- Warnings, downgrades, economic data set stage for a down session. - Employment report disappoints, but the real economic report was a hit. - Market set at support for the coming week, but how long can it rally?
Cold water hits the market early.
A �surprising� employment report that pegged unemployment at 6.4% and showed more job losses than anticipated splashed a bit of cold water on the pre-market activity, but the futures were already lower before that report hit (and indeed they improved after the report). The culprit was a couple of strong sessions, a long holiday weekend ahead, and some earnings warnings that gave recent buyers a reason to take some gains.
The market started weak, recovered to positive on the strong ISM services report, but then faded back as the buyers could not rally together. In the end the market drifted laterally just below the flat line. It was not until the last 10 minutes things worsened as Nasdaq 7 points in that short time span. Thus things looked a bit worse than they were as breadth was just modestly negative and some sectors continued to lead higher, e.g., biotech and internet, after that short hiatus where the market tried to consolidate but really just pulled back short term. If the leaders can continue to lead the market continues to perform near term. What happens down the road without any rest or meaningful consolidation as the market was doing after strong runs up until May remains to be seen.
THE ECONOMY
Jobs report viewed as doom and gloom on financial stations. Surely they jest.
Unemployment hit 6.4% (6.2% expected) and non-farm payrolls fell 30K (0K expected) with May revised from -17K to -70K. On top of the initial jobless claims for the week moved back up to 430K from the prior 409K. With the lackluster yet relatively stable weekly jobs report each week one could hardly have a reasonable expectation that the prior month�s jobs report would show improvement. Nonetheless words such as �disastrous� and phrases such as �horror show� peppered the morning financial shows regarding the report. Not that 6.4% is something to cheer about or the failure to generate jobs is something to shrug off. It is simply that the report should be looked at analytically and with respect to what the actual facts are.
Yes it was the worst unemployment reading in 9 years. That is not what you want to hear because there are a lot of people still out there without work. A lot of the gain, however, was because the economy has improved enough to actually get more people out looking for work. 611,000 that had given up on finding a job came back into the job pool last month to look for work. Many of them did not find it, sadly, and thus the rising unemployment rate. That they are entering the market, however, is important. There is a sense the economy is improving and an optimism about what is transpiring. Of course, there is nothing like the inability to land work that splashes water on the first spark of optimism.
What about the higher loss in non-farm payrolls and the May revision of more losses? Remember that last month the Labor Department started a new method of counting all different kind of economic reports, setting new baselines, etc. May�s lower numbers were partly in response to those changes, and thus there will be some gyrations as the new method of calculating data finds its median. Countering that is a rise in temporary workers and in self-employed workers. The former is a sign that companies are picking up workers to fill in the gaps as opposed to full-time hires; it is cheaper and if things go sour again you can quickly reduce staffing without incurring any costs. Self employment is a sign of optimism about the economy as more individual entrepreneurs set out on their own to take advantage of what they see as an improving economy.
Moreover, the jobs report very much lags the economy. Investors know that while profits are improving, they are not blazing yet. The tax cuts have not hit the economy and won�t until July is mostly over. Thus the market is looking for gains to start showing up around November and December. Employment reports historically lag the economy by 6 to 9 months. If corporations are just now starting to show improving profits, at best you could expect jobs to start popping up in January 2004. With the strong productivity now in the economy some even predict that the 6 to 9 month cycle is more protracted. That may or may not be the case. In the 1990�s jobs grew rapidly at the same time productivity grew.
Thus the real key, as always, is simply how strong the economy is growing. With the current technology and increased production, that requires a 3% minimum and more like 4% growth rate in GDP to start creating the 125K per month jobs needed to reduce the unemployment rate. It is a no brainer, even before Thursday�s �disastrous� jobs report, that the economy is not there yet.
ISM Services soars to 3 year high but is mostly overlooked.
This was the real report for the day. Services make up 60% of the GDP and the sector looks to be back on track coming in with a big 60.6 reading for June. That is up from 54.5 and blew out expectations of 55. Importantly, the employment sub-index rose to 50.3 from 48.7, the first 50+ close since January. New orders also increased, rising to 57.5, it highest since October 2000.
As compared to the employment report, the services report is similar to keeping time with a watch continually radio updated by the national atomic clock versus strapping a small sundial to your wrist. It is a survey of what companies are planning to do right now and orders that are being placed right now. These are much more accurate because they are contemporary and they go to the source for the data, i.e., the business, as opposed to the worker as with the unemployment report.
This was a very solid report. So much is made of the consumer and the mantra about how the consumer drives two-thirds of the economic activity. The service sector, however, is 60% of the GDP. That is one very important reason why it is critical to the economy whether or not the service providers are buying new equipment and hiring new workers. If services are ramping up, the economy is starting to ramp up as well.
THE MARKET
The market turned in a down session, but all major indexes except SOX (-1.2%) were down less than 1%. Can you imagine what would have happened back in 2002 before the rally started if a similar employment report was released? Nasdaq would have dropped at least 3%, talk of an emergency Fed meeting would swirl, the dollar would collapse, whatever was left of consumer confidence would be skewered. Imagine the worst possible market environment and you would pretty close to what would likely have happened.
Thursday the market more or less shrugged the news off. It did not turn and rally after the early selling as we thought might happen, but it did not roll over and die. The indexes sold but held near support. Some leaders in biotech and internet continued their rebounds from the recent pullback, posting solid moves on solid volume. It was not an up session, but the indexes managed to hold near support. Of course the continuing concern is whether SP500 and DJ30 can break their recent toppy patterns; that did not happen Thursday. They will most likely follow Nasdaq, but as we have said before, we are very visual: we like to watch it happen.
Where does a continued rally take us?
If the market continues to rally after this very brief respite (effectively 8 sessions) it will continue its move off the March low with basically no rest other than a 4 day dip to the 18 day MVA in May and the recent pullback to the 18 day MVA as well (Nasdaq). That is somewhat out of character with the rally that stared in October that would rally, then take a nice long, lateral rest, and then rally again. That allowed all of the froth to come out and prepare stocks for the next move. What we have now are stocks that are getting more and more extended without any real rest. While we hate to draw comparisons to 1999 because the circumstances are totally different, that was the type of action seen then where stocks would make mini lateral consolidations and then surge higher without any real rest.
What caused that? A lot of easy money chasing the best game in town. The Fed had pushed a lot of pre-Y2K money into the economy, and the money that was not being used because there were no runs on banks was put into the market to chase gains. Think about what is going on now. There was and is a lot of money on the sidelines (it was $3T, now they say it is around $2T) sitting in money markets. The Fed has also been once again flooding the economy with liquidity to the tune of $10B a week. At the same time it has reduced short term money market rates vis-�-vis the Fed Funds rate to effectively less than 0.5%. The new money that cannot earn any interest as well as the sideline money that is not earning any interest is being pushed into the market to chase these gains just as it was pushed into the market back in 1999 to chase those gains.
Thus we see the market continue to run higher as institutions have to put that money they receive to work. There is talk about institutions being below 5% or 3% or some other low cash percentage and thus not having any more money to put into the market. The opposite is actually occurring. Institutions are getting new money all the time, even more now as the Fed has lowered again and money rates are effectively negative. Baby boomers are not getting their 10% per year returns needed for retirement and they need returns. They are pushing more money into their funds and fund managers are using each and every dip to buy into the market and put that money to work.
This last pullback was set up to be longer term, but the same thing happened as the good set up for a needed longer rest was used as a buying opportunity as soon as, and we mean as soon as, the indexes made the first test lower. Tuesday the consolidation was on track with a breach of near support and the indexes moving toward the 50 day MVA. It was not two hours into that move that institutions jumped back in, started buying, and drove the market back up. They indexes have still not cleared all of the near resistance and could still continue the consolidation, but the strength of the buying suggests otherwise. This is a change in character for the rally from a nice, longer term building process to a more frenetic �buy any dip to capture the gains� mentality.
That type action can last indefinitely. As long as investors are willing to put money into the market and have funds invest it for them the action can continue. That is, at least until something comes up to upset the apple cart. We wrote last week that if the market continued to rally from here with little or no rest that it would head into September in a precarious position. The more it runs higher without proper consolidation the more it risks a sharper and nastier decline when it occurs. And if the economic recovery turns into mush, the results will be magnified.
That does not mean we step away from the market. As long as it shows us the big money is buying then we will buy as well. The big money moves the market up and down. If the move rallies through the end of summer it will show problems when they arrive as it did in early June, e.g., increased volatility, increased volume on both up and down days one after the other, and leaders starting to stumble. After a long run those will be big caution flags that tell us to back off from positions and start building back to cash.
Market Sentiment
The market was down slightly, but the sentiment indicators were jumping. Well, sort of. Volatility was up though it is still well entrenched in the low end of the �normal� range.
The eye opener was the put/call ratio that jumped to close over 1.0. While the put/call ratio lost a lot of the glow on its halo in the long downtrend, it has posted a good reputation at calling for the next pop in the market on a short term basis. Last Monday it posted 0.93 and then Tuesday 0.96. That immediately preceded the test lower and rebound. Based on this indicator we could be looking at the Thursday pullback to lead into another round of buying.
VIX: 21.61; +0.47 VXN: 32.47; +1.42
Put/Call Ratio (CBOE): 1.08; +0.31
Nasdaq
Poked its head above water after the ISM services number, but retreated in some mild selling while holding well above support.
Stats: -15.27 points (-0.91%) to close at 1663.46 Volume: 967.756M (-48.8%). Short day about on par with Wednesday when extrapolated over a full session.
Up Volume: 348M (-1.305B) Down Volume: 607M (+379M)
A/D and Hi/Lo: Decliners led 1.32 to 1. Modest downside. Previous Session: Advancers led 2.71 to 1
New Highs: 190 (-40) New Lows: 6 (-2)
The Chart: (Click to view the chart)
Tested the June high (1686) intraday (1683.77) and turned back to close with a minor loss. Candlestick pattern was a doji but we anticipate it will test toward the 10 or 18 day MVA (1643 and 1632) intraday before making another move higher. That level roughly coincides with the early June high (1646), and you want to see that hold on the close to keep the index from reverting into that short term toppish pattern.
S&P 500/NYSE
Pulled back to hold the short term MVA Thursday and held. Now it needs to rally from here to avoid falling back into that short term topping pattern.
Stats: -8.05 points (-0.81%) to close at 985.7 NYSE Volume: 761.181M (-47.15%)
Up Volume: 175M (-990M) Down Volume: 568M (+308M)
A/D and Hi/Lo: Decliners led 1.54 to 1 Previous Session: Advancers led 3.45 to 1
New Highs: 188 (-49) New Lows: 2 (-3)
The Chart: (Click to view the chart)
The large caps put up on fight Thursday, opening slightly lower, edging just positive after the ISM services number, and then fading in the last hour as no buyers came in to rescue the index. Intraday it undercut the 10 day MVA (985) and tapped the 18 day MVA (983.42) on the low before rebounding to close just over the 10 day. That keeps it in the short term head and shoulders pattern with the left shoulder closing high at 998.51. In order to breakout of this pattern it needs to hold this current support on the close and then rally to close over that early June high.
DJ30:
Stats: -72.63 points (-0.79%) to close at 9070.21 Volume: 761.181M (-47.15%)
The Chart: (Click to view the chart)
The blue chips still find themselves in the short term head and shoulders pattern as well with a left shoulder at 9196 closing and 9236 intraday. Now Thursday the index undercut the 18 day MVA (9061) on the low (9035) but managed to bounce to close over the 18 day though just below the 10 day MVA (9078). The Wednesday move was on super DJ30 volume, and we would expect that to carry the index off the short term MVA this coming week.
THIS WEEK
The market returns from a holiday, and during the long downtrend that typically meant a new round of selling would start when everyone returned to the market. In the uptrend off the October low the opposite has been the more frequent case. With fund managers getting more money to put to work and thus having the need to put it to work, that propensity to rise after a holiday may be enhanced due to that money coming into the funds and the market to chase the gains thus far.
Certainly the Thursday pullback took some of the air out of the Tuesday and Wednesday rally, making some room to the upside and giving the gains chasers a chance to buy in on a dip. The fact that SP500 and DJ30 held near support is a good signal for another move up. Throw into that the put/call ratio spiking to close over 1 and you have the ingredients that have led to bounces in this rally.
This week will be important for SP500 and DJ30 as they fight to move up and out of the near term toppy pattern. With Nasdaq, Russell 2000, SP400 and others having broken up their patterns, the odds are these two will follow. SOX is still lagging, and that is a problem for the market. Several chips have good patterns, so if they are resolved to the upside the market could get quite a boost. With the strength of the move last week that looks likely. What we anticipate Monday is a test lower intraday and then see some buying return. If there is a strong surge, the green light will be on and we will start moving in to stocks that have pulled back and are making the next bounce. As long as the buyers come in with volume on the dips and there are good opportunities in leaders and stocks that have formed good patterns to give us the edge, we will participate in the moves.
Support and Resistance
Nasdaq: Closed at 1663.46 - Resistance: 1685 (June intraday high) still hangs over the index. 1700 (Feb 2002 low). - Support: 1646, the early June high. The 10 day MVA (1643). The 18 day MVA (1632). 1600 to 1595 (June 2002 closing high). The exponential 50 day MVA (1573) is a primary support point. The May high (1554) is what we are watching as another primary support level.
S&P 500: Closed at 985.70 - Resistance: 1003, the early June closing high. Then the June high at 1015. Then 1050. - Support: The 10 day MVA (985). The 18 day MVA (983). 975 (December 1997 peak). 965 (August 2002 peak). The 50 day MVA (959) and the mid-May high (948). 935 (November and January peaks).
Dow: Closed at 9070.21 - Resistance: 9196.55 and 9236, the early June closing and intraday highs. 9352, the June high. 9500 (June 2002 lows). - Support: The 10 day MVA (9078) was slightly undercut Thursday. The 18 day MVA (9061). 9000 is some psychological and price support that is still trying to hold. 8980 is the neckline in the short head and shoulders pattern. January high (8870). The 50 day MVA (8856), then the mid-May high at 8743 are key support points on a test. November high (8800). 8522 and 8520, the March and April twin peaks.
Economic Calendar
7-08-03 - Consumer Credit, May (2:00): $5.0B expected, $10.7B April.
7-09-03 - Wholesale inventories, May (10:00): 0.2% expected, -0.1% April.
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