After three weeks of a sustained uptrend the market finally decided to take a day off and rest its weary legs. The surge to new highs has been relentless and those not already long have been wringing their hands in anguish over the thought of having to go long at new highs with no profit taking for a safer entry. Those fears have been calmed after today and now all they need is confirmation of new upward movement to hook them with the promise of higher highs.
The morning dip was blamed on a higher than expected inflation reading from the Producer Price Index. The PPI may have been blamed but they could just as easily blamed it on the moon or sunspots. The market was very extended and just needed to rest and the PPI was the best excuse market reporters could find. The PPI did jump +1.7% and well over expectations for +0.5%. This was the largest gain in fourteen years and produced a form of sticker shock for those not paying attention.
Those pausing for a minute to look under the hood saw that it was directly related to the spike in oil and the hurricane and those factors causing the bounce are already abating. Oil spiked to $55 on pre election terrorist fears and speculative excess and that is already fading as expected. The impact to the PPI from fuel was enormous at +4.12% and distorted the headline number significantly. Another component causing trouble was food which was driven higher by produce and feed shortages caused by the hurricane damage and supply disruption. Individually vegetables jumped +34.2%, gas +17.3% and fuel oil +17.9%. The headline number got all the attention but ex-food/energy it was a tame +0.3%. Lots of smoke but the fire is already out. This was a slam dunk for traders and should have never caused more than a momentary blip for news dissemination. Instead they looked at the calendar and saw the Consumer Price Index due out tomorrow and took a pass on new positions until that news is out on the consumer level.
The Chain Store Sales fell -0.4% for the week ended Nov-13th and that makes four of the last five weeks the index has fallen. Last weeks +1.3% jump turned out to be an anomaly and could not be continued. Sales on a year over year basis have been running on about a +3% clip and that trend continued. The ICSC is projecting holiday sales of +3% to +4% for both November and December. If oil does continue lower, something we cannot count on, then consumers will feel a pressure release that could lead to more spending.
The November NAHB Housing Index was flat at 71 with October and that is also the 12-month high. Builders continue to be positive despite a minimal drop in traffic to 50 from 52. It is fall and weather does diminish idle shoppers. Those that really want to buy a new home are not deterred. The string of months at 50 or higher reached seven months and the longest string since the late 1990s. The expectations component is holding at 80 and very optimistic. Maybe too optimistic in light of the current uncertainty and the Fed rate hike process.
For Wednesday we have the CPI, Residential Construction, Industrial Production, Mortgage Applications and Oil and Gas Inventories. Short of a disaster that is not energy related in the CPI I doubt that will be a factor for the market. The oil inventories could either send prices sharply lower or reverse the current drop and could be the most important release.
After the bell tonight HPQ reported earnings that beat the street by +4 cents and raised their estimates for the first half of 2005. Not only did they have their best printer quarter ever, HPQ said they strengthened their competitive position with significant new offerings in storage, blade servers, imaging, printing and digital entertainment. HPQ said it had record revenues in every division and every region that helped push profits up +26%. Shares of HPQ jumped +10% in after hours trading. HPQ raised estimates for both revenue and earnings for the first half of 2005.
Network Appliance (NTAP) also announced earnings that beat the street by +2 cents and raised guidance for the current quarter and full year. NTAP said there was rising strength in all product lines and all geographies. They especially saw strength in Japan and from the Federal Government which was spending heavily in homeland defense applications requiring massive amounts of data. NTAP projected revenue in the current quarter to grow +35% to +38% year over year. NTAP soared nearly +10% in after hours trading.
Unfortunately the good news from HPQ and NTAP did not cross over to the broader market. Futures ceased their closing drop on the news but failed to move higher but they do have a positive bias. Several challenges still need to be overcome. Intel was downgraded today from a buy to hold at Wedbush Morgan and it was downgraded on Monday to underperform from buy at First Albany. On Friday Wells Fargo initiated coverage with a SELL. While the tech analyst bears were ganging up on Intel the stock continued to set new three month highs and closed only three cents below those highs. Intel may not be able to hold the SOX up all by itself but it is definitely bucking the downgrade trend. The SOX tried to hold the higher ground today above 430 but could not maintain traction. The SOX only lost -1.96 so it was still a good performance. Having HPQ and NTAP both beat and raise estimates tonight the potential for a new SOX high tomorrow is pretty good. Ironically HPQ made a specific note of strong Intel server sales. Guess those Intel bears will be road kill again.
In order for that new SOX high to hold the investing public will have to overcome caution from the Goldman Sachs CIO survey released today. Goldman found that CIOs were more upbeat about 2005 but 2004 was not going to end with a bang. The 2004 IT growth was likely to end up between +3% and +4% according to the survey. Actually that is much higher than previous estimates but it is still lackluster. More bad news was the prospect for only +2% to +4% growth for 2005. This is also better than prior estimates at +1.9% but still lackluster. It is considered a recovery year and historically there was substantially stronger double digit growth in past recoveries. Analysts and traders could not decide to be excited or worried about the improved forecast. Goldman said Dell, HPQ, NTAP, EMC, MSFT and SYMC were gaining market share in terms of IT budgets with SUNW and CA losing ground.
The markets opened weak on not only the PPI but on numbers from Wal-Mart that failed to impress. Earnings were inline with estimates but profits failed to meet Wal-Mart's hopes. They blamed the slippage on high gas prices and budgets experiencing an energy crisis. They did say sales were ramping up nicely into the holidays and they are expecting same store sales growth between +2% and +4%. WMT lost -81 cents for the day but the results impacted the entire retail sector.
The Dow could not find a bid at the open and fell from yesterday's 10550 close to 10480 before any dip buyers appeared. Once they did appear they were unable to return it to its previous glory but they were successful in holding the index to barely more than a 25 point range around 10500 the rest of the day. Considering the massive gains of nearly +850 points over the last three weeks the minor -62 point loss was only a drop in the bucket. Should we really break the trend and move lower we should find initial support in the 10470 range with very strong support back at 10400. With the HPQ/NTAP news after the bell I would be really surprised to see a continued dip but anything is possible given the huge gains.
The Nasdaq dropped -15 points to 2075 and found very decent support all afternoon. With the tech news after the bell spiking Dell, NTAP, SUNW, INTC, the SMH and many others in after hours I suspect the Nasdaq will open higher without a new pre open disaster. Should we move lower there is very strong support in the 2040 range but a drop of that magnitude would call into question the future of the current rally.
If you look at the charts above you will see that the Dow and Nasdaq failed exactly where they should have failed after the strong run. While they may not just catapult over that resistance tomorrow or even this week I believe they will stay in close proximity for the next attack.
There are a lot of traders waiting for a strong pull back that may never come and I would be very surprised if it appeared this week. If you watched the market gain hundreds of points without you over the last two weeks would you want to face that possibility again as we near Thanksgiving week? Historically the holiday week is bullish and traders hoping for entries before that week are quickly running out of time. They will have to act quick on any remaining weakness and hope there is not a bigger problem lurking in our future. This is option expiration week and the first two days have not been exciting. Those short and hoping for a continued pull back to cover are probably more nervous than a cat in a room full of rocking chairs tonight. The earnings have given the futures an upward bias and a positive CPI before the open could reawaken the bulls. Those waiting for Nasdaq 2050 to enter long positions could be waiting a long time.
Shifting gears slightly I am starting to see more negative press about possible market direction once we get to January. While I agree the direction for 2005 could be a challenge I don't think wasting time worrying about it now is a worthwhile effort. Remember, those fund managers still behind the curve need to capture some performance over the next six weeks and they will be providing the market momentum for the rest of us. Plus, retail investors have awakened from their sleep with newspapers touting the current rally. Money is pouring into funds and that money has to be put to work. TrimTabs said $1.8 billion flowed into the SPY on Monday alone. So far this month $6B has flowed into US Equity funds and $4.6B into ETFs. This is the biggest influx of cash since March. Unless the spigot suddenly runs dry tomorrow that inflow should continue through the Thanksgiving rally. Also helping this flow of cash is the continued low price of oil. Oil closed at $46.10 today and while still above the 100 day average at $45.50 those hoping for a rebound at that support should be getting worried. That worry could lead to further shifting of money from oil to equities. If you are bullish on the market you should be looking for a low CPI tomorrow, higher industrial production and a sharp rise in oil inventories at 10:30. Those three things should erase any lingering doubts traders might have about being out of the market ahead of Thanksgiving.
Buy the dips until the trend changes.