More Ammo For The Bulls
Given today's trifecta of upbeat news, you'd think the market would have held onto more of its early gains. However, the market slipped away into the afternoon, leaving most market participants yawning and scratching their heads. Volume was light and trading was generally directionless.
The bulls initially cheered news from overseas that the European Central Bank and the Bank of England both cut short-term interest rates by 25-basis points. The impetus behind the cuts was a slowdown in the global economy and uncertainty as to when the weakness would cease. These cuts will not only boost sales of haggis in Scotland, but should also serve to increase sales of high tech equipment and software across Europe that will eventually trickle down to the bottom lines of many U.S. based tech companies.
In addition, we received word of shorter unemployment lines. According to the Labor Department, the number of workers filing for unemployment benefits fell by 41,000 to 384,000 in the latest week. The four-week average of first-time claims fell by 3,000 to 402,500 in the week ending May 5, which was the first down tick in six weeks.
Rounding off the morning's bullish headlines were reports from the major retailers that showed that consumers are not out of the equation yet. Same store sales from the major retailers came in higher than expected. Kohl's (NYSE:KSS) and Chico's FAS (NYSE:CHS) knocked the cover off the ball with increases in sales of 12.7% and 32.5% respectively! If anyone shops at Chico's please let me know what the allure is, because this is a business model that is obviously paying dividends.
So why didn't these tasty tidbits tantalize buyers into the market? Looking around, it appears to be a case of more wait and see. We have major resistance still acting as a ceiling on the major indices and the uncertainty over what the Fed is going to do next Tuesday is still hanging over traders in the near-term.
There also doesn't seem to be the sense of urgency to pile into stocks quite yet, which overall is quite healthy. We would rather see the train leave the station quietly rather than stoke the coals too much and blow up just a mile down the tracks.
Just another appetizer that the bulls hope will get your mouth watering: new offerings (in the form of IPOs, secondary and convertibles) have jumped to $20.5 billion in the last 11 days. The horned ones note that this is the best showing in new issues since March of 2000 when $38 billion hit the Street in a little over a week. This of course is a sign that the market has at least stabilized, since companies don't float new issues if they think the chances of them tanking right out of the gate are high.
The market continued its range-bound ways today, as it quickly hit the upper limits of its recent trading envelope only to settle back to more "comfortable" digs near support levels.
The NASDAQ (COMPX) popped 40-points at the open but settled back to close down 27.77, or 1.29% to 2128.86. As mentioned, volume was on the light side of weak, with only 1.7 billion shares crossing the tape. New highs beat new lows 118 to 22.
The Dow (INDU) faired a bit better as a result of strong showings from some of its members. Retailer Wal-Mart (NYSE:WMT) was up $1.83 to 53.42, defense contractor United Tech (NYSE:UTX) up $1.98 to $78.73 and heavy equipment supplier Caterpillar (NYSE:CAT) closed higher by $1.43 to $53.43. The Dow closed in the black by 43.46 to 10910.44. Of note is the fact that the old-economy index inched up to within 21 points of the magical 11,000 mark, only to be turned away.
The S&P 500 (SPX.X) also worked on busting through resistance at 1265 today, but it was doomed from the start because of the lack of volume. At this point we are going to need a 10-ton wrecking ball (or 50-bps rate cut) to get through the wall of resistance at 1265.
Stocks and Sectors on the Move
It wasn't the semiconductors, but the companies who make the stuff that makes the semiconductor chips that moved higher today. Confusing isn't it? Well, not really if you consider that the semiconductor chip stocks are considered early cycle tech. Keeping that in mind, this means the semiconductor equipment makers are early, early cycle tech; meaning the chip stocks can't ramp up operations without first getting a tune up from the chip equipment makers. After all, all that dust that has settled on the delicate machinery has to be cleaned up by someone.
I'm only half joking here, but Morgan Stanley Dean Witter was not joking at all when they upgraded six of the largest companies within the chip equipment group from "outperform" to "strong buy" today. They argued that downward earnings revisions are largely out of the picture for these companies and that upward revisions should start in earnest by early 2002. The six upgrade recipients were: Applied Materials (NASDAQ:AMAT), ASM Lithography (NASDAQ:ASML), KLA-Tencor (NASDAQ:KLAC), Lam Research (NASDAQ:LRCX), Novellus Systems (NASDAQ:NVLS) and Teradyne (NYSE:TER).
Of course Morgan's upgrade of the equipment makers wouldn't be complete without a little friendly opposition. The analysts over at Merrill Lynch were quick to point out that they don't see any upturn in orders for the chip equipment makers and that even if they did, these stocks don't deserve higher valuations.
In other areas of the market, Novartis (NYSE:NVS) shares rose $2.65, or 6.79%, to $41.65 after saying that its cancer drug Gleevec was approved for sale in the U.S. The drug is targeted towards patients with a unique form of advanced leukemia who have failed treatment with interferon, or a synthetic versions of the body's own infection fighters.
Looking Forward, Always Forward
We will be watching Friday's economic reports closely and will be monitoring how the market reacts to them even more closely. First up tomorrow morning is the Producer Price Index (PPI). The PPI for April is widely expected to come in up 0.4% and the core PPI is expected to rise 0.1%.
Following the important PPI is the even more important Retail Sales figure for April. Retail sales are expected to come in up 0.2%, but judging by today's same-store sales results, we might be in for an upside surprise. This would confirm that the consumer is still spending, which is obviously important in regards to an improved earnings outlook.
Speaking of retail and a strong consumer, many bulls are now pointing to the retailers as "the sector" that will lead us out of the woods. Well, looking at the weekly chart below, it is easy to see that the retailers have been amazingly average over the past two years. If this sector is going to step up and lead, there is some serious resistance on the chart that says it will be a while before retailers are the leaders that they once were in early 1998 and early 1999.
If retailers can lead us out of the depths, then the above chart supports the notion that the ride higher will be a bumpy one.
I think the retailers have a shot at being strong over the next year, but who really wants a sector whose momentum can be destroyed by a single month of bad weather leading the market? Not me. I'd rather ride on the backs of the banks or the techs, but we take what we can get.
As traders, we just have to look to where the big money is flowing and listen to the charts. And right now, it's the retailers who are breaking out of bases left and right and holding their own. So on your next trip to the mall, look to see how many empty parking spaces there are and ask yourself if the next market savior can be blue jeans, running shoes and bath towels. Blue jeans, routers - makes no difference.