The Dow changed sides from offense to defense several times on Friday with several strong moves in each direction but the end result was a +3 point gain and a close at almost exactly the same level that it started the week. The battle line continues to be 10600 and the Dow crossed that line six times on Friday. The Nasdaq rallied to 2045 before failing just below the 50ma resistance at 2050 and closed near the top of the weekly range. These indexes are fighting a perfect consolidation battle and the battle lines did not change all week.
Dow Charts - Daily
Wilshire-5000 Chart - Daily
Nasdaq Chart - Converging Support/Resistance
Friday was a busy day for economic reports and it was a grand slam for the bulls. The GDP revision led the day off with a upward revision instead of a reduction in the Q4 estimates. The Q4 GDP estimate rose to +4.1% and well over the +3.6% estimates. This was a very positive revision with exports up +21% and business investment up +9.6%. Inventories rose for the first time in three quarters with a $14.9B gain. The inflation pressures appeared to have eased with the PCE Price Index up only +0.7% while the purchase price index rose at a +1.1% rate. This was a strong revision for the GDP and it caught everyone by surprise.
Also beating consensus estimates was the Chicago PMI at 63.6. This was down slightly from January's 65.9 which was a nine year high. An easing of the index had been expected from that high. The component with the biggest surprise was the jobs numbers with employment rising to 54.8 and the highest level in five years. This was also the first time over 50 since August 2003. Inventories rose to 46.5 from 37.4. All the other components eased only slightly off the January highs. Again, this was also a very strong report and a confirmation of the recovery in progress.
The NY-NAPM broke out to a new high at 267.2. This is the highest level since Sept-2001 and has now posted gains for six consecutive months. The business conditions index has jumped +17.6% since November and suggests business is booming in the New York area. The financial services sector in NY reported bonuses were +20% higher than the prior year and the state comptroller said they were going to receive an extra $57 million in taxes from these bonuses that they had not expected. A little bull market never hurt anybody.
Rounding out the economic menu for Friday was the revised Consumer Sentiment, which rose slightly from the advance level. The sentiment rose to 94.4 and over consensus estimates of 94.0 but this was down significantly from the January number at 103.8. Traders were relieved it was revised up instead of down given the fall in the various other sentiment/confidence indicators over the last two weeks. The preliminary February reading was only 93.1 so the gain was appreciated.
The Dow displayed multiple personalities on Friday with a sprint out of the gate to 10650 and a +60 point gain. This lasted about 90 minutes before a serious sell program sent the index to the lows of the day at 10563. This nearly -90 point drop from the highs took less than 30 min and left everyone in a state of uneasiness. After about an hour at the lows the bargain hunters bought the dip and took us back to 10633 for a +70 point rebound. Unfortunately the gains did not hold and an end of day bout of profit taking knocked it back under 10600 to end the day with only a +3 point gain. Four major moves and a 90 point range and we ended with only a +3 point gain. This is typical consolidation type activity and it is more prevalent toward the end of the consolidation period. This shows the sellers are still lurking overhead but the buyers are becoming stronger to be able to test the upper boundary of the range.
The 50ma moved up to 10513 and remains the first level of real support. Initial horizontal support is currently 10575 and 10550. These are very narrow ranges and they are rising slowly. Nothing here rules out another retest of the lower support but despite the flat close the overall bullishness is increasing. If you look at the difference in the Wilshire chart and the Dow chart at the top of this article you will see a definite uptick in the Wilshire that is not seen in the Dow. This is purely the impact of UTX, BA, MMM and GE for the week that gave the impression of more market weakness than really existed. Compare the charts, you will be surprised.
The Nasdaq rallied back to the highs of the week at 2045 on the opening bounce and fought valiantly to hold its gains. Unfortunately the morning sell program was tech weighted and the damage was severe. The Nasdaq was knocked for a -25 point intraday loss and back to 2018 before the recovery began. The Nasdaq struggled back to close -3 for the day but remained at the high end of the weekly range. This was the sixth week of losses for the Nasdaq but I am betting the string ends here. We have seen four straight days of uptrend on this index and we are starting to see articles on positive April earnings expectations. Nasdaq 2000 remains strong support and the 100ma has risen to 1991. This makes the 1990-2000 level even more formidable as support. The Nasdaq chart today was very exciting to annotate. (You can tell I have no life) The converging support and resistance lines are predicting an explosive move very soon.
The strongest index for the day actually started off as the weaker index. The Russell lagged the big cap indexes until after the morning sell off then led the charge back from the depths. The Russell closed up +1.70 at 585 and at the high for the week. This is a very strong showing especially when the SOX lost -7.58 (-1.48%). This is major divergence and the Russell close at 585 is only a little more than -10 points from the February highs. The Russell is well over its 50ma and now over the 10ma which had been near term resistance. Were it not for the SOX I would advocate buying the Russell at the open on Monday.
Russell-2000 Chart - Daily
The SOX was the weakest index on Friday and contrary to the other indexes it closed near its lows. This is very disconcerting to me and I could not really find any specific reason. Considering the SOX was up nearly +5% from its Monday's lows it could have been simply profit taking. Next Thursday Intel will provide its mid quarter update and expectations are for some improved guidance based on comments from Intel execs over the last couple weeks. This makes it even more puzzling why the chip stocks should sell off on Friday. Intel is expected to affirm its higher capex spending and that should help the chip equipment makers. Also, considering Monday and Tuesday are normally bullish from month end cash inflows there could be even more reason to buy Friday's dip. I am still unconvinced and will want to see upward motion before taking the positions.
SOX Index Chart - Daily
Helping techs on Friday was news from IDC that SUNW was seeing gains in its sector and had seen +21% server growth from the previous year. According to IDC SUNW gained +15.5% in units and +3.1% in market share. Marvel announced a profit in the 4Q compared to a prior loss and announced a 2:1 split. The stock gained +7% for the day. Oracle continued to fall as comments about suing the Justice Dept on the PSFT acquisition continued to surface. They also extended the tender offer period in light of the Justice delay. Come on Larry, rein in that ego and go sailing or something. The lawyers don't need your money. Rounding out the stock news Autodesk jumped +11% on much stronger than expected earnings and raised guidance. ADSK jumped nearly +3 to $29.
UTX finally posted a winning day with a +2.23 gain after a week of heavy losses. UTX used the 100ma at 89.25 as a springboard to launch the rebound. Bargain hunters were waiting with money in hand for that level to be hit. Dow component CAT offset the gains in UTX with a -2.20 drop (-16 Dow points) after announcing an acquisition.
Mutual funds are continuing to see massive inflows of cash according to ICI. In January stock funds had $43.7B in cash inflows despite the continuing fund scandals. This was the third highest monthly inflow since records have been kept. The highest was $55B in Feb-2000 and right at the top in the market. In the last week alone nearly $3B flowed into stock funds. There is currently over $4 trillion invested in stock funds.
The calendar next week starts out with a killer on Monday morning. The ISM for February is expected to drop slightly to 62.0 from the 63.6 two year high in January. This is the key report for the beginning of the week and is the key indicator of the current economy. This will help confirm the recovery is still on track and help quiet some of the concerns from several weak reports recently. The middle of the week has several reports that will be watched but are not really critical including the ISM Services, Beige Book, Productivity and Factory Orders. The Beige Book would be my pick for the most critical of that bunch and it comes out on Wednesday.
The next biggest report for the week is the Employment Report for February that comes out on Friday. Currently the estimates are for a gain of +128,000 jobs but nobody knows where those jobs are coming from. The Employment report is done by survey in the week which contains the 12th of the month. (Wonder who figured that out?) The Jobless Claims for that week in February were -344K and the prior week was -368K. This suggests we were not seeing a booming job market when the survey was taken. We will get a lot more in the way of analysis as the report draws near but I would suspect we could see some caution in the market as the week winds down.
I am still in buy the dip mode and when the markets exploded out of the gate on Friday I thought maybe I had been too patient trying to wait for some stocks to come to me. This is where I have really mixed emotions. I want to see the market ease back to its highs but I would really like to see the Dow hit the 50ma first. The longer we go without a cursory touch the more likely the gains will be muted. We are still in a consolidation mode but the increased volatility suggests we could see another breakout attempt soon. That attempt could still be in either direction.
For Monday I expect the ISM to be positive. From the lack of a material rally into the month end I may be the only one on the planet that feels that way. This is good in a way as it means the expectations are not already baked into the cake. A good ISM on Monday along with some decent month end cash flows into funds could help provide a boost to the first three days of the week. The Intel update on Thursday should provide a little advance worry and weakness but a positive update Thursday night and a neutral to positive Jobs report on Friday could produce a relief rally to close the week. Obviously, there is a lot of speculation in this paragraph but that is the way I see it today. Check back with me on Tuesday night and see if the picture changed.
Enter Very Passively, Exit Very Aggressively!