Monday, July 16, 2007

Modest gains cap an important breakout week

- Modest gains cap an important breakout week.
- Consumers get weary as June retail sales turn sluggish on steadily higher gasoline prices and housing weakness
- Business sales are not slowing but are increasing.
- Thursday breakout trying to spread out the gains and improve a flattening A/D line

Stocks add to Thursday gains in a quiet session.

After the Thursday fireworks you expected a quieter session, and that was Friday. Quiet but up. Retail sales were mushy after better than expected (but still so-so) same store sales. The sales report and a slight hangover from the Thursday blowout started the session indecisive, and an oil price topping $74/bbl intraday (closed at 73.93, +1.43) did not help. Nonetheless, after some morning chop the indices started a slow steady climb to positive territory. Nothing spectacular, but again, the fireworks were Thursday and the Friday session was more of a cleanup day.

The big news was Thursday with the strong breakout from the 7 week choppy, lateral move that threatened to break SP500. That move showed a bit of everything with its low volume ascents, its distribution, breaks of trendlines, faltering large cap and small cap leadership. It was also just two months out from the February and March 3% correction, and its proximity raised questions as to the market's ability to continue the rally.

As in March, however, with that month's low volume climbs punctuated by distribution sessions, the market weathered June's short comings and broke to new highs. With the US economy on the rebound from its mid-cycle slowdown and continued world liquidity in the form of new wealth in India, China, Brazil, and of course petro-dollars requiring a home, the market found its bid once more, and found it in a big way.

Technically the Friday action was a non-event with lower volume, flat breadth and modest gains. Leadership was moving again, however, as GRMN, CMI and friends were on the move yet again. More than that, the moved broadened out as techs cemented their new leadership role and were even joined by SP500 as it found its legs, recovered, and then joined NASDAQ and DJ30 with its own new highs on Thursday and Friday. Even SP600 moved to a new all-time high. The move into tech while keeping, for the most part, with the existing leadership in energy, metals, materials and basically anything to do with the world infrastructure build out, was key. The 'new' growth stocks that have led this rally, i.e. the 'old economy' stocks of the 1990's that are the 'new economy' stocks as the world builds out, are now joined by tech. That movement or rotation into other areas is crucial for the continuing success of the rally. The Friday numbers didn't show it, but the pattern for the past three weeks does as NASDAQ held its trend and then rose to the first new high following the June malaise.


Retail sales growth trend flattens.

Same store sales were better than pretty lukewarm expectations, but June retail sales overall were worse than thought. With expectations of flat sales, the -0.9% showing was quite disappointing. Take out autos and the damage moderated, but it was still -0.4% versus an expected 0.2% gain. That was the largest drop in 2 years, but then again, May was the biggest gain in over a year. March and May were much stronger than expected while April and June were much weaker.

The upshot is that the trend is still up but flattening as the mid-cycle slowdown came to an end. That is not as unusual as it sounds. The consumer moves in cycles just as other segments of the economy, and with oil prices moving into the seventies and gasoline prices holding just below the $3/gallon level, the consumer, just as women sometimes do, is getting weary.

Weary for now. The backdrop still shows a strong jobs front as many companies are finding it hard to attract the kind of talent they need. With a strong jobs market the consume rarely ceases spending. More than any other factor, the fear of the pink slip is what drives consumption. Gasoline and housing prices may have their impact, but if a consumer is confident about his or her job, lay your bets on continued consumption. It does not hurt that consumer sentiment remains strong. While sentiment and actual consumption are not directly correlated, it is good to see the consumer still confident, and indeed growing in confidence, as the Michigan sentiment final report for July indicated on Friday (92.4 versus the 85.3 prior).

Business sales continue to grow.

While the headlines Friday focused on the retail sales aspect, the market appeared to pick up on the other story that was the backbone of the Friday economic data: strong business sales. The consumer is important, but as we saw in the last recession, if you don't have business spending you don't have a good economy. In 2000 and 2001 the consumer was not running wild, but he was not slowing much either. With the post-September 11 home remodeling and cocooning effect, sales of homes and home-related merchandise prospered even as economic activity turned negative. The complete lack of business investment in the aftermath of the Fed-induced investment collapse left the economy gasping. There was no capital investment for three years, not until the second Bush tax cuts were passed that provided the incentive to buy equipment even though the real need was not there. That jumpstarted a new wave of investment and brought the economy back.

While retail sales were lower, business sales surged, up 1.3% in May or 16.5% annualized. Unlike retail sales, business sales are growing and growing and growing in strength. From December 2006, retail sales have posted annualized gains of 6.5%, 3.9%, 3.6%, 4.5% 11,7% and 16.5% in May. For the past three months that is 16.3% growth. Sure the economy needs both the consumer and retail to prosper, but with continuing strength in the business sector that means continued job creation. As discussed above, jobs equal consumer strength. Thus with businesses buying and investing, that is only good for the jobs picture. Thus we anticipate continued economic expansion. Indeed, looking at the ECRI indicator, it continues to post gains and predicts in the words of its compiler, 'fairly healthy' economic growth.

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at

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