A Five Point Week
After a week of ups and downs the Dow closed only +5 points higher than lasts Thursdays close. Trader's hopes have been bouncing like a yo-yo with each market gyration and today's market action did not help. The Dow closed back in negative territory for the year and the S&P is on the verge of breaking support at 1200. Greenspam? Option expiration? Geopolitical uncertainty? The answer is yes to all of the above.
Dow Chart - Daily
Nasdaq Chart - Daily
In what is becoming a broken record the day's economic reports presented another mixed picture but the two most watched reports contained market pleasing data. The Jobless Claims fell again to 302,000 and another tick lower than last weeks sharp drop to 304,000. This is the lowest level for initial claims since just before the bubble burst in mid-2000. It appears there is a real improvement in the layoff picture but there is still no real confirmation that hiring has picked up. Today's four-year low in claims was negative for bonds and should have been positive for stocks but you could not tell that from the markets.
The most watched report was the Philly Fed Manufacturing Survey, which jumped sharply to 23.9 from last months 13.2. With the other recent surveys showing a decline in business conditions the sharp spike in the Philly region was a welcomed surprise. The consensus was for a strong bounce to 17.5 but strength of the rebound from last months 12-month low was totally unexpected. Unfilled orders continued in negative territory at -2.8. This component has been negative for four of the last five months. The inventory component stretched its string of negative months to four at -7.4 and the lowest level in nine months. This suggests inventory levels were being allowed to decline as Q4 wound down so as not to be overloaded if 2005 turned in a weak performance. The lower number could also have been impacted by the unexpected jump in new orders and shipments. The strong headline number should have been very market positive given the recent weakness in other areas.
Negative market influences came from a decline in the Leading Indicators of -0.3%. The index was pushed lower by six of its ten components with consumer expectations and manufacturing weakness the leading detractors. Long term the indicators have been in decline since March-04 and today's release was continued confirmation of that decline. Interest rates were also a negative impact and with the Fed still on its measured pace they will not be lower any time soon.
The other negative for the day was a sharp drop in natural gas supplies of -98 bcf for the week. This is actually less than analysts had expected but still sent energy prices soaring once again. Oil rose to $48.65 before easing to close at $47.55. Ken Hebner said in an interview today that oil demand was growing at the rate of at least 2mbpd, per year, and would continue to grow at that rate or higher into 2010. He cited economic growth factors for China, India and other countries that suggested demand could move sharply higher. His range for oil for 2005 was $45-$65. This compares to Boone Pickens $60 target by year-end. I hate to keep sounding like a broken record but that light at the end of the tunnel is actually a train. I am still expecting a drop in price as we move into the March demand slump but I see it as only a buying opportunity.
Greenspan managed to escape his testimony without any material comments on the economy. The general idea he conveyed was a continued recovery but still lackluster. The general topic of his testimony revolved around social security privatization rather than economic issues. Traders were hoping for some economic highlights and indications of the interest rate policy ahead. Unfortunately the only indications of Fed policy suggested the Fed was in no hurry to exit its measured pace policy. Greenspan indicated the current interest rate was still too low and too accommodative given the present economy. This was the interest rate nudge I expected Greenspan to give bonds and that is exactly what happened. The rate on the ten-year rose to 4.185% and right at the 4.2% resistance we have seen over the last month. On Feb-9th we saw a drop to 3.97% and the first time under 4.0% since October. We have seen a steady climb since the 9th and the resistance at 4.2% will be a crucial test. Over 4.3% will be negative for the housing sector and under 4.0% will begin to worry analysts that bonds are predicting another recession ahead. It is a thin line and given the current equity market action it is being watched closely.
With mixed economics the new norm, the Fed still indicating hikes ahead and earnings guidance slowing what else could go wrong with the markets? The answer of course is geopolitical concerns. There were several new sound bites today directed towards Syria and a thinly disguised warning to Iran. Bush said relations with Syria were not improving and warned again about removing government sponsored terrorist staging areas and the governments that support them. This sounds a lot like verbal preparation for air strikes against those Syrian staging areas. Bush also said they would assist Israel should the Iran nuclear threat increase. That does not mean we will airdrop radiation suits over Israel. It was a direct threat to Iran that we will not allow their nuclear threat to increase. If that was not enough the director of the US Central Intelligence Agency warned today that China's military modernization is tilting the balance of power in the Taiwan Strait and increasing the threat to US forces in the region. The growing threat of military action on multiple fronts is not market friendly and the increasing frequency of sound bites suggests eventual trouble ahead.
This sudden resurgence of geopolitical fears so soon after the Iraq election is torturing investors with the buy/don't buy question. Techs can't find a bid and resistance has apparently held once again at Nasdaq 2100. We had seen a positive bias from the SOX for the last four weeks but that ended with the spurt to 445 on Tuesday. For two days the SOX has been negative and after tonight's semi book-to-bill tomorrow may not be a banner day either.
The book-to-bill came in at 0.80 for January and a very sharp drop from December's 0.94. This marks the fifth consecutive month under 1.0 and it appears to be accelerating to the downside. Bookings fell -18% from December levels and shipments fell nearly -4%. It was not a good month for chips and given the recent guidance from most it could be several more months before conditions improve. This is the lowest reading on the BTB since Oct-2002 printed the last cycle low for the bear market at 0.78. The prior low was 0.44 in April-2001 as the Internet bubble collapsed along with chip demand. There was a rebound to 1.28 in June 2002 but the second drop came quickly to the Oct-2002 lows at 0.78. The BTB news is normally release after 6:PM and is not always picked up by the normal press. By tomorrows open it is normally overlooked but today's big drop could attract enough attention that it becomes a factor on Friday.
SOX Chart - Daily
The Nasdaq is still the weakest link and those following my recommendations for the last two weeks should still be flat unless you took my trading short when we touched 2090 as I suggested last week. The 2100 level is strong resistance and with money flowing out of techs for 13 straight weeks it will take a strong change in sentiment to break it. For long-term traders I still suggest remaining flat or short as long as the Nasdaq is below 2100. The BTB numbers tonight could be the straw that breaks the Nasdaq. The Nasdaq is approaching key support at the 100-day average at 2050. This has been key support/resistance since September and a break below 2050 could be a very serious blow to bullish sentiment.
The Dow has twice tried to penetrate resistance at 10850 and twice failed. Technical analysts are beginning to see a double top at that level and today's drop on no material news could be added confirmation. Market internals were very bad with decliners 2:1 over advances and declining volume 3:1 over advancing volume. With tomorrow an expiration Friday and Monday a market holiday there is also a good chance this is just position squaring ahead of the long weekend. With geopolitical concerns making the rounds the prospect of being long over a three-day weekend after expiration is not very exciting. I am not ready to read the obituary on the spring rally but I hear the choir starting to practice their hymns.
Tomorrow could be mild or wild given all the conflicting signals and the three-day weekend. I would hesitate to open any new positions until we see what Tuesday brings. Definitely, enter passively if you must and exit aggressively if this weakness accelerates.