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Market Wrap

Two Down, One to Go

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     06-30-2004            High     Low     Volume Advance/Decline
DJIA    10435.48 + 22.05 10471.24 10375.67 1.82 bln   2033/ 794
NASDAQ   2047.79 + 12.86  2055.65  2031.88 1.74 bln   1873/1197
S&P 100   553.87 +  1.36   556.05   550.88   Totals   3906/1991
S&P 500  1140.84 +  4.64  1144.22  1133.62 
RUS 2000  591.52 +  3.69   591.53   587.73
DJ TRANS 3204.31 + 19.60  3204.80  3161.96
VIX        14.34 -  1.13    15.73    14.25
VXO        13.97 -  1.40    15.97    13.81
VXN        19.37 -  0.78    20.52    19.09
Total Volume 3,902M
Total UpVol  2,610M
Total DnVol  1,067M
52wk Highs     321
52wk Lows       81
TRIN          0.80
PUT/CALL      0.78

The second of this week's three big events has passed and for the most part stocks remain stuck inside their trading range. In what has been described as the most telegraphed interest rate move of all time the FOMC raised rates by 1/4 point, just as expected. A choppy session turned bullish in the afternoon as money came in off the sidelines to do a little end of quarter window dressing. The Dow Industrials, the NASDAQ Composite and the S&P 500 index all ended the month and the quarter in the green.

Have investors left early for the fourth of July holiday or are we merely stuck in the summer doldrums? The markets have been focused on this one week for weeks now and we're just not seeing much conviction either way. Monday's surprise transfer of power in Iraq was great news but stocks failed to hold their gains. Yesterday the markets didn't do much because investors were focused on today's FOMC decision on interest rates. Everyone expected the Federal Reserve to raise rates by 1/4 point to 1.25% so the focus was actually on the Fed's language in their decision. Bulls got what they wanted with the "measured pace" comments still in there but traders continued to sit on the sidelines. There was an afternoon rally of what most were calling some last minute window dressing but stocks began to fade from their highs in the last 30 minutes.

No one really expected a lot of action in stocks ahead of the 2:15 PM ET interest rate decision but U.S. stocks should have been somewhat primed for a bullish session. The lack of headline-grabbing news out of Iraq on a day that many expected terrorists to strike despite the early transfer was a sigh of relief. Maybe it was the losses overseas that weighed on stocks here. European bourses didn't do so well with the French, German and English exchanges all trading lower. In contrast the Hang Seng index in Hong Kong managed a 169-point gain to 12,285. Its Asian counterpart in Japan, the NIKKEI, closed relatively unchanged.

The rise in crude oil didn't help matters. Light sweet crude soared 4% or $1.39 to $37.05 a barrel, significantly erasing a good chunk of this week's losses. Industry experts were expecting U.S. crude inventories to rise. The markets were surprised to hear that the Energy Dept. reported a decline of 500K barrels while the API data reported a 4.2 million barrel decline. Combine this surprise with new comments from Saudi Arabia about no new production hikes and it's no small wonder that oil shot higher today.

Before the Fed decision was released today investors got to hear the Chicago Purchasing Managers Index or PMI report. Yesterday Jim mentioned that we've seen a number of economic reports indicating growth wasn't as strong as expected and thus the Fed was likely to keep their rate hike and language market friendly. The PMI proved to be just another report supporting this message. Last month, in May, the Chicago PMI shot toward 16-year highs at 68%. This month analysts were expecting a decline to 65.2% but were surprised to hear the PMI drop to 56.4%, the slowest reading in eight months. Fortunately it's still a positive reading, with anything over 50 indicating growth, and odds are good the Fed probably had a heads up on what the data looked like before we did.

The big event today was the decision on interest rates. This is a link to view the announcement but I've posted their comments here:

The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 1-1/4 percent.

The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. The evidence accumulated over the intermeeting period indicates that output is continuing to expand at a solid pace and labor market conditions have improved. Although incoming inflation data are somewhat elevated, a portion of the increase in recent months appears to have been due to transitory factors.

The Committee perceives the upside and downside risks to the attainment of both sustainable growth and price stability for the next few quarters are roughly equal. With underlying inflation still expected to be relatively low, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.

The underlining and the bold lettering is mine not the Fed's. Bulls were happy to see the "measured pace" comments, which should soothe fears that the Fed is behind the curve. More critical traders point to the "nonetheless" comment as the Fed's trump card to raise rates as fast as they need to should inflation get out of hand. Most analysts are interpreting the "transitory factors" in the recent rise of inflation as higher fuel costs, which are expected to abate somewhat. All in all the 1/4-point hike is the first jump in rates since May 2000 and pulls the Fed funds rate up off 40-year lows.

As mentioned earlier stocks did turn positive in the afternoon after the announcement. Market internals were also bullish. Advancing stocks outnumbered decliners 20 to 8 on the NYSE and almost 19 to 12 on the NASDAQ. Up volume was more than twice the down volume numbers and overall volume came in at a relatively healthy (for this time of year) 3.5 billion shares for both exchanges. Several sectors look poised for a breakout. The NWX networking index and the BTK biotech index both rallied to new relative highs and closed just under their simple 100-dma's. The Dow Jones Transportation index turned in a bullish close back over the 3200 level.

The Dow Industrials added 22 points to close at 10,435 but the index began to fail at its intraday high of 10,471 in the afternoon under recent resistance near 10,480. The S&P 500 index climbed almost 5 points to 1140 but it too remains stuck in its trading range. The NASDAQ looks a lot more bullish with a new two-month high but it failed to hold the breakout over resistance at 2050 as it sank in the last half hour. Still we shouldn't complain. The Dow climbed 2.4% in June and the NASDAQ added more than 3% for the month. Year-to-date the NASDAQ is up 2.2%, the S&P 500 index is up 2.6% while the Dow Industrials are down 0.2%.

Chart of the Dow Industrials:

Chart of the NASDAQ Composite:

Chart of the S&P 500 index:

Wednesday was not without its stock-specific stories. Research In Motion (RIMM) announced earnings last night after the closing bell on Tuesday and beat estimates by 4 cents per share. RIMM also raised its earnings and revenue estimates for the next quarter to 32-37 cents and $290-310 million, respectively, compared to prior forecasts of 24-29 cents in earnings and $270 million in revenues. Shares of RIMM soared more than 15% today to close at $68.45, a new all-time high.

Meanwhile Lexar Media (LEXR) was moving the opposite direction. The stock lost 16.6% to close at $6.68 after the company warned last night that its Q2 results would be less than expected. LEXR now expects June quarter revenues in the $155-160 million range compared to analysts' estimates at $186 million.

Dow-component and NDX-component Microsoft (MSFT) also made headlines today. A Washington appeals court voted 6-0 to uphold a district court's decision on the Department of Justice's antitrust settlement. The settlement, reached two years ago by MSFT and the Justice Dept., was appealed by the state of Massachusetts and a couple of trade groups. Today's decision should end the six-year antitrust saga for MSFT in the U.S. but the company is currently appealing a recent decision in Europe. Shares of MSFT added 6 cents to close at $28.56.

Looking ahead to tomorrow I'd like to be bullish but the late-day action this afternoon is discouraging. To echo Jim's comments yesterday, if the NASDAQ continues to plod higher then the rest of the market should follow. Fortunately, the Stock Trader's Almanac by Hirsch has a few things to say about the month of July. First of all the first day of trading in July has been up 13 out of the last 15 years. The beginning of July tends to see a lot of retirement money inflows that should buoy stocks. The month of July is the best month in the third quarter. Unfortunately it happens to be the first month in the NASDAQ's worst four months of the year and election year July's don't seem to alleviate this trend.

Another positive factor for stocks is the historical trend for the S&P 500 to rise 8% in the first six months once the Fed begins a tightening cycle. This is due to the improving economic conditions and rising corporate earnings. Now how this figure meshes with the market's typically tepid performance in the third quarter is a question I can't answer.

Tomorrow does bring a few more economic reports. Before the opening bell will be the weekly initial jobless claims. After the open we'll get the construction spending numbers, the ISM index and the auto and truck sales figures. The ISM index is the one to watch but it will probably be overshadowed by Wall Street's focus on Friday's non-farm payrolls report.

Short-term I would continue to be cautious. The volatility indices all took a dive today with the VXO falling 9% back toward its lows and the VIX and VXN are right on its heels. Regular readers know that interpreting the VIX is more art than science but these levels still scream "danger, the market is near a short-term top".



 
 



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