- Jobs report disappoints and the market cannot get over it. - Expanding national manufacturing sector is great news, but no match for the jobs report. - Buyers refuse to commit after overall good economic news, indicating an important test of the trading range to come.
Stocks not ready to move higher.
Stocks could not capitalize on good economic data Thursday, and they fixated on the lagging jobs report Friday as they continued the pullback that started after the failed rally attempt. Despite the predominant signs of an improving economy stocks found something to trip over. No sophisticated investor expected the jobs data to show any significant improvement, and the market, the best handicapper there is, knows this. Nonetheless it used this �disappointment� as a reason to abort a breakout attempt. To us that is a pretty clear sign it was looking for an excuse not to move higher and thus needs quite a bit more work before it is ready to make a breakout move.
THE ECONOMY
Unemployment falls for the first time in 5 months but jobs are lost yet again.
6.2% versus 6.3% expected and 6.4% prior. Yee ha. 44K jobs were lost (10K were expected to be added). The drop in the unemployment rate was due to about 500,000 people leaving the job market in disappointment. That is how the cycle works. When the downturn starts they get laid off and unemployment levels rise. At the bottom the rate starts to stabilize as there are fewer layoffs (seeing that now with the slowing weekly claims numbers). Then there are signs of economic recovery and some of the unemployed venture back into the job market. Early signs of economic recovery, however, do not equal more jobs. Not finding any jobs, these re-entrants to the job market are counted as unemployed and the unemployment rate rises again. After they fail to find a job, they remove themselves from the job market until the next signs of jobs return. The unemployment rate falls as the potential employee pool shrinks. This pattern continues until real jobs are created.
Not until workers are so overworked they are ready to revolt and other companies start cherry picking the competition�s employees, however, are additional jobs created. The economy is not there yet because companies are still squeezing more and more out of current employees. Companies are still using their newfound productivity the past three years as well as new equipment purchases to get more out of remaining employees. Talk with just about anyone you want to and they will tell you they are working more now than ever, making the same or less, and worried to complain or try to slow down for fear of losing their job. Even though the economy is improving and companies could maybe hire some help, part-time or otherwise, they are not going to do it until absolutely necessary. That necessity is manifested in employees leaving for other jobs and substantially better top line earnings. Again, the economy is not there yet, but it is heading that way.
Employment starting to make its move?
Even with all of the upset about the failure of the economy to create new jobs there are signs that jobs are starting to rise. First there is the drop in the weekly claims below 400K for the past two weeks. That is a thin argument, however, as there are seasonal items that could have caused that drop, and two weeks is not a trend. We have noted, however, the stall of layoffs, the first indication of an improving market.
More importantly there is the rise of the temp worker. 42,000 temps were added in July. Temps are important because companies tend to hire them as shortages in manpower are faced and they don�t require payment of benefits or a lot of costly training (have you heard the ad about how �Bob� has all of the accounting problems handled while O�Neal is out with a �cold�?). In the past three months temp jobs have jumped 122,000, the largest increases since the data were first tracked back in 1990. For reference, remember the recovery in 1991 and 1992 was �jobless�. It was labeled by some politicians as the worst recession since the Great Depression. Please. This �jobless� recovery is already ahead of that one in creating temp jobs. That puts this recovery ahead of the 1992 recovery even as many tout this as the worst jobs market since World War II. Misinformation. Big swings in the temp market lead the overall job market by 2 to 3 months. We are going to see a much improved, solid jobs market by year end.
Get the drift? This is really quite a strong positive that was mostly overlooked Friday. Instead, headlines such as �Job Drought Threatens Economy� and other very gloomy predictions about how a slow job market will stall the economy. A worse jobless recovery in 1991 and 1992 did not stall the second stage of the boom that started in the early 1980�s. Those who want to believe that there is no economic recovery underway got what they wanted Friday with the headlines on the jobs report. Those are emotional numbers that can be played upon the masses, but they tell the story of where we have been, not where we are now and where we will be in the next few months.
ISM (national manufacturing) starts to expand as expected.
Two months of expanding regional reports paved the way for an expansion in the overall manufacturing sector. It was the first expansion in five months after the sector tanked ahead of and during the Iraq war. New orders rose to 56.6 from 52.2, production rose to 53.3 from 52.9, but employment slipped to 46.1 from 46.2. As noted, that is about the norm for a recovery despite all of the moaning and hand-wringing Friday after the employment report.
The report is basically a sentiment survey. When things were at the bottom over a year ago the responses were very pessimistic. Now things are improving and their sentiment is better. Many respondents said they did not see an improvement in their own businesses while others noted a higher level of activity than they have seen in a long while. After the dismal views expressed through most of 2002 this is almost s breath of fresh air. In reality the economy and indeed most markets and systems work on sentiment. In other words, a business has to feel things are getting better and feel they will be even better further along before they will spend. The fact that there is more optimism dovetails with the hard numbers the economy is showing with respect to business investment.
Michigan sentiment rises to 90.9, topping expectations.
We noted that the consumer confidence poll released Tuesday flew in the face of other polls. While the Michigan poll is not our favorite, it is more in line with the majority of sentiment surveys reporting sentiment, while not soaring, is holding up. Expectations (6 months down the road) jumped to 102.1 from 94.7, the opposite from the Conference Board�s report. It was the current expectations that fell, down to 83.7 from 86.4 in June. That is more in line with reality: slow job market now that should be much better toward year end.
ECRI soars again.
We discussed the ECRI last week and how it has been running well. Last week the weekly leading index hit a 16 year high. This week it hit a 20 year high in the growth rate. Twenty years ago some very similar tax cuts to those recently passed had been enacted a year earlier. The economy was starting to recover and set off on a 20 year economic boom. We are not saying that is in the cards at this point, but as you can see, there are a lot of positives pointing toward recovery.
Summary.
It is very easy to adopt a mindset that personal debt is too high, the bond yield rise is trouble, the housing market is going to crater, deficits are trouble, social security will sink us, etc. Any of these could cause a problem, but the way out of these problems is (aside from the vast overhauls needed in social security and other programs) growth. The economy is starting to grow. There are too many indicators showing the same moves that have historically preceded recovery. Friday we heard comments about the jobs report such as �yes it is usually a lagging indicator, but this time it is not the same.� Red flag. The bottom in October was not real because �this time the indicators are not working.� This time Wyatt Earp gets shot. This time Casey doesn�t strike out. This time the cows don�t come home. One thing to remember: in the world there are very few exceptions to the norm. That is why they are called exceptions.
THE MARKET
The indexes were set up for the breakout, tried the move, then balked. Thursday there was some solid economic news that prompted a rally. The indexes rallied, DJ30 even broke over its June high. For whatever reason you want to put on it, the indexes reversed and closed well off their highs. DJ30 gave back its tentative breakout as the market was unable to capitalize on good news.
Friday the news was still not bad when one looked at the leading reports as opposed to the headlines on the lagging indicators. The market, however, refused to look at those, refused to look ahead as it has been doing. It sold all session with SP500 heading toward the bottom of its consolidation range. The inability to respond to good news can mean the market is going about its business of consolidating as indicated last week. If the price/volume action was bad and other problems arise (e.g., failing leadership), there could be trouble.
Volume was very light Friday. Summertime Friday could be the reason. Regardless, falling on light volume indicates no concerted selloff. There were more sellers than buyers, but Friday it was more a buyers strike that a seller�s session. If the market has to sell, selling on lower volume is the way to do it.
As far as other nuts and bolts, some leaders ran into trouble late in the week. Homebuilders felt the wrath of higher bond yields and a dramatic slowdown in mortgage applications, and many started fresh moves lower. They had already peaked, however, back in June and broken their 50 day MVA, so this was not a major implosion. More troubling was the drop in the big financial stocks (e.g., JPM, BAC, WFC, C). These are early recovery stocks and made good moves up to this point. Perhaps they are just handing over the torch in some rotation of money as they are also somewhat interest sensitive. Then there is the SP600 and Russell 2000 (small caps) that turned down hard Friday (very weak market breadth) right after attempting the breakout. That set up a potential double top pattern. Still premature to make that call, but it pays to be ready.
Semiconductors on the other hand held up very well Friday with the SOX gaining on the session and many chips holding very solid patterns. That is a good counter to the other sectors struggling. Still the failed breakout on what was overall good economic news has led to deeper tests in the past, and with SP500 already close to the bottom of the range it looks as if the market is going to get a more serious test of the consolidation range.
Market Sentiment
VIX: 22.78; +1.54 VXN: 32.48; +1.26
Put/Call Ratio (CBOE): 0.91; +0.23. Surged right back up on the selling. Spending a lot of time in this higher range of late as the market starts to falter some.
Nasdaq
Gapped lower and sold down to the 18 day MVA on the close. Still in the trading range, selling back on low summertime volume.
Stats: -19.4 points (-1.12%) to close at 1715.62 Volume: 1.496B (-19.51%). Volume fell off the table as buyers went home early and sellers were left.
Up Volume: 596M (-737M) Down Volume: 888M (+380M)
A/D and Hi/Lo: Decliners led 2 to 1. Poor breadth all session long. Previous Session: Advancers led 1.43 to 1
New Highs: 141 (-122) New Lows: 7 (-1)
The Chart: (Click to view the chart)
Reversed Thursday from near resistance at 1760 and continued down Friday, closing just over the 18 day MVA (1713). It is coming back to test the range at near support (1700). After that are the June highs at 1685. Nasdaq remains in good shape with the important chip sector holding up well.
S&P 500/NYSE
Stats: -10.16 points (-1.03%) to close at 980.15 NYSE Volume: 1.357B (-15.36%). Volume fell to below average as large caps have pretty much run the range of the consolidation the last two sessions.
Up Volume: 360M (-584M) Down Volume: 987M (+335M)
A/D and Hi/Lo: Decliners led 2.53 to 1. Very weak breadth all session as small and mid-cap stocks suffered right along with the large caps. Previous Session: Decliners led 1.09 to 1
New Highs: 77 (-118) New Lows: 81 (+27)
The Chart: (Click to view the chart)
SP500 ran to near resistance Thursday (1003) and reversed. Friday it continued lower, tapping 978 on the low, just above the 50 day MVA (976) and price support at 975. SP500 is still working in the lateral range, but it has now made another lower high in the range, its third in the month of July. Of the indexes, SP500 has lagged, and it will be the first to test the bottom of its range this week.
DJ30:
Stats: -79.83 points (-0.86%) to close at 9153.97 Volume: 1.357B (-15.36%)
DJ30 looked solid heading into Thursday and was moving well until it reversed at the June high (9353) and started back down. Friday it fell below the 18 day MVA (9168) though is still holding well above 50 day MVA (9029) and price support at 9000. Volume was lower Friday, but that was Friday afternoon in summer and DJ30 looks ready for a test of the bottom of the range.
THIS WEEK
More economic data out this week with factory orders, ISM services, and of course, weekly jobless claims. Earnings are winding down and the market could not hold some good economic news last week. It looks ready for a test of the bottom of the range, and there is not a lot of market moving data out this week to drive it. Thus the market will be on its own, and that will be a good litmus test of its strength.
Many sectors and stocks are holding up just fine though there are some leading sectors (e.g., homebuilders) that are in continuing trouble and some (e.g., large cap financials) that are just starting to struggle. If it is interest rate sensitive it is undergoing some selling. Some would argue that is the undoing of the economy and thus the rally. Rates are still historically low and there is still a lot of stimulus in the pipeline. Rates are higher because the bond market, as the stock market, is factoring in an economic recovery. Well, they are also higher because Greenspan promised the Fed would buy 10 year treasuries and then he and his henchman took it back. The bond market soared the tanked, and Greenspan told Congress rather smugly that he had no regrets about misleading the market. Seems the man likes wreaking havoc at inappropriate times.
We still see many stocks in very good shape, but we are going to get a test lower this week so we are going to approach the upside cautiously, looking for those good patterns that give the good moves. There are also some downside plays forming up as well. As usual, we will take what the market gives, looking to the plays that give us the best moves.
Support and Resistance
Nasdaq: Closed at 1715.62 - Resistance: 1740 is first resistance. 1760 (May 2002). 1800. - Support: The 18 day MVA (1713). 1700 (Feb 2002 low). 1685 (June intraday high) and June closing highs (1677 to 1645). The exponential 50 day MVA (1656). 1600 to 1595 (June 2002 closing high). The mid-May high (1554).
S&P 500: Closed at 980.15 - Resistance: 1003, the early June closing high. June closing high at 1011. The June intraday high at 1015. Then 1050. - Support: 975 (December 1997 peak). The 50 day MVA (976) and 965 (August 2002 peak). The mid-May high (948) and 935 (November and January peaks).
Dow: Closed at 9153.97 - Resistance: The 18 day MVA (9167). 9236, the early June intraday high to 9250 is cracked but is being tested. 9353, the June high. 9500 (June 2002 lows). - Support: The 50 day MVA (9029). 9000 is some psychological and price support that has held previously. 8980 is the neckline in the short head and shoulders pattern. January high (8870). The mid-May high at 8743
Economic Calendar
8-04-03 - Factory Orders, June (10:00): 1.5% expeced, 0.4% May.
8-05-03 - ISM Services, July (10:00): 58.0 expected, 60.6 June.
DADE: A new issue in February, we covered DADE as it moved laterally in a flat base from May to July. We dropped it off the report to make room when it went back to test the 50 day, but we said we would watch it. It showed a good volume surge Tuesday as the stock moved up off the 10 day MVA. Then Friday DADE surged higher on another strong volume session, hitting our old buy point in the last few minutes of trade. We issued the alert right and went after it at the ask as there was not much time left in the session.
There is not much to learn from this trade other than IPO�s are always good to keep track of as they form their first bases as that is the best buy point, watch for volume spikes as a stock moves close to a breakout, and don�t give up on a good pattern that is shwoing solid attributes. Those are pretty good rules to live buy. DADE is still in great shape and still a buy on this move, particularly if it can get past 25.20 on continued strong volume.
Market Data 
Markets 
AI
