The "Fed is done" rally we saw last week faded once again on fears that maybe that outlook was premature. How many Fed done rallies is that? Seems like one a week for a many weeks but each one gets so much press it magnifies their presence. The corresponding decline after the Fed rallies is blamed on inflation, earnings, oil, geopolitical concerns or the phase of the moon but rarely a return of Fed anxiety. That would require analysts claiming the Fed is done to eat their words or retract their statements. That is seldom done on Wall Street. Analysts would rather just avoid any public statements for a couple weeks in hopes their predictions would either come true or be forgotten. The market has a short memory and tends to thrive on daily sound bites with little regard to stale headlines. Comments from various Fed speakers this week along with a stronger than expected ISM provided the needed excuse for some profit taking. It is as simple as that. No conspiracy theories, no single point of failure. Regardless of the reasons given in the press it was just profit taking after a strong rally as we await the Jobs report on Friday and next week's Fed meeting. We should look at this week's declines as a return to neutral ahead of future market moving events.
Dow Chart - Daily
Nasdaq Chart - 180 min
SPX Chart - Daily
The morning started off with a very strong Challenger Employment Report. The headline number of reported job cuts fell to 37,178 in July compared to 75,076 in June. The last time jobs cuts were this low was July 2000. Analysts suggested the drop in announced cuts was due to the end of announcements in the auto industry. That sector has seen very harsh cutbacks but those have run their course with no further announcements expected. Only 924 cuts were announced in the auto sector in July. Survey respondents also reported intentions to hire 34,537 with the bulk of those being 22,000 at a new engineering facility in Virginia. This level of job cuts announcements fell to levels not seen since just before the recession in 2000. Is history going to repeat itself? Summer is typically a slow period for announcements but more cuts are expected in the fall. The tight labor market is also adding to the lack of cuts since employers are not sure they could easily replace those workers in the future.
Personal income rose +0.6% in June according to the report released today. This was inline with expectations and slightly higher than May's +0.4% rise. However, the PCE deflator, the gauge of inflation watched by the Fed, rose +0.2% to 3.5% year over year. The core PCE rose to 2.4% Y-O-Y, an 11-year high. This is going to be a problem for the Fed as they make their rate decision next week. With the non-core income inflation rate at +3.5% this is not within their comfort range. This report was seen as another indication of rising inflation and a detriment to a Fed pass in August.
The other major report today was the Institute of Supply Management (ISM) for July. The headline number rose to 54.7 from June's 53.8. This was slightly stronger than the 54.0 analysts expected. The report was split with production, employment, imports, inventories, supplier deliveries and prices paid seeing small increases. Declines were seen in new orders -1.8, export orders -3.5 and order backlogs -3.5. The problems came in the rise in inventories of +3.6 to 50.5 and prices paid +2.0 to 78.5. Survey respondents also reported high prices cutting into profits and customers delaying planned purchases. The combination of a rise in several critical components but a decline in sentiment along with a neutral headline number kept the report from being a market mover and only served to confuse traders. The report was seen as Fed negative due to the lack of decline in business conditions and the rise in prices paid. The Fed claims the economy is slowing but the ISM did not show it. If the economy is not slowing then the Fed will be more inclined to continue raising rates given the current inflation picture.
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Chain store sales rose for the week by a healthy +0.9% but the year over year number declined again to +1.8% growth and a 17-month low. Retailers said extremely hot weather slowed back to school shopping. State sales tax holidays in ten states are beginning and could help push sales higher as the end of summer school shopping season jumps into high gear.
The combination of Fedspeak and today's economic reports pushed the chance of a rate hike next week to near 40%. St. Louis Fed President William Poole said that although recent economic data had a negative aspect inflation pressures appeared to tilt in the direction of greater pressures than we had previously thought. Poole said there was a 50:50 chance of a rate hike in August. Poole is not currently a voting member of the open market committee but is seen as expressing the same views as the committee. San Francisco Fed President Janet Yellen, countered Poole's comments to some extent saying the current economic path was quite desirable and the Fed was getting "close to the end of the road" on rate hikes. "Close to the end" may not be the same as "reached the end" but traders seized on her comments as an offset to Poole's. The Fed meeting is next Tuesday and I expect continued volatility ahead of that meeting.
The next market moving report will be the Nonfarm Payrolls on Friday. The current consensus is for +150,000 new jobs but whisper numbers range from +50K to +180K. A strong number over 125K should guarantee a rate hike but a weak number under 50K should suggest a halt in rate hikes. A high number would mean a stronger economy than the Fed was expecting and a weaker number would mean the soft landing decline is underway and the Fed does not have to apply any further braking pressure in the form of future rate hikes. According to Ed Hyman at ISI Research, "The longer the economy stays stronger than the Fed expected the more likely the Fed goes to 6.0% and produces a recession in 2007." Liz Ann Sonders of Charles Schwab noted "there's a race being fought currently between rising inflation in the near term and faltering economic growth in the longer term. These races have been run before, typically causing financial accidents and market pain. The inverted yield curve also heralds a potential recession and a sign of trouble." She expects significant market volatility ahead.
On the earnings front there were some spectacular implosions. Whole Foods (WFMI) dropped -12% (-6.75) to a new 52-week low after posting earnings with revenue that misses estimates and warning that future sales could slow. Whole Foods Markets, my family calls it whole paycheck market because of their high prices, is feeling the impact of higher gasoline prices and the competition for consumer dollars.
Group One Automotive (GPI) fell -11.57 (-19%) after saying auto sales for 2006 would be slower than previously expected. Income rose +38% but the revenue guidance stole the headlines. Auto sales out today showed Ford and Chrysler both saw sales drop -31.5% in July followed by a drop of -19.5% at GM. Toyota saw the opposite performance with a jump in sales of +16.2% and for the first time sold more vehicles than Ford. Five years ago Ford had 24% of the market and Toyota 11.5%. That metric is rapidly changing due to Toyotas fuel efficient offerings compared to the larger cars produced by Ford and GM. Toyota is prying its way into the big three and Ford and GM can't seem to win the small battles much less the war. Sales of Ford's F series pickup, the number one seller in the nation, fell -44% in July while the imports from Toyota and Nissan gained ground. Despite the negative news above the July vehicle sales for all companies rose to 17.2 million vehicles on an annualized basis and nearly a million units higher than the 16.3 million pace seen in June. It was the best sales pace in six months driven by a flurry of incentive deals from the majors. The drops in sales reported above were compared to July of 2005 when the employee discount program was in full swing and the majors were giving away cars to lower inventory levels. This makes the comps very hard despite the jump in sales in July 2006.
Federal Express (FDX) continued its four-week decline to near a six-month low despite signing an $8 billion contract with the Postal Service. The new 7-year contract replaces the final 2-years of the existing contract and provides FedEx with a guaranteed revenue source. FedEx will continue to fly over 4 million pounds of U.S. Mail every business day. This is the equivalent of 40 wide-body DC10 aircraft and uses existing facilities. This provides FedEx with the volume necessary to expand marginal routes and upgrade capacity on those high volume routes. FedEx has been declining on expectations for a slowdown in the US economy and on fears of increased competition from UPS in a shrinking market. The drop in FDX, UPS and the airlines has dragged the transportation index to a new six month low. The transports fell -2% today alone to close below 4300.
Expeditors International (EXPD) contributed to the transport decline with a -11% drop, -$5.25, after missing estimates by a penny. Nobody seemed to care that earnings jumped +53% in Q2 on top of a +70% jump in Q1 that beat estimates by +8 cents. EXPD is poised to see continued rises in earnings and according to analysts is poised to profit even more from a rise in Asian bookings.
Dow Transport Chart - Daily
Retailers including restaurants were also hit for losses on lowered guidance and prospects for tighter consumer spending. Molson Coors Brewing (TAP) fell -$4 after reporting profit that quadrupled from the same quarter in 2005. Unfortunately there were some special items in that number and Coors missed the street estimates by a dime. Higher energy costs and soaring transportation costs caused the miss.
Hot Topic (HOTT) warned that it expected a loss of -2 to -3 cents compared to a breakeven expected by analysts. July same store sales fell -7.2%. The HOTT warning knocked the other teen retailers AEOS, ANF, ARO and PSUN for losses and upset the retail sector in general.
September Crude Oil Chart - Daily
Oil prices rose to $75.50 intraday but closed at $74.93 for a gain of only +51 cents. The rally was due to a new tropical storm named Chris forming in the Caribbean. This storm is headed directly towards the oil patch if the current path was extended. However, forecasters are not yet predicting a conversion into a hurricane or a penetration into the Gulf. As of 5:PM they were still expecting the storm to diminish as it runs into the lower tip of Florida and begins to encounter an easterly jet stream following the heat wave to the Northeast. If weathermen were always accurate traders would not have driven prices higher. As we know predicting weather, especially in the Caribbean, is a coin toss at best. Should Chris thread the needle between Cuba and Florida and pick up strength from the warm gulf water it would likely veer north and target the oil fields around New Orleans. Fears of a repeat of Katrina pushed those oil prices higher. Remember, Katrina was only a category one storm when is crossed the tip of Florida. Note also that Katrina's path was less direct than the current projections for Chris.
Path of Tropical Storm Chris
Also on the radar for oil traders was the UN demand that Iran cease enriching uranium by August 31st or face sanctions. President Mahmoud Ahmadinejad vowed that Iran would not bow to "the language of force and threats" in referring to the UN demand and warned "people would learn this lesson the hard way." While the press may feel the deadline is important the language was very tame. Russia and China refused to allow anything with strong language or specific sanctions and agreed only to consider further action at some point in the future. Talk is cheap on both sides with the UN mandates lacking teeth Iran can rebuke them in strong terms knowing the threats at this stage are meaningless. Eventually Iran will be forced to comply but at the current rate it could be many months if not years before an actual confrontation occurs. The US ambassador to the UN, John Bolton, said the "clock has begun to tick and the ball is clearly in Iran's court." The clock is always ticking Mr. Bolton but without a penalty attached it is just annoying background noise. The controversy over Iran will continue to provide a weak floor to oil prices but that floor is very unstable and could collapse at any moment if Iran accidentally said something that was taken as conciliatory or traders begin to believe a confrontation was many months away. Iran had promised to reply on Aug-22nd to the package of incentives previously presented. Analysts said the UN resolution effectively killed that package and eliminated that date from consideration.
The markets may have posted two consecutive days of losses but we are still near the top of the range for the Dow. The Dow closed at 11125 and -60 after benefiting from a large buy program just before the close. This buy program added +1000 advancers to the internals and recovered +60 points from the Dow's 11083 lows to cut the loss for the day roughly in half. It was just a buy program and not a reversal. The Dow is trying to cling to support at 11100 but finding it tough with the other indexes moving lower. The current Dow range is 10700-11250 and our close today is still within striking distance of that upper level of resistance.
The Nasdaq is struggling to hold 2050 as support after testing the resistance at 2100 on Monday. Tech stocks continue to disappoint on the earnings front and the SOX has pulled back to test support at 400. The NDX appears the most fragile with support at 1475 and a less than exciting bounce off last week's lows. Adobe affirmed earnings estimates after the close and gained +1.50 in after hours. Also rising was ERTS, which reported a +13% rise in sales and raised guidance for the quarter. ERTS rose +2.05 after the bell. ValueClick (VCLK) jumped +$2 after posting better than expected results along with Open Solutions (OPEN) with a +2.81 gain. Blue Nile (NILE) was the big winner with a +5.29 jump or +22% after it reported stronger than expected results. Offsetting the positive results was CheckFree (CKFR), which missed estimates and plunged -9.20 to $33.93 in addition to a -1.37 loss during regular trading hours. Futures were initially positive after the round of after hours earnings reports but faded slightly before firming around 7:PM giving us no hint yet of tomorrow's opening direction.
Market Internals Snapshot
Russell-2000 Chart - 180 min
The Russell is causing me the most concern with a -10 point drop for the day to close at 690. For the past 10 days it has failed to penetrate and hold the 700 resistance level and it appears fund managers are using the sprints to 700 as exit opportunities. They appear reluctant to commit money to small caps and that represents the true health of the market. Caution is the keyword.
The S&P came to a dead stop at 1280 on Friday and has failed to penetrate that level so far this week. It did benefit from the late day buy program lifting it from 1266 back to 1271 but that was little consolation for the bulls. I suggested on Sunday that readers short a failure at 1280 and buy a breakout over that level. The decline this week could be just consolidation of that +40 point romp from the prior week but without any materially positive event in our immediate future I think we are going to remain range bound until after the Friday Jobs report. If that report is weak enough it could generate another short covering rally to send us over that 1280 level on hopes the Fed would pause on Tuesday. That Tuesday Fed meeting is still going to be the final chapter in the current market saga. Any major moves higher before then are subject to a strong sell the news event if the Fed does the opposite of what traders expect.
The next Fed meeting is September 20th and right in the middle of what is historically the worst period for the markets. If the Fed does hike next week it sets up the September meeting to be the pivotal point for a Fed change. They will have another month's worth of data and presumably have a better understanding of our economic direction. It could be the perfect combination of circumstances. A hike in August plus a data dependent statement suggesting further declines in the economy could setup a halt in September just when the market needs good news the most. This is obviously a hypothetical scenario but given this week's inflation news it is one that is gaining in credence as each day passes. I know traders want a pause next week but the Fed cannot be seen as holding an empty gun with inflation rising. I am sure they want to pause but they can't afford to pause only to have egg on their face later if inflation has jumped several more notches by the Sept meeting. You know how hard egg would be to remove from Bernanke's beard. It could take several more meetings and several more hikes to regain credibility again. He is better off taking an insurance hike in August and then taking another look in September. I know the bond market is significantly discounting this possibility with the yield on the ten-year falling to close at 4.983% at the close and only 30 basis points from a four-month low. If they thought the Fed was going to hike bond yields should be rising not falling. This sets up a dangerous sell the news event for next Tuesday if the Fed surprises. Bond yields are likely falling due to investor buying as a safe place to wait out the remainder of the summer and the Fed decision.
My suggestion to traders would be to remain short equities under SPX 1280 and cautiously buy a breakout over that level. There is a major minefield just ahead with Friday's Jobs report and Tuesday's Fed meeting. About the only outcome I can guarantee is that the market should be highly directional on August 9th. Which direction is up to the Fed.
US Airways - LCC - close: 43.54 chg: -2.15 stop: 47.51
Why We Like It:
BUY PUT SEP 45.00 LCC-UI open interest= 656 current ask $4.50
Picked on August 01 at $ 43.54
Martin Marietta - MLM - cls: 77.61 chg: -2.91 stop: 82.05
Why We Like It:
BUY PUT SEP 80.00 MLM-UP open interest=2036 current ask $5.90
Picked on August 01 at $ 77.61
Cytec - CYT - close: 53.41 change: -1.53 stop: 52.45
Shares of CYT are moving farther away from resistance at the $55.00 level and our trigger to buy calls at $55.11. A 1.45% pull back in the BTK biotech index was a potential anchor on the stock. Short-term technical indicators are now growing bearish for CYT. We are going to keep CYT on the play list with our trigger at $55.11 for now. More aggressive traders might want to watch for a bounce near the rising 200-dma as a new entry point. If triggered our target is the $59.00-60.00 range. We do expect to see some resistance near $57.50 so expect a pull back but broken resistance at $55 should become new support.
Picked on July xx at $ xx.xx <-- see TRIGGER
Dominion - D - close: 78.62 change: +0.14 stop: 75.75
Utility-related stocks showed some relative strength today but D under performed its peers. The stock is consolidating sideways and it could be investors just waiting to hear the company's earnings report on Thursday. Right now we're planning to exit on Wednesday afternoon at the closing bell. Our target is the $81.00-82.00 range
Picked on July 17 at $ 76.05
Femsa Fomento - FMX - close: 88.03 chg: +0.23 stop: 85.85
FMX is looking better with a bounce this morning from its rising 10-dma. Aggressive traders might want to consider new positions here or above $88.50. We're still waiting for a move over resistance at $90.00. If shares can trade over $90.00 it would produce a new quadruple-top breakout buy signal on the P&F chart. We are suggesting a trigger to buy calls at $90.05. More conservative traders may want to use a trigger at $90.25 or $90.50 just to see little more confirmation. If triggered our target will be the $97.00-100.00 range. Our time frame is four to six weeks.
Picked on July xx at $ xx.xx <-- see TRIGGER
Goldman Sachs - GS - close: 151.26 chg: -1.49 stop: 144.95
Bulls bought the dip in GS near $149.60. Last night we told readers to look for a dip near $150 as a new entry point and this was it. If the markets continue to pull back we'd look for GS to test its rising 10-dma near $148. More conservative traders may want to tighten their stops. Our conservative target is the $154.00 level. Our aggressive target is at $157.50. We'd suggest that readers exit a majority of their position at $154 and only keep a small play open for the $157.50 level.
Picked on July 25 at $148.05
Ipsco - IPS - close: 94.40 change: +0.29 stop: 88.45
IPS continues to show some relative strength with another gain today. Traders bought the dip near $92 this morning and the stock looks poised to breakout over the $95 level. We remain bullish and would continue to consider new positions here but more conservative traders may want to wait for a move over $95. Of course our target is not that far away. We do see potential resistance at the 100-dma (currently near $97.50) and its trendline of lower highs (around $100). Therefore we're going to target a run into the $97.00-100.00 range. The P&F chart is bullish and points to a $108 target.
Picked on July 30 at $ 92.97
Petroleo.Brasiliero - PBR - cls: 91.88 chg: +0.00 stop: 87.49
For the second day in a row shares of PBR gapped lower at the open only to have traders buy the dip. The intraday low today was a retest of support at the $90.00 level. The rebound suggests this is a new entry point to buy calls. Unfortunately, volume was very light today and has been for the last three sessions. We'd use today's move as a new entry but more conservative types may want to tighten their stops. Our target is the $99.50-100.00 range. We do not want to hold over the mid-August earnings report.
Picked on July 30 at $ 92.72
The Houston Exp. - THX - cls: 64.69 chg: +0.83 stop: 59.99
Oil stocks displayed some relative strength as crude oil ticked higher. Shares of THX did pretty well by out performing its peers and the market with a 1.29% gain. THX is expected to report earnings on Thursday, August 3rd. We're planning to exit on Wednesday at the closing bell to avoid the earnings announcement. Our target is the $67.50-70.00 range.
Picked on July 25 at $ 62.60
Apollo Group - APOL - close: 45.95 chg: -1.37 stop: 50.05
APOL displayed new relative strength on Tuesday with a 2.89% loss and a close under minor support at the $46.00 level. Shares are quickly approaching and almost hit our target in the $45.50-45.00 range. More conservative traders might want to adjust their stop toward the $48 level.
Picked on July 09 at $ 49.92
Chicago Merc. - CME - close: 461.36 change: + 0.16 stop: n/a
This morning CME spiked to $468.40 as investors reacted to news that the exchange's July volume soared more than 40% from a year ago. Yet the strength was short-lived. The stock dipped back to $455 before an afternoon bounce pushed it back into the green. We are not suggesting new put plays at this time. We're not closing the play since it was a high-risk, speculative gamble and we're going to wait out the next three weeks.
Picked on July 23 at $452.00
Manpower Inc. - MAN - close: 56.81 chg: -2.67 stop: 61.05*new*
MAN lost 4.4% today on strong volume as investors reacted to the second downgrade in two days. Yesterday Merrill Lynch downgraded the stock and today it was UBS. Please note we're adjusting our stop loss to $61.05 and our target to $55.75-55.50. More conservative traders may want to consider an early exit right here since we do see what looks like a mini double-bottom during today's session. We're not suggesting new positions. The 200-dma near $55.00 looks like technical support.
Picked on July 20 at $ 59.42
Union Pacific - UNP - close: 83.14 chg: -1.86 stop: 86.26
The Dow Jones transportation index lost 1.97% and the Dow railroad index fell 2.3% on Tuesday. Shares of UNP closed with a 2.1% loss after dropping back under round-number support at $85 and technical support at its 200-dma. This looks like a new bearish entry point but if you're opening new positions here we'd use a tighter stop loss (maybe near $86.00 or $85.60). Our target is the $80.10-77.65 range.
Picked on July 21 at $ 83.75
(What is a strangle? It's when a trader buys an out-of-the-money (OTM) call and an OTM put on the same stock. The strategy is neutral. You do not care what direction the stock moves as long as the move is big enough to make your investment profitable.)
Bausch Lomb - BOL - close: 48.00 change: +0.70 stop: n/a
There is no change from our previous updates. BOL continues to bounce around in its sideways consolidation although we do note that the consolidation appears to be narrowing. We're not suggesting new positions at this time. Our estimated cost on the strangle was $2.15. Our goal will be to sell if either option rises to $3.25 or more. The options in our suggested strangle are the August $50 call (BOL-HJ) and the August $45 put (BOL-TI).
Picked on July 23 at $ 47.40
L-3 Comm. - LLL - close: 72.16 chg: -1.49 stop: n/a
Shares of LLL hit new two-month lows with a 2% decline on Tuesday. The move helped produce a new MACD sell signal. We're not suggesting new strangle plays at this time. Our estimated cost for the strangle was $1.35. We will plan to sell if either option rises to $2.25 or more. The options in our LLL strangle are the August $80 call (LLL-HP) and the August $70 put (LLL-TN).
Picked on July 23 at $ 75.26
3M Co. - MMM - close: 69.91 change: -0.49 stop: n/a
There is still no change from our previous updates on MMM. The stock continues to hover around support at the $70.00 level. At this point we do not know what it's going to take to push MMM one direction or the other. Maybe it's the upcoming jobs report or the FOMC meeting. There are only three weeks left before August options expire. Due to our time crunch we're not suggesting new plays at this time. Our estimated cost was $0.75. We are planning to exit if either options rises to $1.50 or more. The options in our strangle are the August 65 put (MMM-TM) and the August 75 call (MMM-HO).
Picked on July 23 at $ 70.72
Itron - ITRI - close: 45.05 chg: -1.49 stop: 50.55
Target achieved. The sell-off in ITRI continued into Tuesday with another 3.2% decline on big volume. The stock dipped to $44.76 and our target was the $45.10-45.00 range. We did not get the best entry point due to the gap down on Monday but shares have achieved our goal.
Picked on July 31 at $ 48.01 *gap lower*
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