The lazy, crazy, hazy days of August continue to be good for equities, particularly the afternoon sessions. After waffling about with a modestly positive bias for much of the day, stock proxies once again shot higher in the final hour of trading to finish with solid gains. The Dow Jones Industrial Average rose 1.1% to 9053.64, closing above 9000 for the first time since July 9. The S&P 500 gained 1.4% to 962.70 while the Nasdaq Composite rallied 1% to 1422.95, its highest close since July 5. Major averages got a boost from Microsoft ( MSFT), which rose 1.8% to $53.23 following an upgrade by Salomon Smith Barney to outperform from neutral. Merck ( MRK) was the Dow's biggest leading influence, gaining 3.7%, while J.P. Morgan ( JPM) shook off the threat of a Moody's downgrade to close down fractionally to $26.69 after trading as low as $25.66.
The Mighty, Mighty Microsoft
Microsoft has now risen more than 28% since hitting an intraday low of $41.41 on July 24. Its recent flurry to solidly above $50, which was support in June and which more recently became resistance, recalls a story here in mid-June . At that time, I argued Mister Softee was a potential tell for the broader market, given its dominant (monopoly) position in the PC industry and hefty weighting in all three major indices, as well as the Nasdaq 100, which rose 1.3% today. Soon after that article appeared, 'Soft started softening, a decline that picked up speed in July, culminating on July 24 -- or right around the same time as the major averages. In retrospect, Microsoft was a pretty good tell for the market and the question now is whether it's deja vu all over again. "I think it's significant that Microsoft has rallied from $41 to $53 but I don't think it changes much in its pattern which is still pretty rotten," said John Roque, senior analyst at Arnhold & S. Bleichroeder and a RealMoney.com contributor. "The rally here is important, but there's still a lot more work for Microsoft to do." Back on July 18 , Roque suggested that Microsoft needed to "move quickly away" from resistance at $50 or risk falling to the low $40s; a sagacious call for sure. Today, Roque observed Microsoft "still has a lot of resistance in the mid-$50s to $60s." If Microsoft is truly a bellwether, the implication then is those excited about Dow 9000 or the S&P surpassing 950 -- the neckline of its head-and-shoulders pattern -- need to curb their enthusiasm; at least until Microsoft surpasses those resistance levels. "If history is any guide, the S&P's head-and-shoulders pattern should be important," Roque reiterated. "We've rallied back above the neckline but that doesn't mean the pattern is invalidated." The S&P 500 has now rallied 24% from its July 24 intraday low of 775.96, which is "an awful lot," Roque quipped, noting a 21-day momentum indicator he watches is as overbought now as in May 2001 or March 2002. "That tells me a lot of the gain of this rally is in the books." The same could be said about Microsoft, which isn't to say it (or the broader market) can't keep rallying. Just that the "easy" part of the move has already occurred.
(More) Tales of Arabian Investors
Yesterday's examination of reports about Saudi Arabian investors reportedly pulling billions out of the U.S. drew scads of email. Many readers seemed to want to believe the British press, despite the skittish sourcing of their stories (and that's being kind), and the facts to the contrary cited here. Today, Prince Al-Waleed bin Talal bin Abdul Aziz Al-Saud, the nephew of King Fahd, told the BBC that there was no evidence of a Saudi pullout. "I'm holding on to all of my investments and in all honesty increasing my stakes in certain companies in the U.S.," the BBC quoted him as saying. The prince expressed surprise at The Financial Times' cover story on the subject: "My information tells me none of this is correct. Now there may be some withdrawals, but not of the magnitude mentioned." Clearly, there may have been withdrawals (or more to come) and repatriation by foreigners generally is something to watch for. It's quite understandable that Saudi investors might worry their U.S.-based assets will be frozen, as requested by a lawsuit filed by family members of some victims of the 9/11 attacks. Today, the Financial Times reported that an "emergency meeting" of the General Council for Islamic Banks and Financial Institutions has been called for Sunday in Bahrain to discuss the lawsuit. The point is the $200 billion figure for outflows and the $400 billion to $600 billion figure for total Saudi holdings of U.S. assets cited by FT (telegraph.co.uk put the total figure at $750 billion) are thinly sourced and (again) inconsistent with official data. "As we pointed out yesterday , the amount of funds held and withdrawn from the U.S. by the entire " other Asia " category (the region Saudi Arabia belongs to) according to U.S. Treasury statistics suggests this story is mainly hype," Jim Bianco of Bianco Research commented today. (By the way, Bianco loves a good conspiracy theory but he's a bigger fan of hard data, which don't bear this one out.) Other market participants observed that concerned Saudis might simply change the domicile of their assets -- i.e. move the custody to Lichtenstein or Switzerland -- as opposed to actually selling out. It may very well be the Saudis are planting these stories about repatriation in protest of various U.S. policies and statements, but prudence dictates they'd need a better place to invest before exiting en masse from the U.S. The overriding point being that the eagerness to accept carte blanche reports of mass Saudi selling smacks of desperation among some bears, and the kind of "analysis" usually associated with hardcore bulls.
Bears, Bears, Bears
In response to my midday column about rising bullishness, a number of emailers pointed out yesterday's Investors Intelligence data showed, in contrast, a rise in the level of bearish sentiment to 40% from 37.4%, while bullish sentiment fell to 36.7% from 38.5%. Point taken. Clearly there is no shortage of bears (see above). However, put/call ratios and the CBOE Market Volatility Index, which fell 2.1% to 30.96 today, suggest bullishness is, indeed, rising. The bottom line is sentiment is hard to gauge and one can almost always find some data to support a given point of view. From my perspective, anecdotal evidence suggests bullishness is rising, which is understandable given the market has already come farther than many expected. Furthermore, given how low sentiment was just last month, some uptick in bullishness isn't surprising and doesn't mean it's reached anything approaching extreme levels (yet).