For the third consecutive day the indexes rebounded back to strong resistance and failed to breakout. However, after the afternoon dip to initial support we should be grateful for any rebound back to resistance. For all practical purposes this was just another holiday with volume only 3.1B shares across all markets. This was only about 200 million shares over the 2.9B shares traded on Friday when everyone left early.
Dow Chart - Daily
Nasdaq Chart - Daily
The big news for the morning was the ISM report which at 62.8 beat consensus estimates of a decline to 62.0 from last months 62.4. This was a strong report that stretched the string to seven consecutive months over 60. Anything over 50 is considered to be an expanding economy. It has been vacillating in the 62+ range since October's 57.1 reading. The ISM shows that the economy is maintaining its rebound although not surging ahead. Strong steady growth and not necessarily inflationary. Production components did drop slightly with New Orders falling to 62.8 from 65 and Backlog to 63.0 from 66.5. The biggest surprise was the employment component which jumped from 57.8 to 61.9 and suggests the Jobs number on Friday could be as much as +100,000 over prior estimates. 36% of firms said hiring was up while only 7% said jobs were still shrinking. The employment component is nearing a three-year high and a good indication of how strong the gains were.
The employment jump sent analysts back to their calculators to reconsider the 223,000 consensus estimate for Friday's Jobs report. Only 3 of 66 economists polled had expected Friday's Jobs to be +300K or more. Today's ISM suggests that consensus could be 100K short and increases the risk the Fed could react early to a blowout number. The markets retreated on this risk until late in the afternoon but a late day buy program pushed the indexes back to resistance. With the positive ISM and the expected positive Jobs report a Fed rate hike on June 30th is almost a lock. The Fed funds futures jumped from last weeks 92% chance of a hike to 98% after today's data. Futures are still predicting a 100-point increase in rates before year end.
The Challenger Layoff report showed that layoffs remained low at 73,368 for May. This was only slightly above the 72,180 for April and confirms the ISM component above. Challenger also said they saw additional hiring of 55,000 for the month. They did not previously track hiring trends. This was the fourth month layoffs remained in the low 70K range and should be lower except for higher commodity prices. With prices soaring, doubling in some cases, manufacturers are still looking for ways to cut costs and are using increased productivity to trim the work force. With employee benefits rising almost as fast commodity prices any chance to reduce the head count is quickly seized. In many cases employers are terminating workers only to hire them back as contractors to avoid paying the benefits. This counts as a technical layoff but does not impact the workforce. Small companies are leading the hiring and large companies are continuing to cut workers. The retail sector had the highest cuts at 10,868 layoffs with the financial services sector next at 6,113.
Construction Spending soared over three times consensus estimates with a +1.3% gain in April. March was also revised up sharply from +1.5% to +2.4%. Much of the gains were in single family homes but the biggest jump was +5.4% in Health Care buildings. Over the last three months that component has averaged +4.63%. The coming baby boomer retirement cycle has hospital and medical center building on steroids. As mortgage rates climb the single family component, +1.2% this month, will begin to decline. The manufacturing sector dropped -6.1% in April following a -3.6% drop in March. No need for buildings if your work is outsourced overseas.
There are no material economic reports for Wednesday.
The World Semiconductor Trade Statistics boosted its 2004 forecast to 28.4% growth from 19.4% it predicted last Oct. According to WSTS the first quarter has demonstrated stability and consistency across all regions and major product lines. Unfortunately the future is not bright forever. They see only +8.5% growth for 2005 and no growth for 2006. They do expect a recovery cycle in 2007 with +10% growth. Obviously these estimates are subject to change but they do confirm to estimates by others for 2005/2006.
The SOX lost ground on the news after trading at 490 resistance early in the day. Investors will be able to get an inside look a one portion of the sector on Thursday when Intel provides its mid quarter update. Some analysts think PC sales may not be tracking the normal seasonal down trend and could show some strength. Others think the trend is weaker than expected based on comments from Dell and HPQ and expect Intel to lower estimates. Both camps think the estimates will remain in the prior range Intel offered but to the low side.
KB Homes said today that quarterly sales rose +27.7% for their quarter ending May-31st. They said very strong growth of +58% in the Central and Southeastern U.S. offset a -18% decline on the West Coast. Orders in France rose +30%. With mortgage rates rising this trend should moderate but moderate to what? This very strong growth has yet to show signs of failing despite the slow down on the West Coast.
Heading the news today was the terrorist attacks in Saudi Arabia. 22 were killed and was the second recent attack on oil assets there. Oil futures hit a new high of $42.40, up +3.30 from last Thursday's $39 dip low. The futures went out near the high of the day despite a pending OPEC meeting. OPEC will meet again on Thursday to discuss quotas. Rumor has it that they will increase production quotas by as much as +10%. Unfortunately there is not likely to be an increase in actual output. OPEC producers are already exceeding quotas to capitalize on the high prices. The move by OPEC to "legitimize" this production by raising the quotas is meant to regain some level of "control" in the market. If all your members are producing more than your established quota and you can't make them stop then make a big show of raising quotas to "stabilize" prices and try to get some benefit from the current situation. Even with OPEC saying they will raise production as much as possible to stabilize prices, in reality only Saudi Arabia has the ability to produce more than they are currently delivering. Most believe this would be two million barrels per day maximum and likely much less depending on how much they are already cheating. Bottom line - don't expect oil prices to be substantially lower any time soon.
The higher oil prices helped to depress the markets in the morning as prices rose over $42. The Dow rose to 10214 and just under the 10220 resistance that stopped the advance last week. Sellers appeared immediately and the slide began. I say slide rather than drop because it was a slow, leisurely decline on very low volume. Every round number touched became alternating support then resistance until 10140 was reached. Buyers did not rush in but they did provide a bottom that lasted nearly an hour before a strong buy program hit. That program added +1100 issues to the A/D line and pushed the Dow from 10150 to 10210 once again while dazed day traders watched in surprise. Strong program trades seldom start after 3:PM much less 3:30 but that buy program probably rescued the Dow from testing 10100 once again. The internals were negative and oil/rate news was filling the airwaves.
The Nasdaq had started out battling 1990 resistance after the ISM and then fell sharply to support at 1975 by 11:30. After a midday bounce it retested that support at 2:30 and then after a successful retest took part in the afternoon bounce. The Nasdaq ended right back at 1990 resistance at the close. It was a complete round trip day on both the major indexes.
The challenge is still the current resistance levels that have held for three days on low volume. Those levels are 10220, 1990 and SPX 1122. With the Jobs report due Friday and now expected to be even stronger the Fed is almost sure to hike rates on June-30th. Everyone says a Fed rate hike will produce a rally because it confirms the recovery and the beginning of a Fed rate hike process. The uncertainty factor will be removed. While I think this is all a bunch of bull from those who want to be bullish it could produce the desired impact.
The key point for us is the clear trigger level. Those are the resistance levels I defined above. Should we move over those levels on strong volume then we could easily move higher to the next resistance at 10325, 1135, 2025 before the Jobs report. Each level higher will become more difficult until that Jobs report is released. It still represents uncertainty. Far too many times we have seen Jobs numbers surprise and not always in the way we expect.
I would not be surprised to see us stagnate here as the days count down to June-30th. Tech traders will also be afraid of the Intel news on Thursday. Intel traded down today after two weeks of gains. Traders are taking profits rather than hope for the best. Intel traded 51 million shares today when the overall markets barely managed to beat Friday's very low volume. There are many positives and negatives in the market this week and very few of them are stock related. With the indexes locked at current resistance we could easily go either way and I view the odds as 60:40 in favor of a decline. It is that close. If you look at the charts above you will see we are still in a confirmed down trend until higher overhead resistance is broken. The end of day buy program changed the entire technical outlook for me. Had the indexes finished at the lows I would have bet on a range bound market the rest of the week. While I know the buy program was the result of only one buying decision it may have given the bulls just enough confidence to take us higher. Without any material economic reports on Wednesday we will be left to move on world events and Jobs speculation. I am definitely neutral today but ready to react to a move over the 10220, 1990, 1122 resistance or another failure at those levels.
Enter Passively, Exit Aggressively.