Today was taken over by court TV with Ken Lay's indictment and press conference taking center stage. Another sideshow came from the Adelphia trial where the Rigas family head was found guilty on almost all counts. Stocks? That was almost an after thought and after traders thought about the continued earnings warnings they sent the indexes to new lows across the board.
Dow Chart - Daily
Nasdaq Chart - Daily
The morning economic reports helped pull the markets back from a very bad Yahoo induced overnight drop. The Jobless Claims really did correct after the multiple weeks of high numbers in the 350K range. The drop last week to 310,000 was the lowest level since October 2000. However, analysts were quick to caution that the sudden drop was more than likely the result of seasonal adjustments. Seems we just can't win. At least the Labor Department came right out with the caution saying there may have been an inappropriate seasonal adjustment. Since they made that announcement with the number it seems like they should have just corrected it and been done. You don't really think they just realized it at 8:29 this morning do you? Still we live in a headline world and the headline 310K number was successful in lifting the futures well off their lows. Expect next week's numbers to be higher.
Reversing the warm feelings from the Jobless Claims was the drop in Retail Sales for June to +2.9% from +5.7% in May. This was the smallest gain since June-2003 and well off the +6.0-7.0% range from the first quarter. Department stores, furniture stores and shoe stores posted the weakest results. Even the discount stores barely posted a gain at +1.5%. Drugs and Wholesale Clubs were the only bright spots that kept the headline number in positive territory. Personally I am not encouraged that Drug stores saw the largest gain at +8% since those are normally forced sales of some sort and not pure voluntary spending. The same store sales were generally less than expected across the board with the majors blaming the slow sales on everything but a plague of locusts. Weather was the primary excuse but the slowdown was nationwide and that suggests there was a stronger factor such as continued high gas prices. July numbers are not expected to show any increase with back to school shopping expected to be put off until the last minute due to lack of money.
Consumer Debt levels are near record highs and they are limiting the amount of credit available for spending. Consumer Credit increased by +$8.2 billion in May and the April numbers were revised from +$3.9B to +$5.3B. The May jump was the largest increase since January.
The Manufacturers Alliance Survey (MAPI), the index of future business activity jumping to 80, set a record for the third consecutive quarter. Shipments and New Orders surged to 93 from 90 and Back Orders soared to 93 from 85. All components rose and this suggests that manufacturing activity over the next six months will continue to increase. This was a very bullish report and was a new record for the headline number. However, this report compares activity to the same period last year and Q2-2003 was not a hotbed of activity. The comparisons going forward are going to get much more difficult to show gains. This report is not normally a market mover as it looks back over the last quarter and many analysts are now suggesting we hit a peak in late April early May. This makes other more current numbers like the ISM a better read on the economy.
The key focus for the day was on the Ken Lay circus in Houston. He was indicted for his alleged role in the Enron disaster. He took the unprecedented step of holding a press conference once he was released from custody in order to proclaim his innocence. This highly unusual tactic garnered the television spotlight for most of the day and stock news took a back seat to the spectacle. This may have been a very good thing for the markets as the earnings news has been moving from bad to worse as the current confession cycle draws to a close.
Yahoo disappointed Wednesday night and knocked the wind out of the Internet sector and that rippled through techs in general. One good thing Yahoo accomplished was to take the focus off the semiconductor sector and those stocks actually saw some gains early on but those gains faded as we neared the close. I am not going into detail but over the last two days we have seen over 20 companies warn and I can only remember one company that guided higher. That was Yellow Roadway after the close today. According to First Call 1015 companies have issued guidance for Q2 and 51% of those were positive, 15% inline and 34% were negative. Those who follow these things claim the warning ratio for Q2 is only 1.5 and well below the 2.2 average for Q2. This may well be a statistical anomaly that keeps their stress level intact but the pace of warnings does not appear that tame to investors. Maybe it is the rush to confess over the last week that has changed the landscape.
That landscape changed drastically over the last week with the Dow breaking below the 10200 support level today and trading at a six week low. That closing low at 10171 is under the 200dma at 10175. Close enough to hang on by its fingernails but still dangerous. The Dow will be at risk again on Friday as GE reports earnings before the bell. GE has done a good job in managing expectations or should I say lowering expectations so there should not be any earnings surprise. However GE is the proxy for the economy and as such their guidance will be viewed as the gospel for the future. Their revelations will be seen as the roadmap for the rest of the year. A positive spin could go a long way towards curing the economic flu and earnings fever now afflicting traders. Strangely traders have ignored recent warnings by GE so downside risk may be limited.
The Nasdaq continued its plunge to close at 1935 and and for once was not led down by the semis. The Internet Index ($IIX) lost -2.5% on the losses in YHOO -2.52, EBAY -3.22, AMZN -1.50 among others. The Software Index ($GSO) lost -3.13% on continued warnings in that sector. With losses like these the Nasdaq never had a chance. The Nasdaq closed under all its averages 50/100/200 and appears destined to retest 1900 unless a tech miracle appears very quickly.
Another factor in the Nasdaq decline was a massive drop in the Russell-2000. The Russell lost -11.32, -2% and closed at 560, right on critical last ditch support. The Russell was under pressure all afternoon with major sell programs late in the day. The close at 560 is critical and a break below this support level could easily see a sharp drop to 540 and the May lows. The Russell has fallen -5.2% since July 1st and the decline does not appear to be slowing. Today's close is exactly on the 200dma and technical buyers should appear on Friday but I am not counting on it. There is simply too much negativity in the market and unless GE praises the economy and its earnings outlook in glowing terms tomorrow there may be a concentrated run to the exits before the day is over.
Next week we have over 300 companies reporting earnings and unless the trend changes quickly each report will only be another appetizer for the bears before the summer rampage begins. The parade of bullish analysts continues on CNBC with each proclaiming the merits of the undervalued market. Obviously somebody is very wrong. The bulls have a definite wall of worry ahead of them and right now they appear to have no interest in putting on their climbing shoes.
TrimTabs claimed the first three days of July saw +$2.5 billion inflows to equity funds. According to TrimTabs this was the largest three-day inflow since $5B hit the tape in March. Considering June was the end of the quarter and a trigger for strong retirement contributions I would have thought the first week in July would have seen much stronger inflows. Regardless of the actual cash being put to work the markets have been in free fall since July 1st.
Helping that free fall was a press conference by Tom Ridge of Homeland Security warning that a large scale attack is still being planned for this summer inside the United States in an effort to disrupt the elections. Since the democratic convention will begin in slightly over two weeks on July-26th the countdown clock is ticking ever louder. Homeland Security claims to have no specific details of an impending attack but they do have increasing confirmation that one is imminent. This should send chills up the back of any investor with a large portfolio who remembers the 9/11 drop.
With GE not expected to be a market mover tomorrow we are going to be faced with weekend event risk and nothing especially cheerful to send the markets higher. There are no material economic reports and odds are good we will see some more earnings warnings from companies hoping to escape investor wrath by warning on a summer Friday when attention to the market is minimal.
With the Dow and the Russell both closing on their 200 day averages there is support for buyers wanting to buy the dip. How well that support will hold is still the $64 question. Personally I would not enter a long position on Friday regardless of the market behavior. I would only day trade any bounce but always keeping my eye on the exit. My bias for Friday is flat to down but I would not rule out an oversold bounce. We have not seen any market-supporting buy programs recently and the Dow/Russell 200 day averages would be a good place to launch one of those rockets.
Fortunately we will get to see some real earnings from the largest blue chips next week, both techs and non techs. These earnings will blot out the red marks left by the dozens of small cap warnings over the last few days. This will be our chance to reverse the drop and return to our trading range but the black cloud on the horizon will remain until the democratic convention is over. Keep those stops in place because they could protect you from serious harm.
Enter Passively, Exit Aggressively.