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July 31, 2006

Non-stick News

A telling feature of the environment we face is that positive news no longer sticks. Wal-Mart published July same-store sale growth of 2.4%. Only nine months ago, such paltry growth would have sent shares of WMT and its peers reeling. Given growing consumer woes, 2.4% was celebrated and initially sent WMT shares up 1%. By the end of the session, Wal-Mart gave it all back. Target also opened higher, but then sold off sharply to close down 1%. Higher-end retailers such as JC Penney and Nordstrom both saw 3% gains whittled away.

Perhaps the recent rally stood in their way. There is no doubt that equities have lost their near-term upward momentum. In fact, I had the distinct impression from today's action that stocks wanted to move down, but were likely supported by end-of-month tape painting. If true, we could see some heavy action tomorrow. End-of-month shenanigans usually take equities solidly higher, and momentum carries them higher for the first several days of the following month. If the big boys had to fight just to keep the tape even, we can forget about follow-thru.

I'm not sure how much downside could be experienced ahead of next week's Fed meeting. Futures markets continue to lower expectations of a rate hike, now placing chances under 30%. I nevertheless maintain an expectation for a rate hike. Fancy guesswork aside, it just seems practical for the Fed to keep raising until faced with a crisis. Either way, I intend to build up my shorts going into the meeting. Though a pause may produce a pop, I would expect it to be mild and short, followed by heavy selling. Another hike would be followed by immediate selling. August is seasonally a nasty month for equities, and the way things are setting up, I see no reason for 2006 to break from tradition.

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