Two weeks ago, investors acted like instinctual migratory birds that seemed satisfied heading in one direction (up) just because it felt right. This past week, however, the same investors that would have bought stock if you had blindfolded them and spun them around in circles, couldn't find north with a compass in hand. The problems were twofold last week. First, the wall of worry that stocks traditionally climb in a bull market had subsided to a picket fence of indifference and second, the Memorial Day weekend served to infuse an air of "I don't care."
Traders obviously checked out early last week. To wit, volume on Friday was the lowest all year. Only 828 million shares traded on the NYSE and a mere 1.4 billion shares changed hands on the NASDAQ (COMPX) on Friday. For the week the DOW (INDU) lost 2.6%, the S&P 500 (SPX.X) lost 1.1% and the NADAQ gained 2.4%.
It was certainly hard for most investors to concentrate on stocks while there was barbecuing and beaching on the brain. To this end, not much technical significance can be placed on Friday's and most of Thursday's market action due to a lack of volume. As all you chartists know, we study price movements combined with volume, so when volume is sorely lacking, charting goes out the window. To clarify, however, there were surely stocks that saw good volume both days due to news, etc. whose price movements should not be discounted.
Getting back to the wall of worry notion, did anyone else notice that the market moved higher and with more conviction when we were still getting earnings warnings and "make or break" economic data every other day? This is not a new thing. For decades, stocks have needed adversity to move higher. When we have a week like last week's where earnings news was light to nonexistent and economic data slowed to a trickle, traders get complacent. When traders get complacent they sell.
For all of you who have indicated that you are waiting for the next wave of earnings warnings to drive the market down before you buy, be careful. Stocks are always the underdogs and investors love routing for the underdogs. In other words, the upcoming earnings warning season might be the recipe for a slow, (read: agonizing, hair pulling) bull market rally.
Although I make it seem as if everyone on the floor of the exchange just sat around in lawn chairs all week sipping iced tea, there were some relevant developments on the economic, political and earnings fronts which made for some interesting hiccups.
What economic data we did receive last week confirmed that we are still bushwhacking our way through a downturn and that we are not out of the heavy stuff just yet.
The semiconductor industry rang in late Tuesday with their book- to-bill report for April. The reading of 0.42 put a halt to the six-day NASDAQ rally on Wednesday, as the reading was the lowest in 10 years. The ratio simply means that $42 worth of new orders were received for every $100 worth of product shipped for the month, indicating that the pickup is yet to come. Some analysts had predicted a book-to-bill ratio of 0.60 for April, but added that the lower reading of 0.42 was not entirely unexpected.
Some semiconductor and chip equipment makers initially fell on the news, but by week's end had recouped some of those losses. This was due in part to a Friday Prudential upgrade of the chip equipment stocks from "accumulate" to "strong buy." Pru's reasoning was that although there are currently few signs of a bottom in the semis, investors should load up now in anticipation of the next cycle. For the week, Applied Materials (NASDAQ:AMAT) finished down $1.29 at $53.71, Intel (NASDAQ:INTC) closed up by $0.32 to $29.10, KLA-Tencor (NASDAQ:KLAC) added $1.15 to $56.61 and Advanced Micro Devices (NYSE:AMD) lost $0.55 to $31.94. It should also be noted that all of the above semi stocks are still in near term up trends.
Besides economic news out of the semis, we received word on Friday of slower new home sales and slower durable goods sales. Orders for durable goods slipped 5% to $184.7 billion in April according to the Commerce Department. Economists were expecting durable goods to be off only 2.3%. In addition, April's existing home sales fell 4.2% to a 5.2 million rate versus an expected 5.28 million rate.
As a result of the weak existing home sales report, the homebuilding stocks, which have been forging ahead all year on lower interest rates and an unflappable housing market, gave up some ground on Friday. Pulte (NYSE:PHM) knifed through its 50- dma, losing $2.07 to $40.09, Ryland (NYSE:RYL) closed down $1.13 to $45.00 and Centex (NYSE:CTX) settled back down to its 200-dma after losing $0.69 to close at $37.78.
Rounding out the light economic news on the week, we got a few sound bites on the economy from the Fed Chairman himself during his speech to the Economic Club of New York. In short, Mr. Greenspan believes that we are still not free of further economic weakness and that further policy responses (interest rate cuts) may be warranted. He also indicated that he didn't think that inflation is a worry, since there is a serious lack of pricing power in corporate America.
Having probed deeper into the "Greenspeak", many market followers have surmised that although the Fed may again cut rates soon, it may be nearing the end of its string of cuts and will step back and tend towards a neutral policy after next month.
Since Friday's volume was so light, the market decided to take the path of least resistance and just drift lower with the tide. For this reason, trading was choppy and volatile.
The NASDAQ (COMPX) closed down 30.99, or 1.36%, to 2251.03. Advancers and decliners were just about even. Although the NASDAQ had a relatively better week when compared to the DOW and S&P 500, it is still sitting perilously close to support at 2232. We will be watching to see that this support level holds as we start trading next week since the next stop after 2232 is support at 2050.
The DOW (INDU) lost 117.05, or 1.05% to 11,005.37. For a brief period on Friday, the DOW wallowed around below the key 11,000 mark. However, a late day surge into the close prevented a close below the 11,000 support level. The DOW needs to hold 11,000 next week, if only for psychological reasons. It has some good support just under 11,000, but if it looses 11,000, it may bring more doubts as to the validity of the current rally.
Treasurys had a shortened trading day on Friday so trading was range bound and subdued. The 10-year note lost 5/32 to yield 5.51% and the 30-year bond gave up 3/32 to yield 5.85%.
Stocks and Sectors on the Move
As mentioned above, there was some political news this week that caused some turbulence for some select stocks and sectors. Vermont Senator James Jeffords announced Thursday morning that he would be leaving the Republican Party, tipping the balance of power back to the Democrats. This announcement puts many items on Bush's political agenda at risk since he no longer has the votes.
The Jeffords led pullback on Wednesday (as rumors spilled out about Thursday's announcement) was led on the downside by those so called "Bush stocks" that had been outperforming the overall market since the first of the year. Those sectors that took hits on the news were tobacco, drugs, oil and gas and oil service stocks.
But other news out of Washington on Saturday might make people forget the Jeffords setback earlier in the week. On Saturday, Congress passed a 10-year, $1.35 trillion tax cut, which will result in near term lump sum refund checks of $300 for individuals, $600 for couples and $500 for single parents. The bill came with some concessions to Democrats, but nonetheless can do nothing but help the stock market and current economic environment.
Now that you have decided how you are going to spend your refund check (sorry, Splittrader editors cannot except outside gifts) let's move on to some losers and gainers on the week.
Ford (NYSE:F) had a rough week after it outlined plans on Tuesday to break its alliance with Firestone and bare all the costs of a tire recall. In addition, it revised its production figures lower due to the temporary shutdown of three plants. Ford finished the week down $2.39 to $24.74.
ADC Telecommunications also was out with bad news. It was earnings out after the bell on Thursday that prompted a Friday sell off in the shares of the telecom equipment maker. The company met expectations of a loss of $0.15/share, but warned for its third quarter and expects to exit some non-core business to improve its outlook. ADCT closed down $1.69 to $8.60 on Friday to finish the week down $1.49.
On the upside, shares of PeopleSoft (NASDAQ:PSFT) added $1.77, or 4.1%, to $44.95 on Friday after Lehman Brothers upgraded the stock to a "strong buy" and said that PSFT is well positioned to weather the current economic environment due to its diverse offerings. Believe it or not, PSFT is up 132% since 03/16/01. As I said in last Sunday's commentary, it's a stock pickers market.
Speaking of stock picking, you can greatly increase your odds of latching onto a winner by first focusing in on the areas of the market that are outperforming. One way to do this is to first hone down your quest for a winner to the market cap that is currently working. Last week I spoke of the mid caps, as measured by the MID.X. This week, I'd like to focus on the small cap Russell 2000 (RUT.X) since it has edged out the mid caps and is obviously under accumulation by the institutions. Small cap stocks are commonly defined as those under $1 billion (price of shares multiplied by the number of shares outstanding).
As compared to the above chart of the Russell 2000, the NASDAQ 100 (NDX.X) is sitting right on its base, as is the DOW. The S&P 500 is only up 0.7% from its base and the MID.X is up 3% from its base.
Staying power is half the reason to own quality stocks. And as evidenced by the way the Russell held up last week, this is where a lot of the sidelined money is flowing. The more buying support a stock has, the less the stock falls when the broader markets sells off.
Looking Forward, Always Forward
Some folks are already calling the market's surge from its April lows "The New Bull Market." Well, the new bull is going to face a good test this coming week, since many of the larger cap indices are sitting right at support levels. If these support levels fail, it will put a serious dent in investor psychology and could send us back near the April lows (although I don't think we will get down that far).
To that end, this Memorial Day weekend, along with the required barbecuing and summertime merriment, I will be sharpening my own bullhorns. I believe this market is going to hold and head higher. There are far too many blue chip stocks (like GE below) that are hitting support levels and should at the very least, act to keep the broader indices out of trouble next week.
So, this weekend, after you finish doing your own personal salute to the official start of summer, think about how you will go about capitalizing on a bounce off these market support levels, or alternatively, your exit plan should they fail.
As an additional note, if you haven't noticed, more and more stocks are deciding to split their shares. Therefore, don't be surprised if more split runs end up on the play list soon. Many of these splitters are breaking out to new highs, so if you need play ideas, please refer to our Current Play list on our homepage.
Have A Great Holiday Weekend