After a little more than six months of the year has expired the S&P-500 is trading exactly where it closed 2003 at 1112. Six months of hope, excitement, surprise and disappointment and we have gone nowhere. Of course that is not exactly correct with the highs and lows well away from 1112 but we continue to return to this level. We have spent more time above this level with the high for the year at 1163 and +51 points above Friday's close. We have twice ventured lower by up to -36 points to 1076. This is a perfect picture of a range bound market and the reason so many traders are frustrated and volume is dwindling. Everybody is waiting for the market to pick a direction and nobody is trading to give it a direction.
Dow Chart - Daily
Nasdaq Chart - Daily
SPX - Daily
SPX - Weekly
The other indexes are not quite as level as the S&P. The Dow closed at 10213 about -240 points below its 2003 close at 10453. The Nasdaq closed today at 1946 and -57 points below the 2003 close at 2003. The broadest measure of the market the Wilshire-5000 is actually showing a +43 point gain from the 2003 close at 10799. I actually believe that the ability of the markets to hold at these levels is positive considering the long rally off the 2003 lows. While it may be positive to consolidate at these high levels, consolidation is never exciting.
Volume on Friday failed to reach 3B shares across all markets despite strong earnings comments from GE, the largest company and the proxy for our economy. Internals were better and all the indexes finished in the green but excitement was still missing.
The biggest company in the Dow announced earnings before the bell on Friday and beat the street by a penny. The beat was not as important as the comments by GE's Jeff Immelt that "this was the best economy we have seen in years." Those are strong words from Jeff and they backed it up by narrowing their guidance for the year to $1.55 to $1.60. They again said that 2005 should put GE back on track for double digit revenue growth. Of course they have said this for the last couple of years to no avail. Nine of eleven divisions posted gains last quarter but GE still posted overall earnings that were not exciting. The 38 cents included a favorable tax ruling and it was the same 38 cents they earned in Q2-2003. Revenue grew +11% (+$1.05B) illustrating the challenge to grow earnings despite a billion in additional revenue. The expectations for GE were already muted so reaction to the news was positive but calm. GE stock gained only +0.47 cents and Dow component MMM another diverse manufacturer actually lost ground.
Still the Immelt comments rescued the markets from the depths of despair and brought them back from the cliff. The Dow gained +41 to close at 10213 and back over its 200dma at 10175. The Nasdaq gained +11 to close at 1945 and traded flat for the day.
The only economics came from the Wholesale Trade report and the news was mixed again. May sales rose only +0.5% compared to +0.9% in April. Inventories however shot up +1.2% and well over the +0.2% in April. Durable Goods sales rose only +0.1% with DG inventories jumping +1.5%. One analyst said this divergence in durable goods was the worst in over four years. Inventories rarely shoot up this quickly compared to sales due to much better computerized inventory management and just in time ordering. A jump of this magnitude suggests sales came to a screeching halt in May. This also suggests the June swoon we have seen in consumer numbers may have been stronger then we first expected.
I got a kick listening to the talking heads this week as they constantly tried to figure out what happened in June to keep not only consumers but also corporations from making big purchases. Hello, George McFly? I wanted to bang on the TV screen and remind them of the Iraq turnover which many were saying would be a bloodbath both in Iraq and with corresponding terrorist attacks here and abroad. I wanted to shout Fed meeting and rate hike to every one that claimed traders could not understand why corporations deferred purchases of software and hardware in June. With the Fed talking of aggressive hikes if needed I am sure more than one CFO decided to wait for the picture to clear.
Consumers were hit with the highest gas prices in history in the U.S. and analysts can't understand why SUV sales died? Makes you wonder what they pay those experts. Speaking of gasoline, oil prices surged over $40 again on Friday on fears that Yukos would halt production to gain some leverage with the Russian government in the fight currently underway. Yukos exports 1.8 million barrels per day and that would be a serious crunch in the supply line. I would not worry about a work stoppage because that oil flow is worth $720 million per day and that will go a long way toward paying their $3 billion tax bill. Still oil closed at $40 and the short squeeze is on again. It will not be long now before companies start warning on earnings due to higher energy prices. $40 oil is a drastically increased expense for almost any manufacturer. Transports gave up some gains early but strengthened late in the day as oil ticked back under $40 by a nickel.
For once the earnings news was not all negative. Computer Associates affirmed estimates as did SAP. Considering the carnage in the software sector this was a breath of fresh air for the embattled techs. Spoiling that breath was Unisys which warned that server sales had slowed in the last month earnings would drop to 2-3 cents per share below analysts estimates. The stock was killed far in excess of their warning with a -$2 drop to $11. The problem was the appearance that hardware sales might have stalled in June just as software sales did. Everyone works on the end of quarter stuff the channel sales principle where quotas are made or broken in the last week of the quarter. If Unisys hardware sales were deferred then what about IBM, Dell, Hewlett Packard and the rest of the herd?
The Computer Associates earnings affirmation was not without its problems. CA said revenue would be light due to weakness in its services business and an unfavorable product mix. Affirming earnings in spite of the lower revenue saved them from the same fate as Unisys.
With nearly 300 companies reporting earnings next week we have to hope that the majority of them repeat the GE claims and talk excitedly about the future. The problem will occur if they all pull a Yahoo instead. Yahoo did not warn but only failed to impress. The expectations were simply way too high and investors hoping for a blowout ran for the exits when it did not appear. Inline earnings are never met with excitement. Inline means fairly valued and no upside to the majority of investors. It means find another horse to ride for the next earnings race.
Earnings start off with a whimper on Monday with only 16 companies headlined by NVLS and EFII. Tuesday picks up the pace with about 50 reports led by INTC, JNPR and JNJ. Wednesday has AMD, AAPL, ASML, BAC, GENZ, HDI, MTG, QLGC, SNDK, and a flood of smaller companies. Thursday is the big day headed by IBM, PMCS, NOK, C, RMBS, CY and about 100 others.
Before the week is out we should know how the quarter will turn out. The estimates have dropped to +19.4% for the S&P, down from +26% a couple weeks ago and up from +14.6% back in April. We have had a significant ramp from those April estimates and that ramp is rapidly evaporating but still strong. We should have a decent clue by next Friday what the real number will be. +19% would be great and should please the markets but as we all know the guidance is the key. I strongly doubt the software sector was alone in its sales slump. It simply does not make sense that software would slump without a corresponding dip in hardware. So far Unisys is the only company of note that has mentioned soft server sales. It will all come to a head next week and our fate will be known.
Next week is also expiration week. As if we did not have enough to worry about we will be dealing with volatility related to an expiration week right in the middle of a critical earnings cycle. We really had very little volatility over the last week as it appears traders are holding their cards close until the last minute while hoping for an earnings move. That suggests we could see an increase in volatility as the earnings begin to flow. With Intel announcing on Tuesday this should make Wednesday option dump day as the market reacts to the Intel news. Right or wrong on direction those options will be losing value with every tick and volume should be huge.
Martha lost her last appeal on Friday and she is scheduled to be sentenced on Friday and the betting line is 10-16 months in prison. MSO dropped to its lowest level since May-21st on the news and closed at $8.63.
Our economic cycle also ramps up next week with several Fed manufacturing surveys and the return of the much watched PPI/CPI inflation gauges. Where the last week of June was on hold for coming events the next week in July should be anything but slow. There is a lot of pent up trading on both sides of the market and it could break lose with a vengeance next week. The warm up acts are over and the curtain is about to rise on the main performance. How it ends is still unknown but at least the end is near and the waiting is almost over.
It is amazing to see how the markets always gravitate to a critical inflection point just before an event that could produce a strong move. The Dow has settled at 10200 for the last four days and refuses to move lower, or higher for that matter. The one lower close on Thursday was immediately retraced on Friday with the GE news. The 200dma rose to 10178 and is providing support while we wait for earnings. This is actually bullish as positive news now has a strong launch point and we are not that far away from the recent highs just below 10500. We have had a week of consolidation of gains in front of the earnings cycle. The Dow is patiently waiting for the answer right in the middle of 10000-10500 range that has held more or less for three months.
The Nasdaq tried to hold at 1960 range support but the warnings on Thursday knocked another 20 points off that level. We have been stuck in traffic just above 1940 for two days now. The SOX has actually recovered the 450 support level only two days ahead of Intel earnings. The Russell held on to 560 and 200dma support and managed to close slightly higher in front of weekend event risk. This was a positive sign for me.
Russell Chart - Daily
All of these factors suggest there are buyers lurking at what they perceive to be a favorable risk level at the bottom of our range. The lack of any material selling over the last couple days despite the negative sentiment is bullish. This was a perfect opportunity for support to fail and investors to dump stock in fear and it did not happen. Volume on Tue/Wed/Thr was strong for a summer week and internals were very negative and the market did not crack. This does not mean we will not move lower if the earnings are a disappointment but it means there is still hope. Keep the faith for one more week and the picture should be much clearer. Intel is the lightning rod for the market on Tuesday. Try not to stand too close.
Enter Very Passively, Exit Very Aggressively!