Good Day, Mr. Murphy
Welcome to the retirement home of former optimists. "Now leave", cried the unemployed, spendthrift consumers, technology investors, and 201K holders. Murphy stayed put on the doorstep. Again, he saw to it that everything that could go wrong did in the markets today.
So much news, so little time. So let us sort it out, and what it all means right now. First off, Philip Morris' (MO) spin-off of Kraft (KFT) went exceptionally well as the buying public supported the $31 opening price. That was good news as KFT was oversubscribed by about six times and priced $4 higher than expected. That shows that there is lots of liquidity and a willingness of investors to put cash to work in the market - $8.7 bln on that issue alone. While it seems like a good deal and good value on the surface, MO still controls 84% of the ownership and 98% of the voting rights, which effectively makes KFT a private slush fund for MO to pay off tobacco litigation - just sell some KFT stock (and dilute the shares) every time they need money to satisfy a judgment. In the sometimes never to be humble opinion of Fundamentals Guy, MO is the winner in that deal and KFT will always have the MO anchor around its earnings prospects - lose a tobacco case and KFT gets milked. But that is for another column.
Back to our markets. LU, one of the largest of telecom equipment companies on Earth had its debt downgraded to junk status late last night Standard and Poors. Many funds must now divest of their LU holding because they are not allowed to weight so heavily, if at all, in shaky companies. The upshot is continued selling pressure on the stock. Their business prospects are not that great either. I have noted on two occasions in recent months that Lucent looks like a bankrupt company acting without benefit of a trustee. The corporate behavior is eerily similar. LU offers a big clue to the fate of other once great technology brand names. Look for long-term consolidation in this industry going forward.
Not only does LU not speak well for the telecom and networking sectors, NT reaching its lowest price since November, 1998, a 2.5 year low, and Wit SoundView throwing in the towel on JDSU ("business stinks, our numbers are too high, and it's time to get them down." It notes too that channel checks at Corning (GLW) suggest that the bottom for the Photonics division has not been found, and FY01 and FY02 estimates are at risk. -briefing.com) only added gasoline to the fire. CSCO too took its lumps from ABN AMRO, who downgraded the stock, and noted that international business looks cloudy. This is a surprise?
My own sources tell me that CSCO has 800,000 square feet of space available for sublease in the Silicon Valley region alone. CSCO would not put this stuff on the market if it had any clarity on a turnaround timeframe.
Still willing to believe any analyst of reputable brand name who says they foresee a second half turnaround. It is not going to happen. And when it does, you will know it before they will.
In a side note, maybe analysts will now begin to temper their ways as Congress threatens to get involved and legislate against analyst hyperbole if they do not soon begin to police themselves and their propaganda machines. Again, that is for another column.
Wait, there is more. Maytag, a worldwide manufacturer of durable hard goods/appliances warned that earnings would be 25% below estimates. Consumers are clearly pulling in their horns and bringing their old washers, dryers, and fridges to the new homes that housing reports say they recently bought.
That was supported by today's retail sales figures that show a slowdown in retail spending. While retail sales ex-auto came in at plus 0.3% (acceptable level), retail sales overall were up only 0.1% (0.3% est.). That says everything but car-spending fell more than anticipated. Economists and the Fed have finally got to be facing up to the idea that consumers cannot bale out the economy fast enough, even with gushing liquidity that the Fed hoped would keep consumers spending.
Here is the crowning jewel. Fed Vice-Chairman, Roger Ferguson said today that he sees no bottom yet. Few words, but a mouthful from a guy who controls the supply of money in the USA. Count on further rate cuts, but so not expect it to prop up our economy or anywhere else in the weakening western economies. It is no wonder that markets sank like a stone today!
Sheesh! Any happy news. . .something we can hang our hats on? Not that I can see just yet. Even the charts are back to bearish in just one day. Last night, I expected that yesterday's rebound and denial of a head and shoulders breakdown on all major indexes set a bullish tone for the market going forward. But retail sales, confirmed by Ferguson's words were no match for my vote. As I noted then, the market does not care how I vote. It just seeks to humiliate as many as possible. Today's breakdown did just that. Let us look at the charts for further clues to the future.
Dow Industrial (INDU) chart:
For the Dow, as quickly as the oscillators pointed up into yesterday's close suggesting the bulls would be in charge, they pointed down today. Particularly discouraging was the test and severe failure to break back over 11,000. While we suggested that possibility last night, the quick reversal wiped out any possibility of turning the daily oscillators back north. Instead, the daily stochastic is now clearly pointed down along with the 60/30 oscillators. Looks like today's top was a good time for puts if you followed the 60/30 charts. Even with all the bad news, support still remains in the 10,800-10,850 and could easily provide another bounce with another buy program or major short covering. Low volumes help that prospect.
NASDAQ 100 (NDX) chart:
Again, while the head and shoulder breakdown was denied yesterday, NDX has every opportunity to finally crack the neckline at 1750. All oscillators are pointed south. But for those in calls (please say it isn't so!), you may want to consider any technology rebound and cycling up the 60/30 as an opportunity to exit for less of a loss or even a profit. Just as quickly as the 60/30 charts pointed up last night and almost immediately reversed this morning, the same could occur tomorrow with an initial selloff, then reversal to the upside from around 1750-1775. Of course, the head and shoulders could also break down and continue in favor of bears for a while and would mirror what the daily stochastic trend is telling us.
S&P 500 (SPX) chart:
SPX looks a little worse technically than the others. The head and shoulders pattern broke to the downside. If volume were stronger today, I would be firmly convinced of its validity. Instead, it appears almost accidental or coincidental without major exchange volume. It could easily bounce from here based on the 60/30 oscillator cycle (the opposite occurred this morning) or keep cycling down. SPX does not look healthy, but the Bollinger bands on daily/60/30 charts are nearing downside extremes suggesting a bounce is near.
In short, on all the charts, a head and shoulders breakdown is possible, which would portend further bearish action. On the other hand, Bollinger extremes and historical support are at hand near the bottom of the oscillator cycle. The ultimate direction is anyone's guess. One thing is for sure. Set and forget direction trades are out of the question unless using debit and credit spreads. Personally, I like that idea and Austin wrote on that very subject just last night. Otherwise, daytrading is en vogue, much as we hate to reiterate that. With summer upon us, volumes are likely to remain weak and trading ranges are the order of the day, likely for the next few months, despite that fundamentals are weak and getting weaker too.
VIX too is finally giving a clear signal - up. Today, the candle was actually green showing consistent favoring of puts over calls as it rose back over 24. That is the fourth day in a row moving up. While it may be due some trading relief on a daily basis, the weekly stochastic says that it will move up again long-term. Bulls should be on the edge of their hooves and ready to bolt to high ground over that signal.
Economic reports may actually exaggerate the moves. Tomorrow, we have initial job claims and the PPI. 425K new jobless filings are expected, and a 0.3% increase in the PPI. Wait for the markets reaction before deciding which way to play.
Finally, it is a great time for daytrading using intraday swings like we have seen over the last two days. But for the rest of us, this market is tough sledding, and likely to remain that way. Use your best judgment, but most of all continue to educate yourself so that you can take advantage in the future of the opportunities the market offers under any conditions. All you need to succeed is education, charts, education, trading account, and education. Did we mention education?
See you at the bell!