Jim is out of town through next week, attending a conference.
Dell's after-Thursday's-close earnings report was slated to be the big news Friday, sending tech-related indices higher. Pre- market articles talked about the bounce that was to come, but the day didn't unfold that way.
Instead, countries across the globe traded blame for disappointing economic numbers reported Friday. Commentators and economists blamed lower U.S. consumer demand for discouraging GDP numbers in Japan and the eurozone countries. In the U.S., commentators blamed lower demand for goods exported to Japan and the eurozone for the widening of the U.S. trade gap. Those economic releases revealed plenty of blame to parcel among the various countries. That blame settles on consumer demand in the world's three largest economies, or more properly on the impact of rising crude costs on consumer spending habits.
Japan's GDP number proved to be a shocker. GDP growth for the second three months of this year surprised to the downside, at 0.4 percent falling far short of the forecasted 1 percent growth. The annualized GDP rose by 1.7 percent, with some suggesting that assessments for the Japanese economy's growth would require adjustment. It was just Wednesday that the International Monetary Fund raised its forecast for Japan's 2004 economic growth to 4.5 percent from the previous 3.4 percent.
Both private consumption and corporate capital expenditures disappointed. Corporate capital expenditures had been expected to grow by 10 percent, but instead were flat. The GDP deflator indicated that Japan still suffers from "unwanted disinflation," as our FOMC members might have described it. While some economists disputed both the private consumption and corporate capital expenditures numbers, they tanked the Nikkei, with that index plunging lower by 270.87 points or 2.46 percent, to 10,757.20, its lowest close since May 18.
U.S. futures held up well while the Nikkei tanked. Although they stumbled slightly as the European Union released figures showing the eurozone's GDP rising 0.4 percent against an expectation of a 0.5 percent rise, the U.S. futures still gave hope of a bounce. The International Monetary Fund, the IMF, already estimates that Europe's growth will be the lowest among the three largest economies in the world, with Japan and the U.S. being the other two. In Germany in particular, stagnant consumer spending leads the economy to depend on exports.
Clearly, consumer demand isn't rising as needed or expected. Last month, the Commerce Department released figures showing slowing consumer spending. In the eurozone as well as in the U.S., companies center hope on emerging markets, China, and Russia to provide the needed growth in demand. After the release of the eurozone's GDP and the resultant commentary, the FTSE 100, CAC 40, and DAX all headed lower, as did most eurozone bourses.
Still, after that slight stumble, U.S. futures regained their footing and had attempted a couple of bounces by the release of July's U.S. PPI and June's Trade Balance. In June, the PPI headline number had fallen 0.3 percent, but the ex-food-and- energy number had risen 0.2 percent. Expectations for July's headline number had ranged from a decrease of 0.1 percent to a rise of 0.2 percent, depending on the source, while expectations for the ex-food-and-energy number had been for a rise of 0.1-0.2 percent, also depending on the source. The released numbers showed PPI rising 0.1 percent, with the ex-food-and-energy number rising 0.1 percent, both numbers in line with expectations. Dropping food costs offset rising energy costs, but companies reported raising prices due to energy costs. As quoted in one article, an economics professor at Harvard raised the specter of rising crude prices causing higher inflation coupled with slower growth.
It was June's trade balance that started the blame game on the U.S. side of the pond, though. May's trade balance had measured -$46 billion, with economists forecasting a $46-47 billion shortfall for June. Instead, the gap widened to a record $55.8 billion as the U.S. paid more for crude oil and other industrial supplies and exported less. The number revealed a widening trade gap with Japan, Western Europe, Canada, and China, among other countries. Economists placed the blame for the biggest decline in exports since September 2000 on lower demand from Japan and the eurozone countries.
As happened with Japan's disappointing economic release, market watchers began speculating that growth estimates for the U.S. economy might need revision. Some commented that the lower estimate for June's trade gap had probably been folded into the calculations for economic growth.
A dissection of the number revealed that inventories rose, a comment that we've heard recently from reporting companies, too. As Jim Brown commented in an earlier Market Wrap this week, building inventories can be viewed in both a positive and a negative light. They can be a sign that sales have slumped, making it difficult to move that inventory. As Jim commented earlier in the week, some information suggests that may be a cause behind those building inventories, and the market treated companies reporting building inventories as if that were the case. They can also be a sign that companies expect growing sales, too, as they look forward to a period of expected expansion and are ramping up inventories to enable them to fulfill orders. In an effort to put the best spin on this morning's widening trade balance, some commentators embraced the latter interpretation today. Those optimists also viewed rising imports as a sign of increasing domestic demand rather than a function of higher crude costs.
Despite the blows delivered by disappointing economic releases across the globe, the Dow, TRAN, Nasdaq, S&P 500, OEX, and SOX all opened in the green. Early morning articles sported titles such as "Stocks aim higher" and "Stocks bounce," featuring Dell's likely positive effect on the markets. Dell did perform strongly, closing 4.19 percent higher, but its positive effect on other than a few key sectors was dampened by the University of Michigan Consumer Confidence number released soon after the open. July's number had been 96.7, and expectations for August's preliminary number had been for a rise to 97.00-97.50. Instead the sentiment index fell to 94.0. The main culprit appeared to be the component that measures future expectations.
Although the behaviors of the U.S. futures overnight and the cash markets on the open had been those of steadiness in the face of a number of adverse economic releases, the University of Michigan report sent indices into their first declines of the day. Some had already seen their high of the day and would decline steadily throughout the rest of the day. The Dow Jones Transportation Index proved to be one, with this oil-sensitive and economic- recovery-sensitive index succumbing to dual pressures. The TRAN hit its 200-sma, bouncing minimally from that average into the close and erasing all of this week's 110-point gain. Producing two reversal signals within one week, the TRAN made a round trip back to that average from Friday to Friday.
Although the Dow's sister index held up well while crude prices rose this week, Friday it returned to its typical trading pattern of late, trading in direct opposition to the movement of crude futures.
Annotated Five-Minute Charts of the TRAN and Crude Futures:
The TRAN appears poised to bounce from its 200-sma or tank beneath it next week. If the inverse relationship to the movement of crude futures is to continue next week, making a prediction proves particularly difficult. This weekend includes a close recall election in Venezuela, with violence possibly escalating if the incumbent wins. A historical basis for such a concern exists, since output was trimmed during the last upheaval involving President Chavez. In addition, a BP plant in Indiana suffered a fire that cut output; Russia's Yukos may be put on the bidding block with uncertainty over whether the successful bidder could meet the company's previous output, and worries about developments in Iraq persist. Hurricane Charley's threat to oil and gas production had reportedly lessened at the time this report was prepared, but traders pumped the crude futures with event premium in case one or all of the threats to production materialize.
If a truce is managed with Shiite militants in Iraq, other terrorists vow to leave Iraq's pipelines alone, Venezuelan elections proceed peacefully, and the markets find assurance that Yukos can keep up production, some of that premium may seep out, deflating crude prices. Such a deflation might allow indices to bounce, at least for a few days, but if crude prices continue higher, pressures on equities could escalate. Those believing that $40.00/barrel prices were temporary and the pressures on the economy transitory might be shocked out of that belief if crude hits $50.00/barrel. A CNBC Europe commentator mentioned a couple of weeks ago that crude prices would likely reach $47.50 in the short term and $57.00 ultimately, a claim that seemed unlikely at the time. He may be right about that $47.50 price, at least. Crude futures came within a point of that figure on Friday.
It all sounds like doom and gloom, doesn't it? It wasn't. Across the U.S. markets, advancing issues and up volume proved stronger than declining issues and down volume. Adv:dec ratios stood at 19:13 for the NYSE and 15:15 for the Nasdaq. Total volume was a light 1.2 billion for the NYSE and 1.3 billion for the Nasdaq. The Dow, Nasdaq, S&P 500, OEX, SOX, and Russell 2000 all ended the day flat or slightly higher. Only the transports, insurance sector, pharmaceuticals and biotechs declined significantly. Homebuilders, the XAU, the HMO, and some computer-related indices performed strongly, as did the oil services and natural gas sectors. This article could have been titled "The Bounce that Almost Happened."
Nevertheless, many indices teetered on the edge of a more severe drop Friday, including the S&P 500.
Annotated Daily Chart of the SPX:
The SPX's daily chart presents a clear picture of an index poised to bounce from bottom support on its descending regression channel or to fall from that channel. The SPX broke minimally below the bottom support of its possible "b" distribution pattern Friday, but was caught by 1060. The bounce did not prove convincing ahead of the weekend's uncertainty.
The big-cap OEX has broken below the bottom support of its "b" distribution pattern and spent Friday trying to climb back inside the bulb of the "b," without success. The OEX did find support near 520, but closed just below the 520.80 figure that has proven to be support/resistance in the past. Markets appear to have long memories.
Annotated Daily Chart of the Russell 2000:
Like the SPX, the Russell 2000's daily MACD remains in full bearish mode. Stochastics have long been trending in levels depicting oversold conditions, a state that often accompanies steep declines. Stochastics produced another bearish kiss. Note, however, the equal lows on the RSI as the Russell 2000 hit first the July low and then headed down to a lower low in August. That's bullish divergence if it continues. Note also that RSI currently measures a higher level than at the August 9 low. RSI often serves as a leading indicator, but it's a fickle indicator, too. It should warn those in bearish positions to make plans to protect profits, something that should have been done anyway as indices approached key support levels, but it does not yet promise a bounce. Let RSI warn you and price action guide you.
The Nasdaq also balances on a key level.
Annotated Daily Chart of the Nasdaq:
Wednesday, I pointed out the approach of the 38.2 percent retracement level drawn on the Nasdaq's daily chart, and the Nasdaq did spend the rest of the week balancing on that line, reinforcing its importance. Despite Dell's influence, the Nasdaq was not able to mount a bounce, instead producing an inside-day candle. If the Nasdaq does bounce early next week, first resistance should be expected at 1800 and the gap level from August 6. If the Nasdaq drops, round-number support should perhaps be expected near 1750, and slight support appears to exist near 1748 and again near 1740, but stronger support lies nearer 1690-1700.
The Dow's chart shows some of the same characteristics seen on other daily charts.
Annotated Daily Chart of the Dow:
The Dow's chart (using the DJX as a proxy to obtain all the daily candles sometimes omitted on my daily chart) shows the new bearish stochastics kiss, the full bearish mode of the MACD, and the potential bullish price/RSI divergence.
One commentator on the crude markets commented that crude could be $50 Monday or could be $40.00, depending on weekend developments. Those weekend developments and crude's resultant price could drive our markets, too. It appears difficult to imagine that indices could make strong advances if crude prices do not drop significantly, but Monday begins option expiration week, with all the attendant inexplicable market movements.
As Jim Brown has mentioned in previous articles this week, the good news is that volatility has returned to the markets. Although all of us at OIN care about the health of our economy and so would prefer seeing markets move higher, we options traders can benefit from movement any direction as long as there's movement.
We're in a good place for a bounce, but we're also in a good place for a rollover down to a new leg down, a great opportunity to profit from options plays. Until we get past some of the event risk, including the upcoming Olympics and perhaps even the upcoming elections, and have evidence that the prevailing downtrend has reversed, selling rallies remains the preferred tactic, so at least part of next week could be spent sitting out while markets bounce up to test resistance. If a bounce begins, many indices will be trading up through the bulb of a possible "b" distribution pattern, a pattern that is deemed bearish until proven otherwise. That bulb portion may produce choppy trading conditions. In addition, another factor may work against the aggressive trader willing to risk a countertrend play up through a likely choppy zone: options expiration week. Unfortunately, although once a bounce has begun, pent-up pressure may send indices high enough to profit in a bullish play, it's not yet a play I can recommend for any but the most adept scalpers who don't need advice anyway.
Crude prices should be watched carefully Monday morning for signs that some of that event premium is evaporating or that crude prices instead are building. Watch crude's effect on the TRAN, with the TRAN so near the 200-sma that it should be easy to say "bounce" or "drop." Other indices' positions near key levels also offer that ability, although Friday's trading proved that even apparent breakdowns could whipsaw those entering bearish trades. Be prepared to be whipsawed if entering directional plays.
Another index might offer guidance as to whether a bounce could begin. Although many indices produced doji or near-doji Friday, only one among the ones charted here produced that doji at the bottom of a steep decline. The others produced doji at the bottom of consolidation zones, not producing as strong a possibility of those doji being reversal signals. The SOX, however, produced its doji at the bottom of a steep decline.
Annotated Daily Chart of the SOX:
Although a classic morning-star reversal signal requires a tall red candle before the doji, we might give the SOX the benefit of the doubt, as indices sometimes don't produce as classic candlestick patterns as individual stocks might. Those hoping for a bounce want to see the SOX open Monday at or above its Friday close, and then produce a strong white candle. The mauve horizontal line on the chart represents the 50 percent retracement of the rally off the October 2002 low, an important Fibonacci retracement level the SOX violated this week. Those hoping for a bounce want to see the SOX close above that mauve line and above the bottom of the former descending regression channel. Otherwise the bounce remains suspect. Those hoping for a Nasdaq recovery also want to see the biotechs bounce, too.
Companies reporting Monday include Lowe's Companies (LOW), Sysco Corporation (SYY), and Tandy Brands (TBAC), and possibly KMart (KMRT), although I'm finding conflicting information about its reporting date. Each of those offers a measure of consumer spending. They might be closely watched.
Next week's economic releases number fewer than this week's, with Tuesday being a heavy-weight day with regard to those releases. Monday starts out slowly, with only the NY Empire State Index at 8:30 and the August NAHB Housing Market Index at 1:00. Tuesday's 8:30 releases include Building Permits, Housing Starts, Capacity Utilization, and Industrial Production, and Tuesday also includes chain store sales, Redbook Retail Sales, and the ABC/Money Consumer Confidence. Wednesday has become a volatile day as the Department of Energy and API release their disparate figures for crude, distillate and gasoline inventories, and Wednesday has also long been known as a possible trend-reversal day. Thursday rounds up the week's releases, with initial claims, natural gas inventories, leading indicators and the Philadelphia Fed's release.
Have a safe weekend. Our thoughts and prayers go out to all subscribers who live in areas affected by Hurricane Charley or who have loved ones who live in those areas.