You can only stretch that rubber band so far before it snaps back with lightning speed. The markets moved into seriously oversold territory on Friday and then failed to stretch their losses significantly further on Monday. While some individual issues continued to be sold the indexes failed to reflect that pessimism. With the lack of any materially bearish news on Tuesday and partial rebound in Asia investors bought the open and a new short squeeze was born. Nobody should have been surprised that an oversold relief rally would appear only when and how big. The real mystery is how long will it last?
Dow Chart - Daily
Nasdaq Chart - Daily
There were no material economics today. The weekly chain store sales fell -0.5% after gaining +1.0% last week but the year over year growth rose to 2.7%. Retailers said colder weather was starting to stimulate fall apparel purchases. The Treasury Budget came in at -$55.6 billion and just slightly under consensus of -$56.9 billion. Pending Home sales for September, definitely a lagging indicator, rose for the first time since June at +0.2% and only the second monthly gain this year. Pending sales declined -16.5% over the prior two months and an annual rate of -42% for the entire third quarter. That helped market sentiment somewhat but it was mostly under reported. It was obviously a boring day economically.
Wednesday we will get the first inflation sensitive report for the week with the Producer Price Index or PPI along with Retail Sales for October and Business Inventories for September. The only report that really matters is the PPI. The consensus is for a rise of +0.3% in the producer index. The Consumer Price Index or CPI is out on Thursday and the consensus there is for a rise of +0.3% as well.
The main market mover for Tuesday was a Merrill Lynch banking conference attended by the movers and shakers in the banking world. Sound bites from that conference took the pressure off the financial sector and produced nearly a +5% rebound in the financial sector indexes. The Bank America (BAC +2.29) CEO was quoted as saying "losses were manageable." That was after BAC announced a $3 billion write-down for Q4 and warned its losses could grow. Evidently investors were satisfied and bought BAC stock. The JP Morgan (JPM +2.66) CEO said, "We are fine" when referring to their exposure to CDOs and subprime loans. JPM wrote down $2.45B in Q3. The biggest market boost came from Goldman Sachs (GS +18.33) when the CEO said they would "not be making any significant write downs." GS wrote down $2.4B in Q3. There was a collective sigh of relief from the markets given the recent history of daily confessions of worsening conditions. The financials were heavily shorted and their rebound helped power the indexes higher. E*Trade (ETFC) pulled out of the conference late today and there is speculation they could be in play. The CEO was scheduled to speak on Wednesday afternoon. Several analysts said they could be facing bankruptcy after they announced they were writing down billions in mortgages last week. Analysts are speculating tonight that Ameritrade (AMTD) could be ready to make a move while ETFC is weak and vulnerable.
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Also helping market sentiment was earnings from Wal-Mart. WMT posted earnings that rose +8% on only a +1.5% increase in sales. Their 70-cent earnings beat the street by 3 cents. Given all the anguish and hang wringing over shrinking consumer spending the Wal-Mart earnings were another breath of fresh air. The earnings were produced from the right mix of consumer products according to Wal-Mart. Wal-Mart has had trouble finding that mix with numerous forays into higher priced and lower priced ventures. If they have now found the ideal mix analysts think they could actually have a better than expected holiday season. WMT rose +2.65 (6.1%) on the news. This propelled the S&P Retail Index (RLX.x) to a +3.84% gain. Traders were relieved that Wal-Mart did not warn or lower guidance again. This was seen as a positive development for the blue-collar consumer. Analysts were quick to point out that this was a Wal-Mart specific event and not something we should generally expect to see in other retailers.
Home Depot (HD) reported earnings that fell -27% for Q3 and predicted earnings would fall -11% for all of 2007. They had previously predicted a 7-9% drop. The CEO said the market and industry "continued to face into significant headwinds. We started the year with a more pessimistic view of the housing and home improvement markets than many. It turns out we were not pessimistic enough." The CFO said HD was seeing real weakness in demand in Florida, California and in the northeast. HD shares rose slightly on their comments that they were going to continue the $22 billion recapitalization program. They have already purchased $10.7 billion in stock with another $11 billion to go. They are using the funds from the sale of their Builder Supply business to fund the buyback. With their share price at $29 and a level not seen since May-2003 it would seem like now was a good time to be buying back stock instead of waiting for it to go back to $35-$40.
Google (GOOG +28) got some bad news today regarding their purchase of DoubleClick. The European Union antitrust regulators launched an in-depth probe Tuesday into the $3.1 billion purchase. They said an initial investigation showed the deal would raise competition concerns. The commission set an April 2nd deadline to rule on the deal. Microsoft and Yahoo have both claimed the deal would give Google too much power in the online advertising space. Google claims they must be allowed to complete the deal to give them an equal footing to compete with Microsoft. Yahoo, Microsoft and AOL have also made acquisitions in the space to help them compete with Google.
Sirius Satellite (SIRI) shareholders approved the acquisition of XM Satellite (XMSR) today. SIRI said 96% voted in favor of the merger while 99.8% of the XMSR shareholders voted in favor. The biggest hurdle still has to be overcome. That would be the approval by the Justice Department and the FCC on antitrust grounds. The FCC originally voted against allowing the merger but that ruling can be overturned. Since there are only two satellite radio companies that poses a problem for the regulatory agencies. There is nobody for them to be anticompetitive against. Consumer groups have been the most vocal here saying the combination would be unfair to the consumer and allow the merged entity to charge more for their services since there was no other option. Lawyers are now claiming the companies should be able to merge to compete with the rising number of iPods, cell phones and Internet radio stations available to consumers.
Countrywide (CFC) said it was only able to fund $22 billion in mortgages in October. That was up +4% from September but down -48% from Oct-2006 levels. They funded $42 million in subprime loans compared to $3.3 billion in Oct-2006. Adjustable rate loans fell nearly 80% to $3.1 billion from $16.25 billion in Oct 2006. Countrywide had $41 billion in mortgages waiting to be funded on Oct-31st. Countrywide said 5.89% of its portfolio was delinquent compared to 4.43% in Oct-2006. Loans pending foreclosure were up to 0.86% from 0.56% and not as bad as some were predicting.
Oil prices fell to $90.13 intraday (-4.49) before short covering appeared that pushed it higher to close at $91.35 for a drop of -3.27 for the day. That is still a major drop considering the historic high of $98.62 hit last week. Reportedly the reason for the drop was a cut in forecasted demand by the IEA for Q4 and 2008. The IEA cut demand growth for Q4 by 570,000 bpd due to the high price of gasoline. Reportedly they are seeing a significant amount of demand destruction due to higher prices. This means Joe Bob and Sally Mae are cutting down on their trips to Wal-Mart, Dairy Queen or visits to Aunt Sue because they can't afford them on $3+ gasoline. Even with that drop in demand estimates they are still calling for average demand to be 87.14 mbpd in Q4. For all of 2008 they are expecting demand to rise to 87.69 mbpd. That is still an increase over 2007 but 300,000 bpd below their prior estimates. They change these estimates every month so I doubt this is cast in stone. I believe it was also due to the strong statement out of OPEC that they will NOT vote on hiking production at this weekend's meeting. They continue to claim that there is plenty of oil in the market and the price swings have been created by speculators rather than demand. Their firm commitment that they would not even consider a cut even with prices near $100 supposedly convinced those long oil to run for the exits. Maybe it is just me but it seems to me that a firm "no more production" comment would be bullish for prices not bearish. I think the reason crude collapsed was due to three things. First was the lack of any new geopolitical concerns ahead of options expiration today. If you owned calls this week you had to close those positions today and that put downward pressure on crude. Secondly, crude futures expire on Friday and the same pressure created from options expiration is also being exerted on crude futures themselves. Thirdly the oil market was seriously overbought and the continued OPEC insistence that there was plenty of oil in the market finally weighed on those still long ahead of expiration. Despite the -$4 intraday drop in oil most energy stocks rebounded with strong gains.
December Crude Futures Chart - 60 min
Today was definitely powered by short covering and after three days of heavy selling you would not expect anything different. I am sure there was also a little help from the market makers with equity options expiring this week. After the sharp drop in equities they would do anything to bring the indexes back into parity and a point where the most options expire worthless. They have their work cut out for them but today's gains were a step in the right direction.
There were plenty of analysts claiming it was a textbook bull trap. That is a snapback rebound in a down market where severely oversold conditions set the market up for a short squeeze. Bulls, thinking the selling is over buy the bounce and then get trapped when the selling begins again over the next several days.
One firm was adamant that selling would return by the end of the week. The firm was basing their call on the Nov-15th date for year-end hedge fund redemptions. Hedge fund investors must give 45-days notice of their intent to withdraw funds. This notice period comes once per quarter and the Q3 notice date on August 15th came one day before the August lows. Since the notices are received for several days before the actual cutoff it was credited with a lot of the August selling. The firm making the call this quarter claims there are a lot of investors who may want to withdraw capital as the year draws to a close and Nov-15th is their last notice day for year end withdrawals. The analyst was calling for a possible retracement to the August lows before the week is out.
Despite the strong gains today the volume was not very strong. It was weighted heavily (10:1) in favor of advancers but the combined volume was the lightest of the last five days. Down on heavy volume and up on light volume? That is not a bullish sign. It smells a lot more like just a short squeeze with very little conviction. That makes Wednesday conviction day. If the bulls can manage another positive close then we have a chance of the rally growing legs.
The amount of the rebound was amazing. It was the second largest point gain for the Dow ever seen. Check the percentages on the market graphic at the top of the page. The Nasdaq-100 or NDX was the most oversold at -12% and today's rally saw a +3.9% single day rebound. That is very strong but today's +84 point rebound was only 30% of the -275 points lost over the prior four days. There is a long way to go before the damage has been corrected.
I sent out an alert to the LEAPS subscribers last night suggesting we were near the bottom and recommending some new buys. Today I find the predominant feeling in the market to be sell the bounce. Obviously there are a lot of conflicting opinions and that is good. It is what makes a market. We need a strong short interest to power the markets higher. If everybody were long there would be nobody left to buy. We need those shorts to be forced to cover by a growing number of longs.
The Dow gained +320 points the day after closing below strong support at 13000. That was a great sprint higher powered by IBM +3.91, AXP +3.07, WMT +2.68, JPM +2.66, AIG +2.43, C +2.33 and XOM +2.21. There was only one Dow loser. Note that Exxon was up +2.21 when oil was down -$4 intraday and -3.27 at the close. The Dow rebound was so big that it would take a lot of sellers to push it back below 13000 again. It is always possible but I am betting against it tonight.
The Nasdaq rebounded +89 points from yesterday's test of the 200-day average to close at 2671. It was a textbook rebound from support but one day does not make a rally. The Nasdaq-100 also gained +84 points and those same big caps that were crushed over the prior three days were responsible for the majority of the rebound. This is a textbook short squeeze script. The most heavily shorted produce the strongest rebound. The key will obviously be the conviction shown by the tech bulls as the week progresses.
Nasdaq-100 Chart - Daily
S&P-500 Chart - Daily
The S&P-500 added +42 points to close at 1480 and that just happens to be initial resistance with the 200-day at 1483. S&P 1490 has been alternating resistance and support since May that level looms large in any continued rebound. These clearly defined resistance levels make the S&P the key for the rest of the week. If we do move over 1490 then the bulls are back in charge and it is time to saddle up for a year-end rally.
The Russell managed a +2.87% rebound of +22 points. Remember, the heaviest shorted rebounds the strongest. The Russell moved well over initial resistance at 780 but there is an even stronger resistance band from 790-800 that could slow any continued advance.
I could go on with the NYSE Composite, Wilshire-5000, Dow Transports, etc, but
you get the idea. This was a textbook short squeeze BUT it could also be the
beginning of a longer-term rebound. The rest of the week is likely to be marked
by volatility as the buyers and sellers jockey for position in an option
expiration week. I am not going to try and predict short-term direction but I do
think the bottom is behind us. I think Dow 13000 is the level the bulls will
defend and I think
we will see them buying any future dip. Whether they will
chase prices higher remains to be seen.