After a very strong breakout on Wednesday the markets paused to reflect today and managed a very orderly profit taking session. The Dow tried twice to move higher and grab the brass ring at 10500 but fell about a dozen points short on the attempt. Considering the two day rally off the lows it is not surprising traders paused to wonder not only how they reached these levels but why given the current events.
The economic reports produced another mixed picture of conflicting signals sending ten year bond yields back down to 4.64%. The Jobless Claims crept up once again to near the 350K level with a notch at 349,000 for last week. There were comments from analysts that Reagan's funeral prevented workers from applying for benefits in the prior week thus shifting more applications into this week. Sounds reasonable to me but we will have to wait for next Thursday's release to see if they were right.
The Help Wanted Index for May rose to 39 from 38 in April. Considering the recent gains in employment those same analysts are suggesting that this indicator is no longer valid instead of accepting that new employment may have slowed as we move into summer. Had it soared to 45 or so you can bet they would have been pounding the table to raise the estimates for the June nonfarm payrolls due out next Friday. The tea-leaf readers want the surveys to conform to their economic outlook not change their outlook to match the indicators. Since this indicator is based on newspaper advertising it is probably outdated with the onslaught of online job shops. Outdated yes but not yet insignificant.
Another surprise came from a big drop in Durable Goods of -1.6% for May when consensus estimates were for a gain of +1.1%. This marks the second consecutive month that Durable Goods have fallen with the April drop at -2.6%. This two month drop of -4.2% sent the bond market soaring on the outside chance the Fed will see the economy as still too soft to raise rates. While I think that possibility is far too remote to consider the ten-year yields did drop to a five week low and with only four days remaining to the Fed decision. The drop in Durable Goods suggests one of the key points in the economic recovery, business spending, may be slowing once again. This is a very broad indicator and a continued slowdown in most components is troubling to say the least. I think this has a good chance of coming back to bite us very soon if the Jobs report next Friday shows a letup in hiring.
The blowout number for the day was New Home Sales which soared to 1,369,000 units and more than 200,000 more than estimates. This is a May number and it was the largest one month increase since April 1993. I am sure readers remember I have written about this before and we expected the late spring numbers to explode. Once the rate increase was more or less guaranteed builders would provide higher incentives to attract buyers and those buyers still on the fence would bite the bullet and take the plunge trying to get in while they could still afford it. We have seen repeated reports that ARM loans have exploded as buyers try to reduce pmts as much as possible to offset rising rates and to leverage the largest amount of house they could buy on current incomes. With housing prices rising +15% or more a year in many areas the window of opportunity for a favorable purchase is closing. I have a son that owns a mortgage loan business and his closings have risen substantially in just the last month. Also, remember that New Home Sales are counted when the contract is signed and deposit made and not when they are closed. The jump in sales is simply a rushed decision to buy and lock in loan rates and it may be well ahead of the actual date of possession. Builders are now racing to build the homes they have already sold. Builders have been offering a capped rate mortgage for closings up to 12 months away in order to lock in buyers. The builder will eat the difference and add it to the cost of sales. Regardless of the current rate of sales you can bet builders will start fewer homes next winter with the prospects of rates being 2% higher in summer 2005. Keep control of the inventory and you control prices.
It was not the economic reports that had the most impact on the markets at the open. It was news from Iraq as we draw nearer to the June-30th changeover. Overnight attacks killed 69 and injured over 300 in Iraq as terrorists try to further complicate the change in power. With six days left you can expect this carnage to continue with attacks against the new regime more than likely as the clock ticks down. Where a change in U.S. Presidents normally focuses on accomplishments in the first 100 days of office the major goal for the incoming Iraq regime will be staying alive for 100 days. If today's attacks are any indication the body count over the next week could be huge.
Still the markets managed to hold their gains until about 1:PM and the eventual sell off was minimal. The Dow tried very hard to attack the 10500 level but could only manage 10487. Very respectable in my opinion. The closing drop to 10450 is still a level not seen in over two months until yesterday. The resistance explosion on Wednesday came on the back of a very big buy program that triggered massive short covering. Seems there were many traders short in front of the Fed/Iraq events and for good reason. Somebody pulled the buy program trigger at exactly the right time to upset that apple cart with a massive move over the 10430 resistance level.
If you recall my comments from Tuesday night this event was not unexpected. We closed just below 10400 on Tuesday and I speculated that a +100 point move would not be unreasonable and I saw a bullish bias building. The 10500 level was my target. "Should we see a Dow move over 10430 we could see an acceleration of buying that just might overcome the resistance areas to the 10500 level." (Tuesday) The 10486 high on Wednesday and 10487 high on Thursday was close enough for me.
The Nasdaq rebound far exceeded my expectations and it continued today with a spike to 2032, well over the top of the recent range and over the 2020 resistance. It makes you appreciate how strong the Wednesday short covering really was. The A/D volume was 5:1 in favor of advancers and the new 52-week highs were the strongest since April 12th. The spike came after an upward creep to that prior resistance so the spring was compressed and ready to go. The two-day rebound on the Nasdaq saw very little profit taking with only a -5 point day but we did slip back under the 2020 resistance level. We are poised to go either way. The SOX lead the Nasdaq bounce and it also led the decline today with a -5.61 drop beginning right at 1:PM. The SOX is resting on 470 support and well under strong resistance at 490. There could be another opportunity for a bounce here but odds are better for a sideways move into next week.
For Friday we have the final Q1 GDP, which is expected to be +4.4% and inline with the last revision. After the bad Durable Goods today it could move the market if we see a substantial downward revision. Consumer Sentiment is also due Friday at 95.5 and inline with the initial June number at 95.2. This is one indicator that could see a jump. With the Iraq prisoner problem behind us and no material economic challenges in the rate/job market consumers should be happy and enjoying the summer sun. We also see Existing Home Sales where the consensus is for a decline to 6.53M units. After the New Home number today that may be low.
For Friday I am not expecting any major upward move. With the potential for an escalation in violence in Iraq as the days tick away there is more potential for profit taking ahead of weekend event risk than for another rally. With the Fed meeting in two days those making bets should have already made them or the cautious ones might wait until Monday. We are watching the countdown on multiple time bombs and as the fuses grow short the potential for gains diminishes. My best target for a resumption of any summer rally is next Thursday. I would look at any dips before the 30th as buying opportunities.
Enter Passively, Exit Aggressively.