By Markos Kaminis
Over the past few weeks, Wall Street Greek has been warning that as the market digests the new reality that inflation is a serious threat, it would likely retest the March 10 market lows. Ironically, on the same day the Federal Reserve released its minutes from the emergency meetings it held back in March, the market did retest the lows. The Dow Industrials closed the week down 4.2%, settling into a new low at 11,346.51. The S&P 500 drifted 3.0% last week, to close within five points of that aforementioned March floor.
As we pointed out in our article, “Technology Stocks, Underweight Tech Now!,” the Nasdaq Composite has lagged the overall marketʼs move to the breakpoint. We should point out though, that itʼs not as if the Nasdaq has not moved lower in concert with the other indexes. It has, and it declined another 3.8% last week. Itʼs just that the composite is still 6.7% off the bottom, while the other indexes are already there.
The reason for this divergence is likely because the higher beta, or more volatile technology stocks that dominate the Nasdaq, previously moved sharply lower in exaggerated fashion into the March 10 bottom. This occurred as part of a market capitulation process. Capitulation occurs when investors give up on stocks en masse due to a catalyst-driven event, like the Bear Stearns unraveling. When that happens, high beta issues lead the market lower while exaggerating the broader move. Since we have not had another capitulation (read yet), the Nasdaq has lagged in revisiting its low-point.
“The Greek” believes that this quarterʼs earnings season will offer evidence of both consumer spending softness and corporate investment weakness, leading technology firms to reduce their forecasts. We saw two companies do this on Thursday, in Research in Motion (Nasdaq: RIMM) and Oracle (Nasdaq: ORCL). We then warned about Micron Technology (NYSE: MU), which then reported bad news on Thursday evening sending the stock down nearly 13% on Friday. We expect more of the same for the rest of the tech sector in July, and so we are recommending investors underweight technology stocks now.
The Week Ahead
The week ahead is a holiday shortened one, as Americans celebrate Independence Day. The weekʼs marquee data point is clearly Thursdayʼs Employment Situation Report, which follows up on last monthʼs dramatic unemployment increase to 5.5%. Even so, there will be plenty more to keep us busy.
On Tuesday, the Construction Spending and ISM Manufacturing Reports, along with Mondayʼs Chicago area manufacturing survey, should only offer more bad news on these distressed sectors of the economy. We expect the construction report to indicate the spread of pain from residential into commercial construction, as retail and restaurant chains cut back on investment.
Wednesday starts the flow of monthly employment reports, as the Challenger Job-Cut Report, Monster Employment Index and the ADP Private Employment Report all weigh in on the deteriorating state of the labor market.
On Thursday, the regular weekly Initial Jobless Claims data should be overshadowed by the monthly Employment Situation Report. This data portends trouble if the unemployment rate gets even worse than last monthʼs 5.5%. After such a dramatic change last time around, further softening would seem to investors as if the wheels were coming off the economy, and they would be…
Also on Thursday, look for an important European Central Bank meeting to potentially offer the ECBʼs first rate increase in its well-publicized battle against inflation. There is some hope the ECB might delay, after last week offered poor retail sales and confidence readings for Europe.
The day also offers another tough sentiment measure, the RBC Cash Index, and a check on the state of the non-manufacturing sector from ISM.
The weekʼs earnings schedule includes: Monday – H&R Block (NYSE: HRB), Mesa Air (Nasdaq: MESA); Tuesday – Apollo Group (Nasdaq: APOL), Constellation Brands (NYSE: STZ); Wednesday – A. Schulman (Nasdaq: SHLM) and Family Dollar (NYSE: FDO).