Expectations 'in the market'

Early in the week, noted if a close over 1118 didn’t materialize, a dip would be in order. Well, we’re getting just that as the market meanders with nothing up it’s sleeve (catalyst) .

Earnings,  the predominant theme over the past week for the broad market is simply out of fuel at this stage as the bulk of SP companies have painted a (better than expected) picture.   Yesterday and today, we see profit taking on the ’better’ reports,  which means the market is saying.."we know this already, you really have to surprise us now!!”.   Expectations are simply high now.

Focus turns to macro/ eco’ data next week (including China PMI‘s weekend), most investors are fine with waiting it out now as upside to much hyped about ~1130 early in the week is looking improbable to close off July.     There is no problem with letting the market ‘work it off’,  even if it means being off nearly ~20SP from week’s high.  There is enough congestion 1098/1100 to provide a floor for the market and possibly get some dip buying in.   Today, transports were the backbone of the market (DJIA down only 40 vs. NASD -24) with CHRW/ODFL continuing the ‘positive’ tone set by EXPD first.  Watch group for any signs of market deterioration following the already 'Steel' no-show this week.

..stalling too long

The expectation of a dip since early Tuesday morning is getting a bit tiresome due to the action today.  It’s getting a bit too long in the tooth and there is no solace in today’s mid-day rally or the fact the market managed to close above what should be a short term ‘floor’ at ~1098.   The ‘floor’ seems a little squeaky and you can start seeing downstairs (1080’s) through some cracks.    A close above today’s close is a necessity now for Friday (need to see some conviction dip buying show up), otherwise any disappointment over China’s weeeknd PMI’s and/or US ISM on Monday will cause a roll down the stairs to test the 1080's levels quickly.   Market's resiliency will probably be tested tomorrow, if buyer's don't show up before the macro data next week. 

Being underinvested after Tuesday’s 1118 alert avoids any real worrying of the above happening, yet trading goes on slowly and it includes being ‘selective’ in picking out some current earnings and sticking with them and/or buying them on dips.   These stocks have ‘underlying’ earnings that should avoid any ‘hits’ a high beta stock or sector such as commodities may experience in a further pullback.  

A couple more of these earnings in the last 24hrs, include DJIM stocks past and present. BMO, we had VCI, CLW.   AMC, we have DLB  with excellent #’s and ROVI  again not disappointing.   These companies keep producing Q after Q.    Tonight’s EPS#’s in high beta closely followed names like APKT, WYNN, CSTR, even FSLR  are very ‘noisy’ and hard to gauge immediately off the headline revenue and/or EPS beat.   The reactions are more of the profit taking unfolding we alluded to after VECO that is still presiding over the momentum ‘popular’ stocks.

DJIM #31, 2010

In Friday’s trade,  the market’s squeaky floor just discussed at ~1098 succumbed to the 1080’s following GDP data, only to be saved by Chi PMI/  confidence number soon after the opening bell.  The market’s dominance turning back to macro over micro came one trading day before the expected shift come China’s weekend PMI/ ISM on Monday.   Tonight, despite a soft tone China manufacturing PMI, it’s ‘better than feared’ as pace of decline moderating and it comes with PBOC’s statement assuring a moderate loose policy.   This is adding to the rebound kicked off in US on Friday to global markets overnight.    How long it will last will depend on US ISM to begin week with and NFP# to close week,  the main focus will now turn to US with Euro/China decoupling somewhat in macro terms as fears subside for the global economies/markets, but not the US'.

Despite a very strong market gains in July, we saw ‘Steels’ outlooks suffer and Semi’s down >4% this week, signs of technology softening demand is showing up globally (possible correction in technology coming).    Simply, these ‘groups’ did not paint a very healthy signal for the broad market and need to be watched closely going forward.    It’s almost incredible the market held up last week despite these unfavourable, very possible ominous market trends emerging.   The only possible answer is the market is ‘much more’ resilient than just a month before as to why it is holding up and/or it's purely technically driven at this point.

In August, the expectation is for some ‘holiday’ market malaise, but the low volume it will come with will increase volatility.   A morning gap rally is irrelevant until last week’s failure to close over 1118 is solved to the upside. 

..all around the world

                                                                   
How time …doesn’t fly!.  

Back in April, …."Our speculation..... Possibly a May sizable correction coinciding with the “Sell and go away in May” almanac trading mentality returning..”  

Only today, some 50+ trading days from a mid May day, we can we say the market finally achieved a close above that May close and above any June close.   The June peak retest is underway.  Is this the significant step to move forward?.   Most importantly, is performance anxiety going to rule and force investors to get their money off the sidelines and into the markets.   Unfortunately,  it won’t be so fast based purely on technicals because of what’s transpired from the European crisis to Flash Crash to Double Dip chatter in the past 3 months that has really left confidence in shambles.    Also, money managers/MF’s are as invested as they’ve ever been and don’t have excess cash to put in the market without new money inflow, instead of the usual outflow redemptions we've seen for months.  Simply, today’s great, but it’s not so clear cut.   

What today’s global market exuberance off Global PMI/ISM’s did was show those left on the double dip camp falling off.    Last week, we highlighted the importance and the market’s wait and see on the Macro picture into Monday‘s trade.   Today’s market gains are a pure reflection of how integral these PMI’s were to add to the micro earnings picture that developed over the past few weeks!.  It was not only the China #’s noted yesterday before trading,  it was followed by a stronger Eurozone, we can even sprinkle in some Australian and Indian PMI figures for taste.   The icing on the cake was the US ISM#!.   This was the big surprise (GS had a terrible expectation) considering all previous ‘regional’ (excl. Chi PMI Friday) were horrendous!.   What happened in the last weeks/ days of July to propel this final number after such a sluggish start?.   Whatever the fuel was,  it was definitely a changed landscape.

Now, the question is if the market can build on today?.   If it wasn’t for the big 7% month in July, we’d say it would be easy retest and break of the June peak, but sentiment is close to peaking on overbought territory due to the big July.   Still, we can go to 1150 in an overbought state.   Recall, recently called a sentiment bottom here and it prevailed in a very timely fashion.   So, taking it one day at time, but the employment ISM part is very encouraging for a good print on NFP# Friday.   After some probable early consolidation following today’s gains, an effort to go higher into NFP is probable, based on this ISM labor prelude.   

..some resiliency signs..

The market got an early bid and was up nearly 1%…oh wait, that was the bond market from the QE noise!.   The equity market was the one down nearly 1% before staging a decent reversal from the ~1118 levels and afterwards flat lining for the remainder of the day.   This was the expectation to consolidate and the hope not get a retest of 1131, just yet.    The view is it’s better the market didn’t even try to follow through from the previous days big gains and possibly succumb to selling if it tried to push 1131 too quickly.    Maybe this way, the market can generate some mustard by spending time bouncing around a tight range to show levels like ~1118, even 200ma~1114 will provide the necessary support to uplift the market in the near term.   In other words,  give some confidence to those on the fence at this point.

A key takeaway(s) from today could be the resiliency in the market showing up.  Despite a handful of negative reports from household names like DOW PG down 4-10% and not so hot macro data, the market held up quite nicely.   Also, the terrible underperformance of the consumer discretionaries didn't spook the market.   MA, didn't have the most pleasant things to say on spending.

Away from the broad market picture, we had numerous previous small caps put out nice reports to trade into the Q, a few like CTSH ’s amazing sequential growth and PCLN  had robust numbers.   Even, STEC  shows sign of a turnaround for the short term.   Other notables include RBC OPLK HLF VSH  to stick on the shadow list for the Q to go with the VMW EXPD ILMN CRUS CLW RVBD  earnings plays from July.   The more the merrier….                                

...slowly but surely

..the market crawls methodically for 1131 retest

We can wrap the today’s market by repeating yesterday’s first paragraph as the context remains the same.   Overall,  simply buyers on fence and shorts not eager to press on with new positions.Market sticks to tight range showing more signs of resiliency as buyers show up to buy dip blips off anything that can be construed as possible bad news. (*China Stress tests (housing)- Commods bought up after headline pressured them.   Still, this may get more attention as the belief recently was the China gov't would be "relaxing" things.    Also, the discrepancy in the steel uptick end of July vs. X's and other steel co's guidance not resolved.   Leaning on the X  side as to what might be occuring going forward.

Overshadowing a broad tight range market was the outperformance of DJIM’s Q stocks as traders buy the earnings.  Recently mentioned, EXPD  led the charge ( last week noted as long as transports stay intact the market would be fine) with VMW, ILMN CLW  hitting new highs since releases.

Beer and Jobs..

Expectations after Monday’s big day has turned into a something more than the expected consolidation into NFP#.   Even tough, it may seem in the media as one hyped up report, the market volume is one of a day at beach.   As alluded to this morning,  the market might be looking forward to FOMC and the QE noise speculated early this week, instead of expecting anything meaningful to the South or North of 100-150K (Private jobs) expectation.   If this is the case, a bad # may provide a dip buy oppy’ and a excellent # may prompt some profit taking if an upward comes with it as there is a general buyers and sellers strike this week.   

The only thing getting people excited is the Burning Bush ‘Wheat” story gaining momentum.
Interestingly, it’s the flip floppers on CNBC doing much of the hype,  we haven’t seen anything substantial on the subject from GS JPM to generate more than a short lived move from retail.   Once/ if they pump to their institutional clients,  we’ll all follow the money.   If this has legs for the remainder of the year and into 2011, you’ll have plenty of time to profit from the Ag-Chem sector as we did here years past with the POT, TNH  etc.   The rallies in this sector last for a good year or two and the start of this one is not on the same fundamentals as 2006-08.   It’s a question of sustainability.    Still, the trade is on and unfortunately and hate to say it, shorting BEER co’s is a short term trade as brewers and Food co‘s should feel some short term pain.

DJIM #32 2010

At the end of the day, Friday was not any different than every other trading day last week despite the early NFP# sell off.    Most importantly, the same market attributes present all week, won over the day. 

This includes ‘resiliency’ in the face of a worse than expected NFP number, dip buyers showing up, shorts unwilling to press and/or even hold an intraday loss in check.    If every other reason  (there were many last week to sell off the market), this 'poor' employment report was the kicker that should have done damage for more than an hour.    Instead,  the market showed its durability once again, with the end result a bullish day to build something off.     This action may have also shown the market was overlooking the labor report and had set it’s eyes on the FOMC statement this week for some color before deciding what to do.    On the other hand, this may not matter much unless something really changes as we head into the latter half of August (attendance will dwindle and catalytic events, data is not on the calendar).    Interestingly, the market never even tested the 1131 mark last week and due to Friday’s actions it may not even be a retest, but an easy move higher as we hit the summer doldrums.

The transports  outperformed last week and as we’ve been saying as long as this sector remains strong, the market is fine.  It also helps materials  had a good week, which shows China is on course for a stable, if not strong 2H.

QE2 noise..

Last 24 hrs, all the talk has centered around the importance of tomorrow’s FOMC and the subject of QE2 and yes, the camps are quite spilt as to what the FED should or needs to do.   It even gets more spilt as to effect of opening door to QE2 would have on the market direction.   Last week, we noted this story, http://online.wsj.com/article/SB10001424052748704271804575405113846708620.html and that it may affect market negatively, which id did to start the trading day.   Since the story ran the market was supposedly focused on NFP#,  but we said the market might be looking ahead to FOMC instead by last Thursday.   The market has moved nowhere indicating eyes/ money were on FOMC.    Well, now we’re almost here and everyone is treating this as critical as NFP#.   Guess what?.. By end of day,  this FOMC will most likely pass as a whisper to the market as did NFP#.   The story above and the potential incremental steps by FOMC have lost steamed, most notably because of the NFP#, even though not indicating recovery strength was also not bad enough for FOMC policy change.   Those wanting FED to take imminent steps will likely be disappointed, but it’s doubtful it’s enough reason to sell off the market, we think QE2 steps would likely do more damage.     Hope here and expectation is FED stays  ‘very accommodative’ long term as Bernanke signalled recently.    We will get a ‘downgrade’ on economy, but that is priced in.

As far as trade today, besides the GEOY/DGI  early morning alert…summer dullness’ really set in today with volumes way below average.  Once we get through FOMC, heads will turn to CSCO  earnings and more importantly CEO’s comments to see how things are looking forward.  CSCO is important because it’s the first real JULY end report, not June end.  Overall for Nasdaq/tech,  the concern here is still the SMH as noted to start the month..."and Semi’s down >4% this week, signs of technology softening demand is showing up globally (possible correction in technology coming).  Since, SMH has done nothing the change this view.  Sooner or later, the market may not like more talk of demand softening coming.

..Drive by surprise!

If global markets down on ‘poor’ eco data weren't enough, notably China’s demand trending down,  the FOMC added some pie to the face this afternoon!.    As it turns out and as speculated here last Thursday before the job report report…“Starting to think buyers on fence will wait for FOMC next week to decide… but this peak will eventually be decided post FOMC“.  

Since incremental changes were thrown around last week (see article yesterday) , the sentiment that anything was going to be done was slowly being reversed by FOMC time.   This is clear in the action in USD and treasuries the past week, which are the mouth's of the FED when it comes to what the market is thinking will be done or not.    Everything pointed to this being a non-event by 2:15pm as 2yr TSY were weak and USD was being short covered, carry trade unwound with anticipation of ‘nothing material’, but than ‘kaboom’ and a short lived celebration.    As said, “..think QE2 would likely do more damage.”…  The ensuing post FOMC stock spike that recovered almost to 1127 really stunk.   Did you see your individual equity watchlist go with the spike?.   Absolutely not, this was a pure ETF and Futures move.    Stocks got no bid!… Even all those that wanted some QE and said the market would rally on such seemed not to want to participate and instead did some profit taking!.    Simply, as pointed out so eloquently in a post tonight, something in the economic picture in the past few weeks (since the hearing with congress) made them run to bathroom,  FED's economic assessment shift suggests a bigger down shift, worse growth outlook and therefore more policy changes ahead.     After some refection, the market tonight is getting the same drift thought here that this would only put fear in investors.   What does the FED know, that we don't by changing their outlook with this policy shift so quickly and without giving a hint of such recently to the market.   This needs some answers/ clarification.  The fact the FED is willing to act is really of no consequence as it’s the expectation and not a reason to rally the market in our view as many claimed it was.

One thing is clear and that is on the charts now that 1131SPX is out of view instantly with 200ma about to be cracked..  The July low points trendline has to hold!.   Also, this would put the 20ma in jeopardy, which is the benchmark buy and sell line when it’s broken in either direction here.   Buying this dip is not on the agenda here,  we’ve seen many times if a big one day slide occurs, traders/ investors are not willing to step up until some stability or clarification in this case needs to occur.    If some ‘spin’ clarification is sufficient the market will hold, but it seems pretty cut and dry as to what the FED did and why.