Market Wrap, Saturday, 07/30/2005
Oil Creeps Higher, Stocks Wilt
by OI Staff
HAVING TROUBLE PRINTING?
Oil Creeps Higher, Stocks Wilt
Oil prices have almost completely recovered
from their July swoon and broke
the $61 level once again on Friday. Stocks, tired from a breakout to new highs
took the day off for a well-deserved rest. The major indexes gave the appearance
of a rally but closed flat for the week. The earnings parade is drawing to a
close and the high volume on Wed/Thr faded as traders eager for a weekend break
closed their books early.
Dow Chart - Daily
Nasdaq Chart - Daily
SPX Chart - Daily
The economic news on Friday was good across the board and there was plenty of
it. The headline news item
was Q2 GDP at +3.4%. This was slightly below the
consensus of +3.5 and below the +3.8% level for Q1 but still well within a
satisfactory range. A drop in inventory investment by -$6.4 billion was
responsible for the slower growth. Consumer spending rose +3.3% and business
cap-ex spending rose by +9%. The bad news was a jump in inflation with the
personal consumption expenditures (PCE) up +3.3%, one point higher than Q1. The
core PCE was up only +1.8% and rising at a slightly slower rate
than in Q1.
Higher energy prices were the main reason for the jump in the PCE. The Fed
watches the PCE closely for signs of inflation and this release suggests there
will be a continued series of rate hikes into 2006. Greenspan's testimony last
week also confirmed this assumption. There is no end in sight for hikes at this
time although a Fed rate of 4.50% is now the target number by analysts.
The Employment Cost Index showed employer costs rose +0.7% in Q2, which is no
surprise to any employer. Health care costs continue to rise and the higher cost
of employee expenses is being passed on to
employees in the form of lower wages.
Wage growth over the last couple years has been exceptionally weak and that is
helping to keep a lid on inflationary pressures. Benefit costs rose +0.8% in Q2
but to a level that is +5.1% over Q2-2004. A +5% gain in only one year is very
strong. This will continue to pressure jobs as employers try to contain costs.
Employees can expect to work more and get paid less as the ranks are continually
pared to the minimum number of employees possible
to get the job done.
Consumer Sentiment showed no decline in the final numbers for July as the
closing update showed the same 96.5% as the initial reading. The softening of
gasoline prices over the summer vacation period acted to ease sticker shock with
each fill-up. The expectations component rose slightly as consumers looked ahead
The NY-NAPM rose to 339.6 ending two months of decline. The July reading almost
erased those two declines and came close
to the 341.2 high set in April. July's
number was the second higher reading for 2005. Business conditions in New York
appeared to have weathered the spring soft spot and a rebound is underway.
However the outlook component fell to neutral meaning there is little visibility
for future conditions.
The July Chicago PMI surged to 63.5 from its 53.6 reading in June and well over
consensus estimates of only 55. This reading erased the prior two months of
declines and returned
it to near its cycle highs. A +10 point jump in this is
indicator is very strong. Internal components surged with New Orders jumping
from 56.5 to 69.6, Order Backlogs from 45.3 from 56.1 and production from 57.8
to 70.5. The jump in orders and order backlogs suggests an acceleration in
business conditions that should carry over into future months. Again, the spring
soft patch across the country appears to have passed.
This flurry of strong economic news produced a mixed
open on Friday with the
good news mixing with some weak earnings and guidance. The early morning spike
eroded into a session of profit taking as the day progressed. Given the week
behind us that profit taking was completely justified. The weekend headlines
will carry only good news with the Dow up +4.1% for the month making it the best
showing since December 2004. When you reflect on how range bound the Dow has
been for most of the month you realize the majority of the gains came
two days starting on July 7th followed by a huge gap open on the 14th. Those
three days accounted for nearly +450 points of Dow gains leaving the rest of the
month as a range bound consolidation period. The constant bumping against the
top of the range finally managed to produce a break over 10700 on end of month
buying and that prompted at least a few bulls to throw in the towel. The Dow
declined -64 points on Friday to close at 10643.
The Nasdaq headline will
be even more impressive with a +6.3% gain for the month
and the best month since December 2003. The Nasdaq road map looks a lot like the
Dow with big gains on the same three days but adds another one on the 19th that
broke it out of the prior consolidation and into another range. End of month
buying pushed the Nasdaq out of that higher range to tag 2200 on Friday and
ringing the exit bell. The Nasdaq closed at 2185 for a loss of -12.
The SPX also broke out of its boring upward
bias to tag the next level of
uptrend resistance at 1245 the same time the Dow and Nasdaq were touching
10700/2200. Amazing how those round numbers coincide. When Friday's smoke
cleared the SPX had returned to the 1233 range where it had spent most of the
week. While I was beginning to think the breakout had legs I want to see what
happens after the month end buying before switching to a bullish bias. The drop
to close at 1233 could be just profit taking and next week will be key
eventual market direction.
SPX Chart - 30 min
The SOX failed to move higher for the week but it also failed to give up any
ground on Friday. The SOX has clung to 475 like a drowning man to a life raft.
The conflicting chip earnings and guidance has come and gone but for eight
straight days the SOX has failed to stray far from
that 475 level. It still
faces very strong resistance at 485-490 and this could be consolidation ahead of
a breakout attempt or an indication that traders do not have enough conviction
to overcome the summer doldrums ahead.
The Russell is still possessed by a bullish spirit and refuses to roll over. The
constant series of new highs was blunted only slightly by a -3 point dip on
Friday. The uptrend appears poised to continue with this weeks 685 high only a
higher. At least this is what the chart appears to be saying. A
contrary viewpoint would be an oversold index due for a rest. The closest
support is 675 followed by 667 and 660. The breakout by the Russell is the most
bullish confirmation a market could ask for. However, the Russell has help with
the transports also confirming.
Russell Chart - Daily
Chart - Weekly
SOX Chart - 60 min
Dow Transports Chart - Weekly
transports have rallied from a quadruple bottom low at 3400 to just over
3800 for a +9% gain in only a month and in the face of $60 oil. They fell
slightly on Friday as oil hit $61 intraday but only slightly. The transport
rally has been confirming the move in the broader markets and a breakout over
3800, the prior all time resistance high in 1999, and a break over the current
all time high at 3889 set back in March, would be very bullish. This makes the
at 3800 especially critical to hold for the next week.
With more than 65% of the S&P reported we are seeing Q2 earnings at the high end
of estimates, thanks to the outstanding energy profits, and Q3 guidance has
improved to inline with estimates at +16% growth. Without the energy stocks the
performance and outlook would have been substantially different. Energy earnings
have been from outstanding in the +30% to +50% range to over +100% in some
cases. This went
a long way on improving the S&P earnings and outlook. Energy
stocks should continue to rise with oil futures hitting $61 intraday on the
current contract and $63 on the December contract. However, oil stocks fell on
profit taking as earnings traders took profits and moved on to other trades. Oil
demand estimates are beginning to creep upward again and the stage is set for a
Q3 rally into the heating oil season. Continue to buy the dip until we see a
change in outlook.
Crude Oil Chart - Daily
In oil news there were three fires at different installations that helped
trigger the move higher on production concerns. Unocal posted a +40% jump in
earnings and that fueled increased speculation that CNOOC would make another bid
to buy the company. A Chinese newspaper claimed CNOOC was preparing to make
bid that could come as early as next week. However, an unnamed CNOOC
official said Unocal was no longer a takeover target due to potential U.S.
government intervention. Meanwhile the Financial Times reported late Friday that
CNOOC was considering a $20 billion "knock-out" bid to be made public just prior
to the August 10th Unocal shareholder vote. Chevron is not sitting idly by and
said the Unocal earnings made the company even more valuable to Chevron. You
are saying that just to make CNOOC think they will rebut any higher
bid? I would bet on it and the fact remains Chevron NEEDS to acquire Unocal.
Chevron recently reported that their proven reserves fell -11% in 2004 as oil
becomes harder and more expensive to find. Chevron said financial projections of
the merged company were much stronger than originally stated due to positive
events at Unocal. Chevron has offered $17B for Unocal and CNOOC bid $18.5B.
CNOOC has almost no chance of getting
its deal approved by the administration
and may want to save face by withdrawing instead of being blocked. Friday the
Senate voted to approve the $14.5 billion energy bill which has a provision
attached to block the CNOOC/UCL deal pending a four-month review. It was widely
expected that CNOOC would not make any further moves until lawmakers recessed
for the summer to avoid any further knee jerk reactions by lawmakers prior to
the August 10th shareholder vote.
a day where stock news was overshadowed by the urge to leave early for the
weekend those investors in Whole Foods were rewarded with a weekend treat. WFMI
announced earnings that increased +31%, beat the street by +3 cents and raised
guidance. This was a pure case of weakened expectations and a high short
interest being hit with the glaring light of a contrary reality. WFMI shares
jumped +14 to 136.50 as shorts were not just squeezed but battered badly.
Analysts had been downgrading
WFMI and the stock had been listless in a tight
trading range for the last quarter. Investors who kept the faith were well
rewarded. After a +14 point jump +10 points over their prior all time high I
would think puts would be in order.
With the weekend headlines set to show a bullish July it would appear to retail
investors that they are missing the train. They might not be the only ones with
commitment issues. There are a group of traders including me that question this
non-stop rally ahead of the historical August dip. There is another group
holding off on longs in fear of the decade low on the VIX, another historical
danger sign. There are other traders, including a large number of institutions,
who typically wait for the Sept/Oct dip to enter positions. They are probably
watching the new highs with a great deal of worry that they too are missing the
train. The bears, fully aware of all those points have been continually shorting
high only to be forced to cover time and time again. One reader
email this week questioned the contrary trend and wondered if it could continue.
Yes, is the short answer. As long as nearly everybody expects the markets to
pause in August there is always the chance we will move higher. The more traders
who believe a drop is coming the more traders will be short. With each dip being
bought by those thinking the train is leaving the station and buy programs far
outnumbering sell programs
the shorts will continue to be squeezed. The problem
comes when everyone decides we are going higher and the shorts give up the game.
Without the shorts to provide the motive power the market sentiment could
change. I know it sounds crazy that once everyone turns bullish we could get a
market drop but it does happen. It takes both sides to make a market.
The earnings parade is coming to a close but we will continue to get a slowing
trickle of earnings headlined by Dell
(8/11) and Cisco (8/9). Earnings over the
last two weeks has provided lift to the market on the surface. If you look at
the market stats header above you may be surprised. Last week the Dow lost -10,
SPX -1. The Nasdaq only gained +5, Russell +2 and the broadest index of all the
Wilshire 5000 only added +23. BUT the perception by retail traders, the talking
heads on TV and the newspaper headlines this weekend will be that the markets
are in rally mode. Does the knowledge that the indexes
basically finished flat
for the week change your perception of the market?
I believe we should continue to be cautious over SPX 1225 until the market
provides confirmation in the form of volume and points. Yes, we touched new
highs but promptly gave them up along with all the gains for the week. Not much
confirmation there. Volume on Friday was the second lowest in the last two
weeks. BUT, that was the good news. Weak volume on a down day is a market
it was a summer Friday. The damage could have been a lot worse. The
internals were also bullish despite the headline numbers on the indexes. The
52-week highs for the last two days have been very strong averaging over 700 per
day. This is well over the numbers posted since the July 11th spike at 868. We
have seen numbers well under 500 and as low as 217 over the last three weeks. I
view this as bullish confirmation of an underlying bid. HOWEVER, it could also
have been due to month end
buying by institutions and funds.
While I am leaning more bullish as each day passes I am still watching for
lightning to strike. Like playing golf on a cloudy day you could be having an
awesome round but are constantly watching for signs of lightning to cancel the
game. The markets struggled higher during the week with improving internals but
we don't know how much of that was artificial due to month end buying. On Monday
we begin the back nine, using the golf analogy,
and the storm clouds are still
gathering on the horizon. Just like a very hot summer day tends to produce
monster storms a very hot market next week could do the same. I know the minute
I turn completely bullish the market will turn on me in a heartbeat. So I will
continue to recommend cautious longs over SPX 1225 and shorts only below that
level. The bottom of the Dow range is just under 10600 so a move below that
level would be a danger signal. The Nasdaq is much stronger with support
and 2145 before falling out of its range.
Storm clouds looming next week include the ISM on Monday, Factory Orders on
Tuesday and Nonfarm Payrolls on Friday. The ISM is expected to rise based on the
improving regional reports we have seen over the last few weeks. This should be
market positive unless it is a blowout over the estimate of 55, which would be
Fed negative. The Jobs report is expected to show a gain of +175,000 jobs and a
stronger than expected
gain there would also be Fed negative. There is a growing
whisper suggesting the Fed will remove the measured pace language at the August
9th meeting in preparation for a 50 point move in September. All signs point to
an accelerating economy and the Fed will want to be ready to step up its pace of
rate hikes. This makes the ISM and Jobs reports this week all the more
important. Critical inflection points while the market struggles at its highs
only add to the danger of a change in market
sentiment. With the current Fed
Funds rate at 3.25% it is very tolerable to stocks. Should the Fed escalate the
rate hike process we could be over 4% very quickly and numbers over 4% typically
begins to pressure stocks. There were several economic analysts interviewed on
Friday regarding the GDP and two mentioned the potential for a 5.+ number for
Q3. If they are thinking the economy is picking up speed that fast then the Fed
is also thinking it and planning ahead to slow it down.
This makes these two
reports and the Fed meeting only a week away a potential roadblock for the
markets. Either report could be that lightning bolt that ends the game. As long
as you are expecting the worst it is easy to plan for future. Keep those stops
tight, enter passively and exit aggressively if lightning does strike.