The historical end of October ramp finally appeared but the reasons remain far from clear. The Dow has been the laggard for weeks but today the blue chip index roared higher with a +138 point jump to almost regain the 9900 level. It is amazing we had sunk so far that a +138 point gain does not make it back to 9900 and a level that was support then resistance over the last two weeks.
The morning started off far different than it finished. The indexes dove at the open in anticipation of the Consumer Confidence number with the Dow retesting 9750 before the numbers hit the wires. The Consumer Confidence came in less than expected at 92.8 with a decline on almost all internal components. The magnitude of the declines were minimal on each internal component but the forward looking views were the most telling. Most consumers are backing away from a potential home or major appliance purchase and feel business conditions and employment will be worse six months from now. Only autos showed an increase in purchase expectations and that was due to the new model year and the very strong incentives now being offered for year end inventory reductions. This was the third consecutive month of declines and this is the lowest level in seven months. The high was 105.7 in July making today's number a -13 point drop in only three months.
After the headline number was announced the markets rebounded off the lows on decent volume despite the worse than expected results. Traders claim the whisper number was far worse based on the negative campaign ads, mudslinging and the rise in energy prices. The drop was not as severe as the recent Michigan Sentiment and analysts expect the low interest rates will help buoy confidence once the election is over. Retail prices are still experiencing some deflation from excess inventory and are expected to rise but the elimination of apparel quotas should lower apparel prices after the first of the year. Bottom line is a continued decent environment for consumers as long as the Fed does not get carried away in Nov/Dec.
Weekly Chain Store sales posted their second week of declines with a -0.6% loss which indicates the high gas prices are continuing to drag on consumer budgets. The index fell to the second lowest level since the beginning of April and has nearly erased the early October bounce. However the ICSC feels growth will improve for the entire month to something in the +3.5% range compared to only +2.4% in September. Somebody better buy a lot of Halloween candy very soon because October is about over.
While the economics probably did not provide a large boost to the market the Marsh Mclennan news did. The extremely quick turnaround by MMC to the Spitzer claims has cooled the Spitzer attack. Spitzer has removed the criminal portion of the claims and said the problem can be handle on a civil basis. This removes the potential death sentence for MMC and by association several other companies. The board of MMC quickly addressed the problem and came up with a huge bundle of changes structured to make buyers, investors and Spitzer happy once again. Investors have moved back into the stock over the last three days based on changes being made and discussed and the calming of the Spitzer attack. MMC gained +2.45 today to $28.81 and well above the $22.75 low from last week.
AIG was a major winner with a +4.23 gain. As a Dow component this equates to about +35 points of the Dow rebound. The AIG chairman is Hank Greenberg and the father of Jeffery Greenberg the CEO who resigned from MMC. The Dow also got help from GE after GE backed 4Q and full year estimates citing strength across all divisions. GE rose +0.73. Also helping were CAT +1.07, HD +1.00, BA +0.98, AA +0.98. IBM also rose slightly after authorizing a $4 billion stock buyback.
Despite the gains by the major insurers, AET +4.49, ATH +3.84, CB +4.56, CI +3.69, WLP +4.67, there is another lion prowling the woods. Connecticut Atty General Richard Blumenthal confirmed he had issued 35 subpoenas to insurance companies and brokers who operate in his state. Anthem was the headliner for this effort but ATH downplayed the event saying it was not material to their business. Bloomenthal said he was working with his counterparts in other states to sift through not only property and casualty but also health, auto and employee benefits. The wide net approach is sure to trip over some more practices they feel are contrary to the public good. Hopefully the fear has already been seen in the boardrooms and when any problems are found there will be a swift response. Given the cash cow that could be milked by aggressive states currently in financial stress the odds are very good there will be some heated discovery and the insurance companies will eventually pay.
The Dow rebound this morning may have pulled it out of danger for making the history books. At the open the Dow had lost -2.3% for the month, more than any October since 1997. The +1.4% one-day jump erased more than half of that drop for the month. The key question is obviously how long will it last? With 9900 resistance looming overhead and 9950 almost as strong there is going to be some potholes in the road. However this is October and this is the week that should see a strong rally. At least in normal years we could expect a rebound from the October lows to set us up for the Nov/Dec year end run.
The Dow actually pegged the pattern almost to the point with Monday's drop to 9700. The downtrend since February was looking for a lower low and 9700 was the earliest potential rebound point once the August lows at the 9800 level was broken last week.
The Nasdaq was not as lucky. A couple of high profile warnings from FLEX and SLAB and the SOX was knocked for a loss that almost took the Nasdaq down with it. FLEX dropped -$1 after it said profits would be below prior analysts estimates on weaker than expected sales. While that warning hurt the market more than it hurt the FLEX stock price the damage from SLAB was much more drastic. SLAB was slammed to a -6.56 point loss after warning that high inventory levels and cautious customers had turned the outlook "extremely murky" according to one analyst. SLAB said they expected the current inventory excess impacting the entire sector to take time to work itself out. SLAB expects Q4 sales to fall to $95 million from prior estimates of $125 million. That slash in outlook knocked three times that amount at -$370 million off the market cap for SLAB. DBS and FB downgraded the company to inline levels making the last six ratings changes all downgrades on SLAB. It seems the analyst community has turned sour on SLAB.
The challenge was not the downgrades to FLEX/SLAB but the impact to the markets. The SOX clung to support at 395 and tried several times to rally to no avail. The SOX closed flat at -1.10 at 396. The lack of SOX support for the Nasdaq kept the Nasdaq from joining the Dow party and held it to only a +7 gain at 1920 until the closing spike. The closing spike was due to a couple buy programs on the S&P and the Russell which pushed the Russell to a three week high at 577.63 and over strong resistance. The result was a Nasdaq that moved right back into the middle of its recent range (1900-1950) at 1927 and a +15 point gain.
Last week the chip stocks could do no wrong in the eyes of investors. Of the 20 or so chip stocks reporting earnings one analyst said 19 either missed estimates or guided lower. Yet the SOX rallied off its 375 low to a high of 411 last Thursday. So what changed? The reason for the SLAB warning was exactly the same as the rest but the market timing was different. Last week you could not give away insurance stocks and huge amounts of money was flowing into sectors not related to insurance. Once the get out of jail free card was played by Spitzer that cash suddenly saw returning value in insurance and weakness in chips for Q4/Q1. As you can tell by the gains in the insurance stocks I reported above the funds were rushing back into the sector and away from techs they loved last week. Why? Insurance stocks were suddenly undervalued repositories for excess cash ahead of the fund year end on Friday. Those funds wondering what to do with cash generated from the portfolio rebalancing over the last three weeks suddenly decided Chubb, AIG, AET, HIG and CI were better investments at their current valuations than chip stocks where 19 of 20 had warned.
Another factor sending the indexes higher was the AT&T Wireless sale to Cingular. According to futures traders the close of the deal produced a huge index disparity in the S&P-500. S&P dropped AWE from the S&P-500 and added CIT. AWE had a market cap of $41 billion and CIT only $8 billion. This meant index funds had to buy the index equivalent $33 billion of other S&P stocks to make up for the reduction to the overall market cap loss in the S&P. Rick Santelli said that about 12,000 S&P futures contracts would need to be bought to cover the changes. Obviously the S&P got a much needed shot in the arm and the rebound in insurance stocks definitely did not hurt.
I am sure you are thinking the same thing I am. What does that mean for tomorrow? Based on the procrastination factor I would expect more S&P buying tomorrow. I really doubt that every fund that needed to make the change did it today. The Justice Dept did not make the announcement until 3:26 pm on Monday and there were some qualifications. S&P did not announce until 5:46 PM on Monday what changes would be made to the various indexes. This means funds could not make changes until today and just given the enormous amount of money to be shuffled and the number of funds needing to make the change the odds are very good we have not seen the last of it.
After setting the stage I suggest we look at it from the bears point of view. Oil closed over $55 again and is moving higher overnight. The S&P closed at 1110 which is just below strong resistance at 1112 where the 50dma and 100dma converge. That resistance won't matter if funds still need to buy billions in S&P stocks. The tech sector did not join the party despite the S&P being better than 25% weighted in tech stocks. That may change tomorrow once fund traders are shocked but the big gains in some non tech stocks. Non-techs may look suddenly over valued and techs may be combed over once again for bargains.
The calendar is right for more buying as funds put the finishing touches on their portfolios for year end. The calendar is also wrong for a continued rally based on the current election surveys. With the election still a dead heat according to the surveys there are some other sources predicting a Kerry victory with the University of Minnesota releasing its latest projection on the election saying that Bush has less than a 30% chance of being reelected. The missing 350 tons of explosives made the news all afternoon and the blame is being placed on Bush despite him not even knowing it was there. Late news today suggests a setup by Dr. ElBaradei in an effort to discredit Bush ahead of the election. The IAEA Director General Dr. Mohamed ElBaradei is no friend of the Bush administration and releasing this news the week before the election could be payback. For whatever reason it was released this week it is not doing the Bush campaign any good. This causes even more confusion for investors with only four trading days until the election.
The combination of these events suggests more confusion in the markets but a potential upward bias from the S&P changes. The Nasdaq has room to run and the S&P could break 1115 if the fund shuffling continues. The Dow has the biggest challenge at 9900 and 9950 but a textbook support low is in place at 9700. This could be all the bulls need to justify continued buying. Were it not for the election I would bet we close higher on Friday than we did today. However, the election mudslinging on both sides and the closeness of the race will continue to keep the market outcome in doubt. Fortunately October and the election will be history in five trading days and we will be free to trade on fundamentals once again. That may have it's own set of problems but at least it will be different than the ones we are facing this week.
Enter Passively, Exit Aggressively.