Lewis, compliment of Boxer
Stocks Finally Bounce But Not Much
May 11, 2004
Asia was mostly higher overnight. Japan picked up a hair, Hong Kong was up a hair, and Taiwan picked up a percent. China’s Shanghai Comp rose half a percent. The Chinese apparently cancelled a meeting to discuss raising interest rates overnight, which seemed to help things in Asia for the time being.
Europe was up over a percent this morning, and the US futures were also higher. We gapped up at the open and traded up until we had filled yesterday’s gap down. At that point, the rally ran out of gas, and we slowly slid back to the open and to a marginal new low for the day. We quickly stabilized, however, and spent the rest of the day working our way back up to the morning’s highs. Things turned a little shaky in the runoff ahead of CSCO though, and the futures actually closed back near the opening levels. Volume backed off a bit (1.5 bil on the NYSE and 1.6 bil on the NASDAQ). Breadth was 4 to 1 positive on the NYSE and over 2 to 1 positive on the NASDAQ. New lows on the NYSE backed off to 251, and there were only 7 new highs.
The semis were higher across the board by a couple percent for the most part, although INTC managed to rally 5 percent for whatever reason. The equips were up 3 to 5 percent, and the SOX rose just over 2 percent.
CSCO rose nearly 3 percent, and there seemed to be a lot of optimism throughout techland in general ahead of CSCO’s results tonight. Given the way that the market has faded good news of late, it’s hard to see how “so so” results from CSCO (which is what I expect to see tonight) could inspire a rampjob, but we’ll see obviously. Tomorrow’s action in tech is going to be all about the reaction to CSCO, and I suspect we could be in for a good deal of disappointment. For today, the NASDAQ rallied back to underneath its 200 dma, but it failed to recover it.
Financials were higher also. The BKX rose a touch, and the XBD rose over 2 percent. The derivative king interestingly slid nearly a percent despite the rally in the rest of the financials. BAC and GE both rose a percent. The mortgage lenders were mostly higher by 2 to 3 percent. FRE and FNM both rose nearly 2 percent.
Retailers were mixed, with the RTH ending flat. Homebuilders were up a percent or two across the board.
Crude oil surged $1.13 to a new closing 13-year high of $40.15, and this was despite the Saudis saying yesterday that they “would not tolerate $40 oil.” So, we may be seeing the problems in Iraq and the Middle East finally moving to forefront in the market’s thinking. I’d also note that the US imposed sanctions on Syria today, which takes things up a notch as well. The XOI rose nearly 2 percent but is still well off of its recent high and diverging from oil a bit. The XNG rose a percent and a half. The CRB was up a touch, and the CRX rose nearly 2 percent. Gold opened down a dollar or so in NY, and after a brief recovery, slid lower by about 3 bucks to its low of the day down around $375 (but importantly well shy of a new low). From there, the metal recovered, and while it never could quite get positive, it did manage to close near its best levels of the session and only off $1.50 to $377.50.
The HUI opened flat, traded down slightly with the metal, and then spent the rest of the day rallying to go out at the very best levels of the session and up almost 2 and a half percent. This makes two days in a row now that the gold shares have outperformed the metal, which is mildly bullish, although that alone isn’t reason enough to think anything has changed other than the fact that the freefall in the golds may have finally ended. We may be beginning to see a slow shift from the “reflation trade” in the golds to geopolitical concerns based on the move in oil today, which might help gold. It’s too early to say one way or the other. It’s just something that I am thinking about at the moment, but it is a possibility worth considering I think.
My bottom line concerning the golds continues to be that because I think stocks are headed for potential accident (which nearly always takes the gold shares with them), I’m really not comfortable buying the gold shares yet. But I may begin to look at the South Africans soon anyway, given that the rand continues to sell off against the dollar and reduce the South African’s cash costs. I haven’t done anything there yet, but if I do, I’ll be sure and note it here for those that care.
The US dollar index was only up a hair after trading up nearly a percent this morning to another new high. The yen bounced a touch along with its stock market overnight. Trading in Tokyo’s stock market is still being dominated by foreign speculators that are engaged in the reflation trade (having borrowed cheap dollars and gone long yen vs. the dollar and Japanese stocks), so when Japanese stocks fall, the yen tends to get hammered too. The euro fell a hair. The British pound, however, was busted for a percent to a new low for the year. No real change here. The dollar continues to slowly work its way higher, as its bear market rally continues.
Treasuries were flat after today’s auction went off “ok.” The bid-to-cover ratio was 2.08, which is slightly worse than February’s 2.27 ratio. Now, the February auction was at much lower yields, so the auction was actually a little disappointing. But it was by no means a disaster. The yield on the 10yr slipped slightly to 4.76%.
We’ve got a couple of potential negative catalysts that could go to work on the bond market at any time. The first is crude, which could push up bond yields initially until the deflationary effects of higher interest rates and higher crude prices weighed on stocks. Secondly, is the possibility that the BOJ may be forced to sell treasuries (i.e.- sell dollars and buy yen) in order to allow reflation specs out of their short dollar/yen trades if the Nikkei should decline precipitously again over the next few days. The unwinding of the carry trade continues to dominate trading in the bond market (these other things I am mentioning are only negative catalysts), and despite more comments from Fed heads today to the effect that they won’t be raising rates quickly or anytime soon, the market appears to want to take rates higher. The only thing that’s probably going to stop that is stocks collapsing, which is exactly what I think is coming up next in the playbill.
We finally got a bounce today, and it was a fairly weak one at that. It wouldn’t surprise if today was a one-day bounce given that all of these major indexes have already taken out their March lows (except for the NDX), but we’ll see. If it is just a one-day bounce, that now sets us up for some potential acceleration lower tomorrow. I find it hard to believe that CSCO is going to live up to the lofty expectations that people have, and Asian markets continue to be fairly jittery as well as we await news out of China concerning monetary policy. You put it all together, and things could turn a lot uglier as the week progresses unless the bulls can pull off some sort of goal line stand down here and repair a lot of the technical damage that at the moment is looking increasingly “terminal.”
Disclaimer: Lance Lewis periodically publishes columns expressing his personal views regarding particular securities, securities market conditions, and personal and institutional investing in general, as well as related subjects.
Mr. Lewis is the president of Lewis Capital, which manages a hedge fund in Dallas, Texas. This fund regularly buys, sells, or holds securities that are the subject of his columns, or options with respect to those securities, and regularly holds positions in such securities or options as of the date those columns are published. The views and opinions expressed in Mr. Lewis' columns are not intended to constitute a description of the securities bought, sold, or held by the fund. The views and opinions expressed in Mr. Lewis' columns are also not an indication of any intention to buy, sell, or hold any security on behalf of the fund, and investment decisions made on behalf of the fund may change at any time and for any reason. Mr. Lewis' columns are not intended to constitute investment advice or a recommendation to buy, sell, or hold any security. |
