The markets completed another week for 2005 and they survived an onslaught of mixed economic reports and two doses of Greenspeak. Survived is the operative word here. The Nasdaq continued to be the weakest link and Friday's close was right on critical support at 2058 and just above the 100-day average. This has been support since October and there was just enough buying interest on Friday to hold that level. We may only be 51 days into 2005 but it seems like 100 and the Nasdaq holding support at the 100-day average may be appropriate.
Dow Chart - Daily
Nasdaq Chart - Daily
The Dow received a double dose of Cox-2 inhibitors on Friday with Dow components MRK and PFE seeing a strong bounce on the positive votes from the FDA committee. The committee voted to allow Celebrex and Vioxx to remain on the market but with a stronger warning label. MRK rose +3.75 and PFE rose +1.80. This accounted for over +40 Dow points. This was the biggest one-day gain by MRK since records have been kept, a period spanning 32 years. Had the committee not met on Friday the Dow would have closed in negative territory and most likely at the lows for the day around 10740. The jump in PFE/MRK produced some short covering in the associated ETFs and gave the Dow more lift than just the gains in MRK/PFE would have by themselves. Erasing the Cox-2 rebound we would have seen both the Dow and the Nasdaq close at the lows of the week and most likely the S&P would have closed below support at 1200.
Economics produced some of Friday's depression with the PPI causing some serious concerns. The headline number rose by +0.3% and inline with estimates but the core rate jumped sharply by +0.8% for the month. This was the largest jump in core prices since 1998. Inflation was broad based and included things like cigarettes, alcohol, sporting goods, clothing, autos, capital equipment and construction machinery. Core intermediate goods marked their third month out of the last six where inflation exceeded +0.8%. Crude products are still up +10.8% year over year despite the drop in oil prices from the Q4 highs. With the next Fed meeting only four weeks away there is almost no hope the Fed will take a pass on hiking rates. Inflation has been constrained on the retail front with manufacturers bearing the brunt of the price hikes but that is apparently ending. Retail prices are beginning to rise with commodities on a seemingly unrelenting upward path.
Copper, a critical commodity that is required for almost every electronic product we buy along with autos and homes hit a 16 year high this week at nearly $1.50 a pound. The building boom has been a strong factor in pushing prices higher with an average of 440 pounds of copper in pipe, wiring and other materials in each new home. The global demand has also been growing with China and India consuming vast amounts. Steel has also set new cyclical highs due to that global demand. Another overriding factor is the continued strength in oil prices. Almost every product we buy and use has depended on oil in some fashion either in its manufacture or delivery. The rising price of oil contributes to increased costs over the entire supply chain. The Fed is going to have a fight when it tries to slow the commodity inflation ahead. The Fed strategy works best against price inflation brought on by easy money, high employment and a bull market. By slapping higher interest rates on the economy those forces can be constrained. Higher rates have less impact on commodity inflation fueled by global demand. The Fed can't slow down China or force lower oil prices. This suggests a long-term battle where the Fed may have to become more aggressive to slow domestic growth to lessen the impact of global demand.
The January depression in the markets impacted Consumer Sentiment with the initial February reading dropping to 94.2 from 95.5. Estimates were split from expecting a small decline to a small gain. The drop was not earth shaking and we are still in the range we have seen since last July. The final election battles had dropped it to a low of 91.7 but once past we have returned to the recent norm. However, this was the second monthly decline. A third down month could cause self induced acceleration so next month should be the key. If employment continues to improve, the Fed continues it's measured pace and the weather turns warmer the consumer sentiment should move higher and break the trend assuming the markets don't implode. The wildcard here is the new flurry of geopolitical concerns over Syria and Iran.
On Friday Bush was queried on potential military action against Iran. He responded that a president should "never say never" and left a veiled threat on the board. This was in response to news that Iran and Syria had agreed to stand together to resist any pressure from the United States. Russia jumped into the fray saying Iran had no nukes and was not a threat in an attempt to deflect U.S. comments. Are we supposed to believe anything Russia says? This is the government that just perpetrated a complete scam that included deception, outright lies and misdirection to recover the Yukos assets so they could sell them to China. Sure, Iran has no nukes and Russia respects property rights.
Friday was a calm day for trading and expiration week ended with a whimper. Volume slowed even further ahead of the three-day weekend and was aided by an early close in the bond markets. Were it not for the MRK/PFE gains it would have been losses across the board. However, those losses would have been minimal. We saw several periods of selling this week but they lacked conviction and we ended the week at strong support. Since this was an expiration week in front of a three-day weekend I believe the selling was mostly option related with a little profit taking adding to the weakness. We have seen some strong gains over the last couple weeks and the failure to make new highs took some of the excitement and conviction away from the bulls. Fund flows were positive with +$2.4 billion flowing into funds over the last week, +7.5B since Jan-27th. We are seeing those flows into domestic funds continue to slow. However, historically fund flows follow performance. When the market is moving strongly higher money flows increase. When it is weak fund flows decrease. January is the only month where funds lead because of the end of year retirement contributions. We all know what happened to January. There is a bright spot on the horizon. This was the 13th consecutive week of outflows from tech funds but the outflows only amounted to -$85 million. This was down from -$145 million last week and -$160 million the prior week. Is the tide about to turn?
The SOX acted very well to the horrible book-to-bill number Thursday night and only lost -2 points on Friday. Several analysts suggested this was the cycle low for chips and suggesting it was time to buy. Obviously not many traders took that advice but there were enough to hold the SOX to only a minor dip to 427. The uptrend support from the January lows is 420 so we could still see some weakness and maintain the upward trend.
Sox Chart - 60 min
Dow Chart - Daily
Last Sunday I showed you how the 100/130 exp averages impacted the S&P-500. In the chart above you can see how they also provide key support/resistance on the Dow and that support was tested on Friday and held.
The Nasdaq came to rest at 2058 and just above the 100-day average at 2055. This has been support since October. With the SOX still in an uptrend and the Nasdaq holding above strong support on expiration Friday I am actually seeing some upside potential. If the weakness this week was option related profit taking ahead of a long weekend then Tuesday should be the turning point. This is a big "IF" but the gains have been on strong volume and the declines on weak volume. Money flows are still positive and tech flows are improving. It is entirely possible this week was just another consolidation pause. This potential scenario will go down in flames if the Nasdaq breaks below support at the 100-day average. Currently 2055 but we will use Nasdaq 2050 as our line in the sand. There is support from 2020-2040 but the 100-day break should provide enough bearish sentiment to make that 2020-2040 support much less likely to hold.
Besides Monday being a holiday the economic calendar is light for next week with the major reports being a repeat of Consumer Sentiment with the Consumer Confidence on Tuesday. Also we will get the CPI on Wednesday, Durable Goods on Thursday and GDP on Friday. All of those should be market neutral as long as they are close to their expected ranges. The main focus by traders will be the ISM, PPI, Factory Orders and nonfarm payrolls the following week. This week will be consigned to the last dribble of earnings reports and whatever geopolitical events occur. Bush will be traveling abroad so anything is possible. My recommendation still stands to remain flat/short under Nasdaq 2100 with a trading long at Nasdaq 2020. If we do break the 100-day this will be our last chance support to prevent a major breakdown and I believe there could be at least a minor bounce if not a double bottom rebound. Under 2020 and the bears will come out to play.
The Dow and S&P failed to reach new highs and the Nasdaq is facing a serious retest of support. This is a heck of a market to try and pick stocks. The economic and geopolitical concerns making the rounds are simply a smoke screen for analysts that don't have a clue and excuses for traders trying to avoid the reality of bad trades. The real problem facing the markets today is the age old question "Why Buy?" Earnings are over for Q4, guidance was choppy at best and the economic picture looks more like a splatter painted Picasso than a Rembrandt. Investors are staring at it for long periods and still coming away confused as to its meaning. If this is how you feel then you are not alone. In times like these cash is a position and you do not have to be in a trade. We only want to be in a trade when it is profitable to do so. Just because the market is open does not mean you have to place bets. Sit back and relax and wait for the real market to appear. Remember to enter passively when there is no trend and this market would definitely qualify as lacking direction.