Wednesday, August 4, 2010

A Thousand Points of (False) Hope

Stocks on the major indices closed near their highs of the day, pushing the averages ahead for the 14th time in the last 21 sessions - about a month's worth.

Most of the upside movement since the 4th of July holiday has been on lighter-than-normal volume, and today was certainly no exception. Out of a universe of over 3000 stocks, the top five most active on the NYSE accounted for 12.5% of the volume, a skewing to the degree of magnitude of nearly 100 times normal, proving that when analysts say that most people trade the same stocks, they surely aren't lying about it.

Those five stocks - Citigroup (C), Bank of America (BAC), Motorola (MOT), Pfizer (PFE) and Ford (F) all trade for under $20 per share and have since Autumn of 2008, when the systemic financial collapse made everyone rethink valuation models. It's patently clear that investors have gotten stuck in a routine, especially in the case of Citi and BofA, two stocks which, under better-managed conditions would have been bankrupted and de-listed long ago. The pair of zombie banks consistently lead the most actives, as gamblers attempt to profit from fairly large percentage moves in what have become, essentially, penny stocks.

Another interesting side note on those top five is that all but Bank of America posted a gain, though Citigroup's was only a slim penny advance. BofA dropped by 14 cents, making the two most actively traded stocks the worst of the bunch. One can only speculate as to why so many trades occur on these two dogs, but there are, almost without a doubt, plenty of sellers, long-term holders who a quietly slipping their money out of them.

The advances over the past three days have pushed the Dow to a 1000-point gain over the past month, putting them right at (for Fibonacci fans) a 67% retracement of the 1500-point decline which commenced from mid-April to the first days of July.

At what appears to be a key inflection point, stocks face an uphill battle to surpass the April high of 12,200 on the Dow. Since the latest move has been fueled largely by excellent second quarter results from a wide swath of companies (notably, neither BAC nor C among them), the propellant seems to be missing for the final push, replaced by two key data points: Thursday's unemployment claims figures and Friday's July non-farm payroll report.

There were an equal amount of groans and cheers this morning when ADP released its own private payroll report for July, showing 42,000 new jobs being created during the month. Since the report does not include government employment, it serves as a proxy for Friday's figures, which are likely to come in only slightly on the positive side or even negative, due to layoffs from expired census employment. Thursday morning's unemployment data will provide another clue.

It's probably safe to say, barring any outsize surprise on the upside, that stocks are ready for a reversal after a month in a fantasy zone, though those of the bearish camp will contend that the stock market does not represent the US economy, and thus will continue to climb on their own.

There is some degree of truth to that argument, but if US-based companies refuse to hire US citizens, as they have for the past two years (ad for some, much longer than that), there will be bottom-line damage eventually, unless the companies in question are doing 75% or more of their business outside the USA, in which case they should be listed on another, non-US exchange. The US market is still the largest and most important, and people without jobs cannot continue to buy good and services at a steadily-growing rate. Of course, should congress deem that unemployment benefits should continue indefinitely, beyond the currently-absurd 99 weeks, companies might as well just lay off all US employees and allow the government to pick up the tab.

ISM services index rose from 53.8 in June, to 54.3 in July, eliciting another big whoop from perma-bulls, various tea-partiers and clueless analysts, who seem to be everywhere at once this summer.

Dow 10,680.43, +44.05 (0.41%)
NASDAQ 2,303.57, +20.05 (0.88%)
S&P 500 1,127.24, +6.78 (0.61%)
NYSE Composite 7,182.14, +35.15 (0.49%)

Advancing issues dominated decliners on the day, 4577-1880; new highs soared past new lows, 408-68; but volume, as previously mentioned, was the real story, well below normal levels and embarrassingly below what used to serve as average prior to the 2008 meltdown.

NASDAQ Volume 1,881,489,125
NYSE Volume 4,293,061,500

Commodity traders seemed unable to gain traction. Oil paused, dropping 8 cents, to $82.47. Gold gained $8.50, to $1,193.70, though silver did not follow on, losing 14 cents to $18.26.

With new economic data on the horizon, there appears to be no new catalyst with which to lift equities near-term, and longer-term prospects, heading into 2011, also seem pinned to dim, or even false, hopes.

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