Thursday, April 10, 2008

Faux Rally Sputters in Final Hour

Veteran market watchers can say they've seen this before, and they probably have, but there is little reasonable explanation for today's rally other than short covering. Seldom, if ever, is there a pre-earnings rally, as investors usually wait until companies actually release their earnings reports, not before them.

Equally unusual are stocks gaining on prospects of lower earnings expectations, especially after the company releases a pre-earnings warning. Various retailers released dismal same-store sales figures for March on Thursday, the worst, by some accounts, in 13 years. The actual figures were somewhat sobering:
  • Dillard's Inc. -10%

  • J.C. Penney Co. -12.3%

  • Kohl's Corp. -15.5%

  • Nordstrom Inc. -9.1%

But, amazingly, all of these stocks were up on the day!
  • Dillard's (DDS) 21.14 +0.64

  • J.C. Penny (JCP) 40.07 +1.15

  • Kohl's (KSS) 43.72 +1.32

  • Nordstrom (JWN) 34.39 +1.10

If anyone reading this has a plausible explanation for the phenomenon, please post a comment below. Surely, the brightest of the bright (CNBC analysts and Jim Cramer, in that order) will attest that the results were widely expected and already baked into the share prices. The result: massive short covering on a "buy the rumor, sell the news" upside-down trade.

OK, we've got it now, except that Dow Jones News has reported that the retailers blamed an early Easter and unusually cold conditions in the Northeast for the widespread sales declines.

Well, there are two good explanations. My very own perspective, upon witnessing this particular variety of bizarro-world trading, is to issue sell recommendations on those four companies and the one mentioned below, Boeing.

Some companies announce that they are encountering production delays in an anticipated big product. Such was the case yesterday with Boeing (BA), which gained nearly 5% after announcing that production of the 787 Dreamliner aircraft would not be finished on time, though, and we always love these statements, earnings would be unaffected Uh huh, sure, yeah, right. Boeing came back down to earth a bit today, dropping an entire 17 cents. Not to worry, the aerospace king will drift out of orbit and close below 70 in the not-so-distant future.

As for the general markets, with the retailing news in hand at 9:30 am, opened higher, lost ground and then climbed to the best heights of the session by 11:00 am. Drifting between 12,600 and 12,650 for the better part of the day, the day-traders which now overpopulate Wall Street had finally played enough and began to take profits. The Dow, which was up more than 120 points, fell back to show a gain of just 20 points with about 20 minutes left in the session. Those 20 minutes were spent as they usually are, adjusting the numbers to make them look better than they should.

Dow 12,581.98 +54.72; NASDAQ 2,351.70 +29.58; S&P 500 1,360.55 +6.06; NYSE Composite 9,096.86 +22.04

All told, the rally was built with borrowed money (nothing new there), exaggerated by short-covering and decimated by profit-taking near the close. Wall Street continues to play this game, holding the indices at unsustainable levels. Since the massive run-up of April 1, stocks are down, but barely. The Dow, for instance, is off 72 points from the April 1 close. They've absorbed day after day of discouraging words, and while the Street is no home on the range, the skies are anything but not cloudy all day.

Once actual earnings being to flow, one would expect stocks to take somewhat of a beating, unless, of course, we'll be forced to stomach the various vacuous analysis of "cold weather", "already baked in" and other such explanatory nonsense.

These markets are cooked, fried, flambed and roasted to a crisp. It's a waiting game, and there's plenty to be lost or gained. The general consensus by the major holders - mutual funds, brokerages and institutions - is that it's better to hold on than make any panicky moves. So it goes.

Internally, the markets look less than robust. Advancing issues regained a clear lead over decliners, 3793-2410. New lows overwhelmed new highs, 174-75, and my point is that if you're not making new highs, you'll test those lows eventually, and the majority of stocks are in that lower-end range, approaching their bottoms or just off them. Another bout of profit-taking or fear will send the new lows up over 500 within the next 10 trading days.

Corporate earnings are not going to be healthy. The economy continues to flounder, but the fascist news media continues to ignore most of the salient facts about the credit crunch and its implications. If banks aren't lending money, the economy is going to rot.

Oil actually trended a little lower, but not by any significant amount. Crude fell 76 cents to $110.11. Gold's short-term rally stalled, losing $5.70, to $931.80. Silver dropped 16 cents to $18.04.

The retail sales figures came in as ugly as expected and went, with the market closing higher. Eventually, all of the data gets evaluated and stocks respond with reasonable valuations. Today's traders are not interested in actual, true valuation, just how much they can squirrel away in a given day.

NYSE Volume 3,642,058,750
NASDAQ Volume 2,206,656,750

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