change. On Tuesday there was 4.1 billion shares, 3.1B down volume, 1.0B up volume and the Dow lost -105, Nasdaq -37. Yesterday there was 4.0 billion shares, 3.1B up volume, 0.9 down volume and the Dow gained +194, Nasdaq +45. Exactly opposite days by volume.
Market Breadth Last 30 Trading Days
People have been asking why the market is so hard to predict lately. First, because it has not been following normal calendar trends. The second reason is the stall at the top. Since September 1st we have been trading in a narrow range between 9400-9600 with the drop over the last week being the only major move out of that range. Take a look at the sheet above. It is the total market breadth for the last 30 days. Over the last 30 trading days over 110 billion shares have changed hands and the total points gained in that period was +61 on the Dow and +56 on the Nasdaq. Notice also the huge shifts in up and down volume. One day there are 900M in one direction and the next day it is over 3B. (The volume columns are in millions) What you should derive from this exercise is that when markets are at or near the top traders are nervous. Both bulls and bears are afraid of that next big move and they are quick to buy the dip or sell the top and do it in a hurry. Note also the increase in the range of point swings as we near the top of the chart. If you do not like one days massive move just wait and it will reverse. There is a lot of information in this sheet if you take the time to review it. It tells the psychology of the market without even looking at a real chart.
I put this together for one reason. You can easily see the increasing volatility and bipolar swings in the U/D volume. Next week begins the two most volatile weeks of the year and the odds are good the numbers at the top two weeks from now will be even more bipolar. Nobody knows which way we are going or how far but the odds are we are going to be moving fast and we are likely to cover the same ground more than once. Keep those seatbelts fastened!
Enter Very Passively, Exit Very Aggressively!