The song remains the same as the bears are dancing in the street. And no, it is not the Bull Dance.
The S&P 500 led the major indices lower today with a loss of 1.8% or 26 points to close at the lowest level since 4/2/07. For the year the broad based index is now up less than 1%. The NASDAQ tumbled 1.7% or 43 points to directly on its 200-day moving average. The tech-heavy index has been able to trade above the long-term trend indicator since last September and therefore a breach would be significant. The Dow fared the best, but still lost 1.6% or 207 points to close at 13.028, the worst close since late April. The small-cap stocks suffered bigger losses with the Russell 2000 off 2.2% on the session and down over 3% on the year.
Technically the market has continued to weaken on the concern more credit problems will arise. That being said, every rally is sold into because it gives the hedge funds the ability to liquidate positions that are easily sold and raise cash. The first sign of a market bottom will be a string of bullish days when the rallies are not faded into the close. Until that time, CAUTION is what the flashing sign says!
Earnings and Economics
Wal-Mart (symbol: WMT) cut it annual earnings guidance due to what the company called a trouble economy. Home Depot (symbol: HD) reported a 15% drop in the bottom line and said it believes the housing weakness will spill over into 2008.
Should it be a concern that Wal-Mart believes we are in the midst of a troubled economy? It goes in one ear and out the other for me. While some experts believe Wal-Mart is a gauge on the US economy, I beg to differ. If that is true, why is the stock trading at the same price as it was in March 1999? In the same timeframe the S&P 500 is up nearly 15% and the S&P Retail Index has gained over 40%. Not to mention very large gains for its number one competitor, Target (symbol: TGT).
I will admit that I have not stepped foot in a Wal-Mart in years. Not because I am too good for it, but simply because there is no need for me to shop there. With warehouse stores such as Costco (symbol: COST) and the better selection and quality at Target, I have no need for Wal-Mart. I may be way off base in my thoughts towards Wal-Mart, but I will stick by my view that it is NOT a gauge on the US economy.
The top-line PPI number came in hotter than expected with a rise of 0.6% in July, above the expectations of 0.3%. In June the PPI fell by 0.2%. The Core PPI, which the Fed watches more closely, rose 0.1%, in-line with expectations. The reason for the overall number coming in higher than expected can be attributed to a 2.5% rise in energy prices.
Even though the Fed is more focused on the core number, I believe the whole number gives a better look into inflation. Granted the month to month swings will be volatile, but when removing food and energy it eliminates two key components. Think about your two biggest expenditures – feeding your family and getting them where they need to go.
Random Numbers and Thoughts
The CBOE Volatility Index (VIX) was closing in on a 4-year high as the fear continues to rise on Wall Street. If the last four years of data were used to analyze the VIX it would be indicating fear is running rampant and that a bottom is very close. Long-term VIX data shows the indicator has been trading at historically low levels for a long period of time. My data goes back to 1986 and the trough formed this January was the lowest ever.
What is interesting is the VIX traded in a similar bottoming pattern on the monthly chart from 1992 through 1996 before exploding up to a reading of 50 in late 1997. During the low volatility period the stock market was in a consistent uptrend and when the volatility started to increase the market initially fell before putting together a significant rally. Could the market be setting up for a continuation of the first half rally?
The put/call ratio is back at bullish numbers with 1.3 puts being bought for every 1 call. The bearish tone is very high as indicated by the VIX, the put/call, and a number of other sentiment readings. I cannot blame the bears for selling into every rally, though at some point the money will have to go somewhere and the most attractive instrument on the Street will be STOCKS!
Have a great night,
Matt McCall