You know the bulls are in control when the biggest manufacturing company in America warns that they will miss earnings and the market ignores it. You know the bulls are in control when Intel Chairman Andy Grove warns that the U.S. is in danger of losing its technology lead due to outsourcing 500,000 high tech jobs over the last two years and the market ignores it.
It was not a banner day for investor sentiment but the bulls held the line once again. The market traded in a very tight range with a solid underlying bid all day and came very close to finishing in the green despite the bad news.
The economic reports were not exciting with the PPI rising +0.3% when the consensus was flat. The majority of the increase was due to gains in food and energy and after subtracting those items the core rate was unchanged. The finished goods component rose +1.2% with the strongest jump in fresh vegetables and meat. With Canadian beef now outlawed in the U.S. until the mad cow scare passes the price of red meat has rocketed. In the broader scope of things the inflation rate has remained very low at a +2.0% rate for the year. There was nothing in this report for the Fed to worry about.
The International Trade deficit slowed during August as imports fell faster than exports. The headline number came in at -$39.2 billion compared to consensus estimates of -$41.5 billion. The drop in both imports and exports surprised analysts who worried that global demand may be slipping without a U.S. bounce to hold them up. France and Germany both contracted in July with Germany dropping -2.9% and France -0.9%. Mexico remains weak and Brazil is mired in a recession. The only pockets of strength were the Asian economies.
Those terribly unexciting economic reports failed to distract traders from the GE and INTC warnings. However after seeing the minor market impact it appears traders were more interested in leaving early for the long holiday weekend. GE spoiled the bullish party by warning that they were not going to hit their previous 4Q estimates of 46-49 cents and would be looking at 45-47 cents instead. GE announced earnings for Q3 inline with consensus estimates at 40 cents but revenue only rose +3% from the same period last year. It was not a great quarter but GE put on a strong face and went shopping to improve future results. GE said higher costs and a challenging environment caused several of their units to lose ground. They lowered the outlook for the plastics division due to weak demand. The shopping trip picked up a bargain in London with the $9.5 billion acquisition of Amersham PLC, a British medical diagnostic company. This fits in well with their current product line and Jeffery Immelt said we know how to do medical systems right. The strategy of announcing a key acquisition along with the disappointing earnings had the desired effect. The stock only lost -81 cents for the day.
Andy Grove, the Intel Chairman, warned that America was losing its lead as the technology super power. Grove warned that outsourcing jobs to India was growing at such a rapid rate that 500,000 high tech jobs had left the U.S. in just the last two years. Grove warned that India could take the technology lead from the U.S. by 2010. He pointed out that labor costs in India are only 1/6th the cost of the same worker in America. With jobs leaving at such a rapid rate the high paid American worker will find it tougher to find another job that will provide him the same high standard of living. Grove warned that this was dangerous to the future of America. He suggested that the U.S. technology sector could go the way of the steel sector which enjoyed a 90% global market share until the technology became available overseas where cheaper labor eventually knocked the U.S. back to only a 10% share. The sector has never recovered from the blow. Grove warned than the same move currently underway in information technology would be a serious problem if allowed to continue. He also pointed to the recent drop in the chip market from 90% American made to massive amounts being produced in Asian markets at a fraction of the cost. He said that 1 in 10 American information technology jobs would be eliminated next year by outsourcing overseas and millions more by the end of the decade. (Gartner Group survey) He emphasized his point by noting that the U.S. economy is slowly recovering but the tech job market is not. This dire warning fell on deaf ears and after a brief bout of selling the dip was bought.
Other than the GE results, which were not really bad, the earnings parade has been stellar. However we have only seen the lead horses so far. Next week the pace will pick up substantially and as long as the news remains the same traders should be pleased. JNPR was the first major tech to report and they helped increase recovery hopes when they said their book-to-bill was greater than 1.0 for the qtr. Next week will see a lot of various companies report and the techs will have a tough test ahead of them. Word on the street has several banks ready to announce less than stellar earnings as well. The bond implosion has caused massive earnings losses at some major institutions or so the rumor goes. The size of the losses are said to be enormous. Rumor or fact remains to be seen but the BKX is not making any progress as earnings dates get closer.
Janus is still bleeding cash according to the people that track these things. $4.4 billion was withdrawn in September from Janus funds after they admitted finding several hedge fund trading schemes. Several funds have pledged to make investors whole for any damages by the fraudulent trading practices and the authorities are expanding their probes to new fund families almost daily.
Get used to the cheap gas because it may not last. I paid $1.45 for unleaded on Friday in Denver but with oil trading over $32 a barrel on Friday those prices are not going to last long. There are multiple reasons for these hikes and you have heard them before. The bottom line is the coming drag on the recovery when energy prices begin rising again.
There is no drag on the markets with the risk to the bears instead of the bulls. Every dip is continuing to be bought and the minor profit taking expected for Friday was so minor it was almost nonexistent. The NASD warned on Friday that the tech dips were being bought on credit with margin money and that margin credit was reaching dangerous levels. According to the NASD there was $26 billion in margin debt on Nasdaq stocks in July which is the most current month reported. To put this in perspective there was only $21 billion in Nasdaq margin debt in March 2000 at the top of the market. Stocks bought on margin are considered held by weak hands as a sudden drop in the market can cause a wave of forced liquidation that further accelerates the drop. With Yahoo's market cap equal to General Motors there is concern that bubble mania has returned. Volume in low priced stocks has surged to more than the NYSE or Nasdaq. Volume in bulletin board stocks surged to 41 billion last month compared to 117 billion for all of 2000. This represents extreme speculation and an increase in market risk.
Volume on Friday barely broke 3 billion shares across all markets. It was 25% below Thursday's levels and there was speculation that the Thursday volume was option expiration related as traders rolled out positions before the holiday weekend. Monday is Columbus Day and while the bond market is closed the equity markets will be open. If you thought Friday's volume was low wait until Monday. It is also an expiration week but they have been remarkably uneventful recently. At least uneventful from an expiration viewpoint. Earnings will be heating up substantially as well as new economic reports. Monday and Tuesday we get a pass on economics with no material reports. Wednesday we get the Fed Beige Book and NY Empire State Index. Thursday has CPI, Jobless Claims, Business Inventories, Industrial Production, Capacity Utilization and the Philly Fed Survey. Friday has Housing Starts, Building Permits and Michigan Sentiment.
This sets up Thursday as a key day for the week. There are over 400 companies that announce earnings from Monday thru Thursday. Many of them are key blue chips and key tech stocks. We have key economic reports on Thursday and options expire on Friday. This could be a volatile day. With Monday a quasi holiday there will be a lot of money changing hands in only three days of trading. One train of thought has the Dow hitting 10,000 by Thursday on hopes of better than expected earnings from the big guys. That same trader talk has the Dow recoiling from a touch of 10,000 with some serious profit taking and portfolio reshuffling before the mutual fund year end two weeks later.
That is only one scenario being discussed but almost everyone is having trouble coming up with a catalyst to push the Dow any higher than 10K near term. I am not going to rehash the gains for the year or the earnings expectations. They are both at extreme levels. Bullish sentiment as measured by Investors Intelligence is hovering at 60% and bearish sentiment is rising at 22.5%. The Dow Bullish Percent chart below shows the BP at 83.33. This is an extreme reading but as you can see it has been over 80 for five consecutive months. The only conclusion we can draw here is that there is no weakness in sight.
Dow Bullish Percent
Nasdaq Bullish Percent
Since the bulls are refusing to slow the stampede we should decide what the upside potential is from here. The Dow has reached a level where it is facing about six months of congestion in the 9800-10000 range from 2002. On a more detailed view you can see strong resistance at 9800, 9900 and again at 10,000. Each of these levels will require stronger and stronger commitment by the bulls.
The S&P is where the real battle will be fought. There is strong resistance at 1050 and again at 1068, which is the 38% retracement level from the all time high to the bear market lows. These are the two levels that will serve as resistance between now and Thursday. Once over 1068 the next major hurdle is the 50% retracement at 1161 and the five month high of 1170 from 2002. This could/should be extremely tough resistance whenever we get there.
S&P Weekly Chart
The Nasdaq has been unstoppable and it is also approaching an area of tough resistance between 1950 and 2050. This level was the top for several months in 2001/2002.
Nasdaq Weekly Chart
What does this mean to us? At the risk of alienating some readers I have to stress caution once again. I can easily buy the theory that the Dow will make a run toward 10000, Nasdaq 2000, SPX 1068 but once there I have a hard time believing that we will have enough momentum left to break out of that resistance. We cannot go a day without several noted analysts claiming +5% to +7% GDP growth for the 3Q/4Q. Dallas Fed President McTeer said on Friday that growth was likely to be 5% for both quarters with zero inflation. You heard it straight from the top. Unfortunately we have been hearing it daily for weeks. To not believe it is already priced into the market would be in error.
This brings us back to the facts. The bulls have a wall of worry to climb and they have been doing an excellent job. The only question is whether they can make it through this earnings week without being tripped up. If they do make it through this week then they are staring at the Mutual fund year end two weeks later. Nobody knows if funds will try to lock in profits or risk it all with a dice roll on the 4Q. That leaves us with a huge wall of worry right in front of strong resistance. These same obstacles existed last week and the bulls tacked on +400 points. Let's sprinkle a few earnings misses over the next four days and see if they can add +300 more. When we are sitting at 9700 and only 300 points from Dow 10K the goal is clearly in sight. Friday was a day of rest and low volume on Monday should restrain any action. That makes Tuesday launch day if they are going to have a chance to hit that goal. The critical earnings on Tuesday are INTC, MOT, MER, NVLS, TER, JNJ and BAC. Positive results from these early reporters could go a long way towards keeping the rally alive. Should the Dow actually hit 10,000 this week the bulls could consider it the finish line and take a well deserved rest. I suggest we do the same.
Enter Very Passively, Exit Very Aggressively!