Fed Comes Through
The Fed gave investors exactly what they wanted today. In cutting its Fed target rate by 50 basis points to 4%, hopes of a sustained market rally remain alive and kicking. The discount rate was also lowered by 50 basis points, to 3.5%, and to top it all off, the Fed said that it remains ready to cut rates again if needed.
The Fed last cut rates five times in a row back in 1994. At the risk of comparing apples to oranges (this recession is very different from 1994) the following year, in 1995, the Dow surged from 3867 to 5181, or 34%.
However, the Fed doesn't necessarily want the market to go straight to the moon. What it does want to happen is for capital expenditures to pick up and for corporate profitability to stop eroding.
In its statements following the announcement today, the Fed mentioned that inflationary pressures are expected to "remain contained". However, one has to wonder if Dr. Greenspan will now step back and see how the full 250 basis point shot in the arm since 1/1/01 treats his patient. Because the economy takes a good six months to fully process an interest rate cut, we will not know how the economy will react to this stimulus until much later this year.
The Fed also noted in its comments that excess inventories seem to be dwindling and that consumer spending and housing "have held up reasonably well." Ironically, these were the same strengths that caused many investors to recently question whether the Fed would stay the course on fighting a recession. But by stating that they will remain on the watch for further weakness, the Fed has all but said that they will do everything in their power to avoid a recession.
As expected, it was a volatile session on both the Dow and the NASDAQ today. Quiet morning trade ahead of the Fed move was replaced by wide swings immediately following the announcement. Granted the swings were smaller than usual due to the fact that the Fed did its best to telegraph its move ahead of time.
The NASDAQ (COMPX) spent most of the session hovering just above breakeven and ended the day up 3.79 at 2085.93 after a brief foray into the red. Volume came in surprisingly light (1.7 billion shares) given the good news from the Fed. Stocks hitting new highs beat out new lows 162 to 48.
The Dow (INDU) also closed near breakeven after a seesaw session. The old-economy index added 4.36 to 10872.97. Volume was also disturbingly low on the NYSE, with only 1 billion shares changing hands. On a usual rate cut day, the NYSE can easily do 2 billion shares.
Also as expected, Teasurys reacted negatively to the rate cut today, as the Fed's continued aggressive stance has bond traders already anticipating the next tightening cycle. The 10-year bond lost 15/32 to yield 5.48% and the 30-year note fell 26/32 to yield 5.90%.
Stocks and Sectors on the Move
We didn't get the standing ovation that would have been expected on a day like today. This has many traders worried that it's going to take an act of God to get the sidelined cash back into the market. Though today's market reaction was anticlimactic, all we can do as traders is to monitor what has been working and go with it.
Up until today, it has been the retailers that have been firing on all cylinders. However, the S&P Retail Index (RLX.X) lost 13.54 to 895.88 today on the heels of some mixed earnings reports from selected heavyweights within the hot sector.
Dow component and former Splittrader Current Play, Home Depot (NYSE:HD), reported profits of $0.27/share beating Street estimates by $0.02/share and reiterated that it was comfortable with its second-quarter estimates of $0.37/share. HD moved ahead by $0.95 to $50.10 on the news.
Fellow Dow stock, Wal-Mart (NYSE:WMT) also had good news for investors today when it reported that first-quarter earnings met consensus estimates of $0.31/share. In addition, the Bentonville, Arkansas retailer said that it would be upping the anti on its share repurchase program to $3 billion worth of outstanding stock. WMT shares stumbled $2.35 to $52.00.
More than offsetting the good news out of WMT and HD was an earnings warning out of J.C. Penny (NYSE:JCP). JCP reported earnings of $0.11/share, in line with estimates, but followed up with lowered estimates for its upcoming second-quarter. The giant retailer now expects a second-quarter loss of $0.20- $0.25/share as opposed to previous estimates of a loss of $0.11/share.
Lastly, Target (NYSE:TGT) fell back into its base after having its price target raised from $40 to $48 by Lehman Brothers. The brokerage firm also reiterated its "strong buy" on the stock, but none of this was enough to keep shares of TGT above its pivot point of $40. Shares fell $1.40 to $38.30.
In other specific company news, Qualcomm (NASDAQ:QCOM) finally caught a break when China announced contracts to purchase code division multiple access wireless gear totaling $1.5 billion. QCOM, mired in a downtrend since mid February, rose $2.58 to $59.50 on the China news.
In after-hours news, one of the last big tech companies to report earnings, Applied Materials (NASDAQ:AMAT), rang in with earnings of $0.32/share, which missed estimates by $0.01/share. They mentioned that their core business continued to experience a "severe decline" in their most recent quarter.
Looking Forward, Always Forward
On the schedule for release Wednesday morning is the April CPI (Consumer Price Index) number and housing starts and housing permits data. While economic data should have a more muted effect on the market since the Fed just cut, the housing start numbers should give us another read on the all-important homebuilding market. This sector of the economy has been on a tear and needs to hold up for investors to remain bullish on the economy's near term health.
Look for homebuilding stocks to be volatile as a result of the housing report. Many of these issues are now in holding patterns and are poised to break significantly to either direction in response to the housing starts number.
In other areas of the market, look for sidelined cash to start finding a home in tech and financials since the Fed has outright said that it is not going to let us down. We also have a lull between now and earnings warning season that could set the table for more potential gains before traders become unraveled by warnings from companies that have fallen short on sales and new orders.
What we want to see for the remainder of the week is for more institutions to be placing bets. We need a ramp up in volume to get us over the 1265 level in the S&P 500 (SPX.X), the 11,000 level on the DOW and the 2250 level on the NASDAQ.
It's easy to see how this resistance is holding back big cap stocks like Dow components IBM and GE. A look at their respective charts is proof that these resistance levels are holding up strong. Until we break through these technical levels, the bears will still have one claw in the mix.