Stop Me If You Have Heard This.
A baby bunny happens upon a wounded snake at the side of the road. Initially, the bunny is hesitant to help out a known enemy, but after hearing a number of times, "I won't hurt you. All I need is some help slithering back into the tall grass. Please trust me", the bunny decides to help the snake anyway against his better judgment. The snake promptly ate him - exactly as nature had designed it to do.
Moral: No matter how smooth-talking the snake is, a snake is a snake not to be trusted on soothing words.
So just why is it that investors continue to believe that we have seen a market bottom? Is it the soothing words of analysts? Is it the soothing words of corporate brass saying so? Is it not their job to spin, twist, and paint the best possible picture to maximize the price of a share of stock? How can they be intellectually honest and still say the future looks bright when they have no idea?
That's just it - they have no idea. And neither does anybody else. Don't believe me? Just one month ago, Sun Micro (SUNW) announced a downward revision to earnings in the neighborhood of $0.06 from $0.08 and scaled anticipated revenues back to $4.4 bln. Scott McNealy, himself, noted then that if analysts and management did not see the cliff approaching, how could they possibly know where the bottom lay? Furthermore, if the market is a discounting mechanism that predicts the future of business 6-9 months out and stocks have risen in the last two months in anticipation of such, but now such seems less likely to occur on that timeframe, hasn't that theory been proven wrong too?
To me, the market is screaming at the top of its lungs that it does not know when or where the bottom lies. None other than the man who offered the cliff example above, Sun's CEO, Scott McNealy could have predicted that SUNW would again warn of an earnings shortfall today, reducing estimates yet again from $0.06 to "$0.02-$0.04", and revenues down to $3.8 bln. This is the same guy that chastised users of the word, "guidance" for not substituting the more appropriate word, "guess".
So heed his words. Each of us knows exactly as much if not more than ANY analyst on the Street or corporate Chief out there. While they may have facts and figures specific to their business, they are no better judge of the economy than you or I. Each of us individually has the capacity to gauge the business climate in our own communities from shoe repair to silicon reproduction, from sea to shining sea. Your mind and your wallet know. Trust your own judgment and avoid putting your faith in snakes. That way we do not get eaten like the hapless bunny.
OK Buzz, off the soapbox.
Speaking of SUNW, it and EMC were given much of the blame for today's selling of technology issues based on an early morning call by Laura Conigliaro of Goldman Sachs. Channel checks indicate reduced orders and no profits. No kidding.
I could go on endlessly about the downgrades on networkers, semiconductors, and the like. Some are making bullish calls that the bottom is here; buy now. Others are saying the bottom is not here, but we see it a few months out; buy now. See the common theme? Buy now. Our tribal instincts where we all turn our collective ears to hear the noise in the woods leave us ill-prepared for the real danger that is sneaking up behind us.
And in market terms, that brings in the concept of the market as The Great Humiliator, where as money manger and Forbes columnist, Ken Fisher notes that the market's objective is to humiliate as many people as possible. When everyone is saying to buy now with the bottom in sight, it is probably time to sell (and the end is not in sight - see above).
Charts tell us so too. Take a look.
Dow Industrials (DJX) chart:
Forgive the slight deviation today as we use the DJX chart instead of the INDU due to delayed daily data on the latter. Other than pivotal support or resistance at ll,000, the chart patterns are of more importance. First of all, notice the bearish divergence on the daily chart. That says, "headed down". Sure enough, it did. Oscillators confirm the negative trend. However, the 30/60 min charts began a counter trend move to the upside during the mid-day. While this may have looked tradable, keep in mind the move was roughly $0.40 on the DJX - a very narrow range - and tough to make any money. When the 30/60 min charts align again in overbought, then move down in unison with the daily trend, I would consider this a "putable" event.
The NASDAQ is only a slightly different story. We do not show the 30/60 chart setups, they are oversold and we would look for them to cycle up on the next bullish move. But that would be counter to the daily trend, which will likely prevail. Note how 1950 as acting as resistance for some time until the breakout just a few short days ago where id became support. Today that support was broken to the downside. The next level of support is around 1775-1800. However, there is large gap to fill from mid-April, which could see the NDX back at 1700 before the downtrend is over. That would make the technical cycle complete and the price thus free to move back up. Until the gap is filled, a big advance back over 2300 is unlikely.
As for SPX, this chart still has the retracement brackets drawn here weeks ago. While they did not hold true, they were pretty close. That said, historical support/resistance is better found at 1268-1272. While the closing number at 1267.93 is a whisker under support and a case could be made for that number holding up, I would say that given the oscillators' condition, the SPX has a good chance of testing support in the 1238-1250 range before moving back to 1300. The chart favors further downside, but the 30/60 charts (not shown) are buried in oversold and favor the bullish side for the daytraders among us.
Where does all this leave us? Probably not testing old lows, but possibly 1225 on the SPX, 108 on the DJX, and 1725 on the NDX. The COT report suggests that is the most likely course of action. A VIX that has popped up from its lower Bollinger band to close at 24.68 certainly supports more downward pressure on prices as put buyers begin to exhibit their head of steam.
Also note that consumer confidence, while coming in today higher than expected this morning did not help support the markets. That tells us that dip-buying has ceased paying off, even when accompanied by good news. So for bears that were slow to get bullish over the last two months, here is your chance at redemption. You might be able to make some money from the bear camp once again - at least in the short run, or until the weekly charts roll over to suggest that the downward move may be more prolonged than anticipated.
Oh, and since I did not cover much news today, just note that the Lucent/Alcatel merger has been called off as quickly as it was called on. What was to be a merger of equals began to sound like an acquisition of LU by Alcatel of which Lu would have no part. Bold chess move - LU is in big trouble and will need $2 bln this fall to make interest payments. That management sought to be purchased/merged with no premium over the current price tells you what the insiders think of the situation. They would sooner take what they can get because the "taking" won't get any better. That does not speak well for the networking and optical sectors of the tech heavy NASDAQ.
It is not all doom and gloom, but a breather and removal of rose-colored lenses are clearly in order. The charts say so.
Take note too that there is no major economic news released tomorrow, but that Thursday, Initial Claims (est 408K) and the Chicago PMI (est 40.0%) will be released, and that Friday brings the unemployment and NAPM figures. Look for some negativity in anticipation of both of these days. The bearish side is your friend right now.