Lewis from Boxer
May 19, 2004
Sellers Fade Another Rally Attempt
Asia continued to bounce back sharply overnight. Japan rose over 2 percent, carrying the Nikkei back above its 200 dma. Hong Kong rose nearly 4 percent. Taiwan rose nearly 6 percent, and China was flat. The catalyst for the bounce in the region (besides the region simply being oversold and due for a rally) likely had a lot to do with the fact that the Vice Premier of China, Huang Ju, said last night that government measures to rein in the economy were working, and that an immediate rate hike had been ruled out. However, I don’t think this really changes anything fundamentally. The steps that China has already taken are likely already more than enough to slow its economy dramatically.
Europe was up nearly 2 percent this morning, and the US futures were also sharply higher. We gapped up big at the open and then surged higher by almost another percent on what looked like panic short covering. We hit our high for the day within the first 30 minutes and began slowly sliding lower. That slow slide carried on for the rest of the morning and on into the early afternoon. With about two hours to go, we suddenly began accelerating lower in both the S&Ps and NASDAQ. The coincident news was a rally in oil and gasoline along with the headlines of a mistaken bombing of a wedding party in Iraq, but again, I think this was more of a coincidence than a cause. The bottom line is that there are simply too many sellers overhead, and a weak option related bounce just wasn’t enough to keep stocks up. From there, the selling accelerated, and we broke to a new low for the day. That basically led to chain selling for the last hour and a half into the close, sending us out on the very worst levels of the session as well as negative on the day. Volume picked up a little but wasn’t anything massive (1.5 bil on the NYSE and 1.8 bil on the NASDAQ). Breadth was slightly positive on both exchanges.
The semis ended mixed after being sharply higher early on. As for the equips, AMAT won the “beat the number game” overnight and guided orders up 5 to 10 percent. But, nobody seemed too impressed because the stock couldn’t really get going even during the portion of the day that the market was trying to rally. In the end, AMAT ended down just over a percent on the day. The rest of the equips were higher, although significantly off their intraday peaks. The SOX ended up a percent.
Overnight, HPQ guided the midpoint of its revenue range up a whole percent for the second half (yawn). Inventory actually fell sequentially, which seems a little strange given that inventory exploded at DELL, which is a direct seller and a much better company operationally. In my mind, this can be the result of only one thing, and that’s channel stuffing on the part of HPQ. HPQ gapped up about 8 percent this morning, but ended on the low of the day and only up just over 3 percent. Elsewhere among PC makers, DELL fell a percent.
The earnings results really took a backseat to the wild action we saw in tech today. The fact that you had a massive intraday reversal (something I don’t recall seeing in a long time) was the real story, as positive earnings news continues to be faded at every turn.
Financials were mixed. The BKX was flat, and the XBD rose nearly a percent. The derivative king rose half a percent, BAC fell a hair, and GE fell nearly a percent. The mortgage lenders were mostly lower by a percent or two (see the MBA data below). FRE and FNM both fell a percent.
Retailers were mostly lower, with the RTH falling a percent. The homebuilders were all down 2 to 4 percent on the back of some disappointing data regarding mortgage demand. The Mortgage Bankers Association said its seasonally adjusted market index declined for the week ending May 14 by 11.9 percent to 654.1 from the previous week's 742.2, which is its lowest level since 599.9 touched in the first week of January. The group's purchase index fell by 8.1 percent to 454.2 after hitting its second highest ever level at 494.3 the previous week. Its all-time high was 501.6 reported for the Jan. 16 week. The group's refinancing index fell last week by 16.8 percent to 1,816.9 from previous week's 2,184.6. The refinancing index was at its lowest level since the first week of January when it was at 1,755.4. After today’s decline, the HGX housing index is once again threatening to make a new low for the year and complete a 7-month top, and if it does, I believe that will be a fairly strong statement by the market that the housing bubble has busted, which means the US economy is on the way to busting soon as well.
Crude oil rose 96 cents to $41.50 and just shy of a new high. Again, there’s not much to stop crude oil from rising further except a collapse in equities in my mind. I’d also note that gasoline hit another new high today. The XOI fell a percent, and the XNG also fell a percent. The CRB rose 2 percent, and the CRX commodity stock ended down a hair after being sharply higher this morning on what appeared to be hopes that the reflation trade was back on due to China’s statements overnight regarding interest rates. Gold gapped up over $3 in NY this morning and proceeded to rally another 5 bucks where it spent the remainder of the session gyrating around near the highs to go out at nearly the best levels of the day, up $7.10 to $383.
The HUI opened higher with the metal and traded up with it and the general stock market, but as the stock market began to fade, so did the HUI. Then, as the intraday slide in the stock market accelerated, the selling also accelerated in the HUI. The end result was that the HUI closed up less than 2 percent and on its low of the day. There’s still nothing new here. The golds continue to move lockstep with the rest of the industrial metals shares and the general equity market. As we noted yesterday, the golds (and commodity stocks and commodities in general) are all still trading as one with the equity market as the reflation trade unwinds (they have all been basically moving sideways since May 10th). These trades were all correlated to the upside last year when the reflation trade was being slapped on, and now they’re correlated to the downside as that speculative trade unwinds. If stocks in general take out the lows in the coming days, I would expect the gold shares to also, regardless of what the metal does.
The US dollar index fell nearly a percent. The yen rose just over a percent, and the euro rose half a percent. Treasuries were lower but have yet to make new lows. The yield on the 10yr rose to 4.79%. Should equities turn sharply lower from here (which today’s action suggests they very well could), I would expect the bond market to rally and confirm that Friday’s outside day reversal was in fact some sort of important low for the bond market.
I don’t remember the last time we had a big intraday reversal like the one we had in stocks today (other than an upside reversal of course), and I find it extremely bearish. Today was also the 3rd day in a row that we closed under 10,000 on the Dow, which is probably going to trigger more mutual fund redemptions from the public. So, while I had originally thought the option expiration might hold things together for the rest of the week and hold off any downside acceleration until next week, today’s action suggests that judgment may have been a little premature. The rest of the week should be interesting to say the least…
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.
Copyright © 2002-2004 Lewis Capital, Inc. All rights reserved. |
