The range trading continues on Wall Street as the Industrials added 32 points after overcoming a triple-digit loss earlier in the day. The tech-heavy NASDAQ closed in the red, albeit by a slim margin of less than two points. Investors seemed to ignore the better than expected factory orders for June, which came in +1.7 percent, better than the forecast of +1.5 percent and the previous month's gain of just +0.4 percent.
The other big "economic" report was from the Semiconductor Industry Association (SIA). The SIA announced this morning that chip sales for the second quarter rose 3.2 percent from the first quarter and more than 10 percent from the second quarter a year ago. The report was positive with comments pointing to a "broad- based" recovery on the horizon. SIA projected worldwide sales to increase 10.1 percent in 2003 and 16.8% in 2004. Despite the good news the $SOX semiconductor index rose just 0.38% and remains below resistance at the 400 mark.
The talk of the day was all about bonds and how higher yields would or would not impact the economy and the stock market (as if we didn't hear enough about this subject last week). The concern over bond yields has impacted homebuilders and mortgage lenders in the last several sessions and both groups bounced lightly today as bonds rose. The question that seems to be on everyone's mind is "at what point do bond yields become attractive enough to initiate an asset allocation from stocks to the perceived safety of bonds?" Late Friday and early Monday, the yield on the 10- year note was above 4.5 percent. As Jim mentioned in his Sunday wrap that may already be enough of an incentive for more conservative money managers to rotate capital back into bonds and out of stocks.
Chart of the 10-year yield:
There was also plenty of talk about how August and September are traditionally the two worst months of the year for the stock market. It's not hard to understand why. We're currently in the doldrums of summer. Plenty of Wall Street professionals take their vacations in August, which already exaggerates the normally light volume during the month. Couple this with the retail investors' focus on their own vacation before the kids go back to school and you can see why August has the lowest average volume for the year. The July earnings season is effectively over with more than 400 of the S&P 500 already reporting and the post- earnings slump settles in.
As one commentator said on the T.V. today, some of the bulls feel like just holding the markets in the current trading range is a victory. Whether you agree with that statement or not it's hard to argue that there is any real direction. The Industrials bounced off the 9050 level and some might argue it's 50-dma. The NASDAQ Composite bounced from the 1687 mark, which coincides with the July 25th low. The S&P 500 bounced strongly from the 966 level, which is relatively close to the July 1st low of 962. However, despite the bounce in the SPX it's still below the simple 50-dma.
Don, thanks for the post from Fleckenstein. Always interesting reading. He stayed away from short positions for a long time during the Spring.
Tech stocks have looked a bit tired this past week, with the Nasdaq ($COMPQ) trading in a narrow range during the past month. On Monday, tech stocks got off to a bad start, but were able to bounce back and finish with just minor losses. Surprisingly, the Naz finished in the red despite an upgrade of Cisco (CSCO) and positive economic news.
Cisco is set to report its quarterly earnings Tuesday after the bell, with analysts expecting the networking giant to post EPS of $0.15 a share. However, it seems traders are a bit more upbeat, with the whisper number coming in a penny higher. This means that if Cisco disappoints, it could be in store for lower prices. The stock reached a new 52-week high just last Thursday, so hopes are high. Besides the overall earnings view, traders will be looking for signs of optimism from the company. This will come from words and deeds, with traders looking for higher capex spending. Cisco shares saw little strength on Monday, despite getting an upgrade to “Strong Buy” from “Outperform” at SG Cowen.
The Philly Semiconductor Index ($SOX) saw mild gains on Monday after the Semiconductor Industry Association [SIA] released world-wide chip sales figures for June. On a year over year basis, chip sales were up 10.4 percent. However, month over month growth was just 0.3 percent. Nonetheless, SIA believes a broad-based recovery is emerging in the sector. The SOX is just 17 points from a new 52-week high, but with optimism high, it could be difficult for the sector to live up to expectations.
On a technical basis, the SOX has formed an ascending triangle this past month. This formation is developed when the highs remain constant, with the lows moving higher. This consolidation pattern normally precedes a large breakout move for the stock or index. This is something to keep an eye on.
Figure 1: Daily Chart of $SOX
Overall, economic news is likely to have the largest impact on trading in the next few months. This could be good or bad, depending on the news. However, it is going to take rather strong economic information to keep stocks moving higher given the sharp rally they have gotten the last four months. Nonetheless, the bulls have remained strong and have not allowed sharply lower prices to set in. Even so, the market is at a key juncture, with analysts and traders unsure of what to expect in the months to come.
Jody Osborne Senior Writer & Options Strategist Optionetics.com ~ Your Options Education Site Visit Jody's Forum
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