Breakout!!! The SPX and RUT finally snapped up and was sucked up into the 2 week long rally to break above their resistance – it was a euphoric and rapid move to the upside. It seemed that we could continue on to 10,000 or even 11,000 in the Dow Jones – even Crammer (Mad Money) is said this is a rally you can believe in (that’s if you give anything he has to say any weight).
But there was mixed economic signals yesterday, jobless claims (taking a back seat to the big rally) we up 30,000 and while existing home sales were up – we had additionally been reminded that foreclosures continue to mount. No worries – the market ignored it and headed higher.
Then after the close – the futures began to flush pretty hard. Microsoft missed earnings and sales were down, the stock was hit. Then Amazon got hit on their earnings, AXP and others starting following suit. The futures began selling off and the put volatility (skew) started increasing rapidly.
Certainly the resistance has now become support, but was the aftermarket session the indication that the short-term rally is over?
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Microsoft – reported a profit decline
Microsoft the world’s leading software company reported a 29% drop in profit and a sharp delinquency in customer credit payments. If customers can’t make a payment for their software – which is showed a 29% drop - how are they making payments on their computers or other items? Apple is unique in that the majority of their iPhone sales are via a cellular carrier that makes up a significant amount of the revenue, rather than direct sales. But you must begin to wonder about that consumer spending power.
Microsoft was not optimistic with their forward guidance coming out of the first quarter – they had been conservative (like others) lowering expectations – but they didn’t even make that hurdle. When we step back and look at the earnings and compare the two important factors; year-over-year and revenue = the earnings on the whole across the board look pretty crappy. Repeated again on Bloomberg this morning (and we keep hearing it) the earnings surprises have been from cost cutting measures – NOT because they had increase revenue. Sure there are some rock stars out there – but if Microsoft is having problems collecting payments, seeing a slump in computer sales, and couldn’t even beat (let alone meet) their relative conservative guidance – I think it is a clear sign (that while the market is up) the economy has a long way to go to recover.
Microsoft down in the pre-market.
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Amazon – Brick and mortar online
While I mentioned yesterday that I had a love affair with eBay, Amazon is a different story for me. Sure I use them and like their services – but really they are just a brick and mortar store online. The warehouses, shipping, returns, sales, credit card payments, etc. They have a lot of items to manage and WAY thinner margins to work with than an eBay.
Great idea, while executed, and a brilliant use of the internet – however they are subject to the same problems that every retailer has (inventory, short-term financing to stock inventory, shipping prices, credit payments, sales, returns, etc.) Of course they don’t have to have a store front or a sales staff.
But just like Microsoft – Amazon (the world’s largest online retailer) saw a decline in 2nd quarter profits and a slump in sales (even after discounts).
This doesn’t bode well for “back to school” sales and if that doesn’t pop – I think “holiday sales” could also fall flat. So far the picture for the 3rd and 4th quarter is not looking too hot – if we measure it by consumer purchases using Amazon as a bell weather.
Amazon is down in the pre-market.
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U.K. reports the economy shrunk twice as much as expected
The U.K. our closest ally and economic mirror in many ways reported that the economy shrunk twice as much as forecast (.8%) in the second quarter. The slump is lead by the same conditions in this country, job losses, credit availability, payment delinquencies. Sure the market has rallied abroad as it has here – but the economic outlook continues to remain weak.
The pound is off about .5% to the dollar this morning, but for now the U.K. report is most likely similar to our own.
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Futures Pre-market
The futures after market fell sharply on Microsoft and Amazon’s poor earnings – fair value is considerable higher from here and the futures continue to look lower in the pre-market. Expect a gap down in the market this morning.
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Support / Resistance
Just when we saw the SPX and RUT finally breakout above those resistance levels, Microsoft had to ruin the party and pull it back down. Sure we are still above those resistance levels – even after the lower opening this morning – but as one investor on Bloomberg said this morning, “When I saw the Dow Jones hit 9000, I knew I should take some profits.”
INDU 9000! (We not only touched it we ripped through it yesterday, however futures are pointing to a opening below the 9000 level. The question is can we get back there today or was that the short-term top?)
NDX 1600! (Just like the INDU the NDX ripped to 1600 and then sold off over 20 points in the aftermarket.)
SPX 950! (We broke through and went to 975 – futures are looking lower but above 950. Watch the close.)
RUT 540! (Again we got through it – but it looks like we are opening right at 540 this morning.)
It is the weekend and we may see some additional profit taking. Watch those numbers at the close – if we close below them or above them. If we get a rally into the close – that means we could see more strength next week. If we close on some lows and below those numbers it could mean that the short-term rally has lost some steam and a visit to slightly lower levels is in the cards.
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Conclusion
No doubt, most traders I have heard from – had all expected (for those technical guys) that the head and shoulders from a couple of weeks ago, coupled with the talk that the stimulus was not working and second one was in the cards looked like we might drop. Then as we started getting back up to that 20MA (or shoulder top) – we had a gap and a run during expiration week that was between 5 to 8%. Coming into the week the short open interest was getting up to February record levels (before the sell off into March lows), and that gap up on Wednesday triggered some serious short covering which has continued to help fuel the rally. Short-covering is not good for investors (regardless of your bullish or bearish stance) because it injects some volatility and knee jerk movement – catching some out and I have seen long holders see it top out only to watch it retrace. Just like a rubber band – it can snap. Yesterday’s pop in OTM put volatility was the first indication of the panic the started to surface at the close in 15 minutes of aftermarket futures options trading. Watch out for hyper-moves (in both directions).
The 1,000 foot view continues to show a huge gulf of separation between the economic reality on the ground and the market euphoria of heading higher. It was only two weeks ago that the media was talking about the failed economic stimulus and a second was needed, foreclosures and delinquencies were up, jobless claims continue to increase, and the green shoots were turning into weeds. (Notice how the “Green shoot” talk faded as nothing was coming up daisies?)
Then going into expiration week and earnings season we have a pop (gap) fueled by short covering that continues for 2 weeks. Everyone forgot about the economy, talked about earnings surprises, and pointed to them and said “There! There is the proof and good news!” – only a few asked, but everyone lowered expectations to super sucky levels – anyone should have been able to beat those expectations. They the talking heads start reviewing – wait it’s cost cutting, banks still have huge loan losses and mark-to-mark losses (sure Goldman traded for record profits – but their code is stolen and there is some skeptical business practices being suggested). Now two bell weathers, Microsoft and Amazon go further to indicate that sales have slumped and consumer delinquency is on the rise.
At the end of the day we can’t forget about the most import part of our economy, it is WE – we the PEOPLE. Our economy WILL recover – when the housing prices hit bottom, foreclosures stop, consumers deleverage, job losses stop and new jobs are created. But until that happens anything else is just “green shoot” optimism and a failure to look at the reality.
As they say in WAR (and McNamara admitted he got it wrong – sitting behind a desk and looking at numbers) – unless you are on the ground you really don’t have a clue as to what is going on.
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