With earnings basically over for the 4Q we are entering the period in the earnings cycle where there is a lack of a catalyst to move stocks forward. The economic calendar will heat up next week and there is a greater risk of a disappointment than a positive surprise. As we enter this void traders will be watching recent support levels very carefully.
Dow Chart - Daily
Nasdaq Chart - Daily
Economically Friday the 13th lived up to its superstitious reputation. The December Balance of Trade reversed its gains from last month and despite the declining dollar exports fell and imports rebounded strongly from the November drop. The December exports to China were the second highest on record at $3.3 billion. Imports from the EU were the highest on record at +$23.1 billion. One positive sign was the $20.1 billion in imports of high technology products. This was the highest level since Nov-2000. This suggests there was a real pickup in business spending or at least ordering in the last quarter. Considering more and more of our consumer goods are now produced overseas there is little chance of the trade balance reverting any time soon. The majority of the imports were autos and parts, oil and related products and the high tech equipment. All high dollar items.
The Import and Export Prices rose substantially for January but the majority of the volatility was again oil and beef. Prices jumped +1.3% and well over the +0.5% expected. This was the largest monthly increase in nearly a year. Commodity prices are also rising as global demand continues to increase.
The biggest shock of the day was the Consumer Sentiment which fell to 93.1 from 103.8 in January. I say it was a big shock unless you have been reading my commentary. I have reported twice in the last week that we could have a negative surprise based on other survey information. Both components fell with expectations falling to 88.4 from 100.1 and present conditions falling to 100.4 from 109.5. This is a serious drop in the sentiment BUT it is only a retracement of the +11 point jump in January. We are right back in the December range of 92.6. The spike to 103.8 was simply a spike caused mostly by the unreasonable expectations for a big Jobs number in January. When those jobs failed to appear the miss was so large most consumers suddenly felt maybe the future was not so bright. There is also the election impact. Now that the democrats are blasting the airwaves with how bad jobs and the economy have been under Bush those voters are feeling depressed. It is not a slam against democrats, just a fact that negative campaigns produce negative feelings of well being. This report should not be seen as a market negative. The January numbers were wrong and they have been corrected with the initial February survey.
The markets used the economic numbers as an excuse for profit taking but despite all the whining coming from the talking heads on TV it was not that bad. We had a couple of sell programs at 10:20 and 10:30 and a sudden drop at 12:20 when news of a fire alarm at a Senate building hit the airwaves. Contrary to the commentator's rhetoric it was not a bad day.
The Dow did fall to 10600 support but was immediately bought and was in no danger into the close. The Nasdaq dropped to support at 2050 and quickly rebounded and held above that level for the rest of the day. The Nasdaq closed exactly -100 points off the high of the year but nowhere near any critical support. This was the fourth consecutive weeks of losses for the Nasdaq but it is still within 100 points of the highs. Sounds better when you say it that way. The Dow Closed up for the week and stretched its winning streak to 10 of the last 12 weeks. The S&P has closed up 11 of the last 12 weeks.
All of this just emphasizes the sideways consolidation phase we are in. That may sound strange when you remember the Dow and S&P closed at a new two-year highs on Wednesday. Need further proof we are moving sideways? The S&P is only trading up +25 points from its January-5th close at 1121. The Dow is only +90 points above its 10540 close on Jan-5th. The trend is definitely up but we have spent almost as many days under 10540 as above it over the last three weeks. February is known as a consolidation month and is historically the 3rd weakest month of the year. Given those historical norms we are having a great month.
However, we are entering the catalyst void. This is kind of like the Bermuda Triangle of the earnings cycle. Strange things can and do happen for no apparent reason. Next week we have a flurry of economic reports and very few major earnings to provide excitement. The major reporters are WMT, TGT, AMAT, HPQ and Deere (DE). Nobody expects any surprises from WMT or TGT and HPQ already pre announced. That leaves AMAT as the only real tech poster child to announce next week and they are assumed to be doing great. This sets up a potential for negative surprises but it is a very small risk. The real risk comes on the economic side but it is still hard to paint a high risk picture. On Tuesday we will get the NY Empire State manufacturing Survey, Industrial Production and the Housing Index. Not much to worry about there. Wednesday has a bunch of reports but none critical. Thursday will be a key day with Jobless Claims, PPI and the Philly Fed Survey. With Jobless Claims up over 350K for the two weeks with weather getting the blame it will be crucial to see a drop this week. If claims are over 350K again it will be tough to sell the weather excuse. The PPI could show signs of inflation with rising commodity prices and the Philly Fed will be read with hopes last months monster spike is not retraced like the sentiment numbers. Friday is almost an after thought with only the CPI on the economic schedule.
We have a flurry of reports but nothing really critical as long as the positive trend continues. Should a couple weaken slightly they will probably be ignored but in a weak void of excitement each could take on a life of their own. Next week is also option expiration and other than the two sell programs on Friday we really have not seen any normal increase in volatility. This may be the first month since November that the markets are not significantly higher for the option cycle. This could dampen the option related explosions we saw in Dec/Jan. Those that rolled out to the next month to avoid big losses may finally escape the pain. This could suggest a negative bias for the week compared to the prior two months expirations.
Odds are we will continue our consolidation and with that in mind the Dow does not appear to be in any danger. It is above support at 10600 and well above stronger support at 10450. That is a lot of points to churn given the current bullish sentiment and patient Fed. The 50 dma has risen to 10392 and in position to provide even stronger support to the 10450 level by the end of the week. The Nasdaq is more of a problem. The morning drop on Friday knocked the Nasdaq below its comfort range support for the week at 2060. The current 2050 support level is more psychological than physical but the 50 dma has risen to just below the current level at 2032. The Nasdaq is in danger of retesting that 50 dma support on even minimal selling. The last test took us down to just below 2020 and left 2000 untouched. Worst case the 2000-2020 level should provide significant support. This leaves the Nasdaq with a possible range between 2000 and the highs for the week near 2100. Should we continue to consolidate in this range I am sure nobody would complain.
The biggest losers on Friday were the SOX and the Russell. The SOX dropped -1.58% on Friday to close at 511 but that is well off last weeks lows of 493. The biggest hit to the sector came on a downgrade from BAC on Intel and the chip equipment stocks. They said they lowered estimates on Intel based on weaker than expected notebook PC demand. Based on their own channel checks they expect Q1 notebook shipments to drop -12.9%. Long term they still suggest using any weakness in Intel as a buying opportunity and predicted very strong performance for Intel in the second half. Still the SOX was knocked for a loss with the knee jerk reaction to the downgrade. Intel's mid quarter update is scheduled for March-4th. The drop in the SOX was likely a one day event in front of the holiday weekend. It is still well above support at 495.
Semiconductor Index - Daily
Russell-2000 - Daily
The Russell also dropped -1.28% to 585 but is still much better off than the SOX. The Russell came very close to its recent high at 601 on Wednesday and well over its 565 support low last week. I suspect the drop on Friday was simply profit taking in the high risk stocks before the weekend.
In reality the majority of the profit taking on Friday was probably related to event risk over the long weekend. We had flights cancelled on Friday, evacuations of Senate offices and a post office closed because of a white powder. It is a wonder the selling was not any worse. The internals were negative but no worse than any normal profit taking day. In short there is nothing to suggest that Friday's drop was anything more than just a normal market cycle. We are still in buy the dip mode until something changes and I see nothing on the immediate horizon to make me change that opinion. I expect some increased volatility next week due to option expiration but nothing serious. However, the really big moves normally come when you least expect them so keep those stops in place!
Enter Very Passively, Exit Very Aggressively!
For those that took the HPQ earnings play on Tuesday night you know by now that the rules changed. The Greenspan rally sent HPQ soaring to $25 by noon Wednesday and our 40 cent option more than doubled with Dell's earnings coming out on Thursday and HPQ not due until next week. That is where the plan fell apart. For no particular reason HPQ suddenly pre-announced earnings during market hours at 2:30 Wednesday afternoon. Huh? In what was clearly a ploy to steal some of Dell's thunder they totally ruined any earnings strategy by any option trader playing their earnings cycle. Our play was immediately busted and the option values collapsed along with their stock price. Thank you Hewlett Packard! Remember to check Dell's offerings the next time you buy a computer printer.