Whoa! What Was That?
"Hello, Mr. Marconi? We have an emergency over at Federated and someone at the Treasury forgot how to use a calculator." If that is not easily understandable, let me shed some light on today's happenings.
First off, British telecom equipment company, Marconi (MONI) warned that its profits would be one half this year's original estimates. Coincidentally, that is exactly how much its share value was sliced in today's trading - by one half to $3.35. Yes, Europe is starting to weaken too. The economic slowdown is not just a U.S. phenomenon.
While not British, Germany's unemployment rate is rising for the 6th month in a row and they do not plan to lower interest rates anytime soon. They are the largest of the European economies and are showing their hand of what is to come.
Second, a retail stalwart, Federated Department Stores (FD) warned as well by telling analysts its Q2 earnings would come in around $0.40 - $0.50 instead of the projected $0.70 - $0.75, a one third decline. While it did not lose one third of its value, it lost $2.37 to close at $38.03.
Finally, from the Britney Spears, "Woops, I did it again" department, the U.S. Treasury announced they made a calculation error in the consumer spending and savings figures released Monday - from 0.5% down to 0.3% in spending, and -1.5% down from -1.3% in savings. Finally, it is actually considered bad news that spending is declining and so is savings. Now bulls have less reason for optimism.
Accordingly, the markets suffered all day, though on low volume. Only 1.3 bln shares traded hands on the NASDAQ while just 931 mln shares traded on the NYSE. Still many support points were violated today, which we will get to in a minute.
After hours announcements did nothing to bolster confidence. Finally reality is setting in and removing the rose tint from those analysts who prattle on that we have reached a bottom. Fat chance. We repeat, "they do not know". AMD warned that earnings would be $0.03-$0.05 vs. estimates of $0.27 citing a depressed PC market. Intel (INTC) fell in sympathy. Meanwhile EMC warned that it would earn only $0.05 compared to current estimates of $0.18. All three traded down substantially after hour on heavy volume. Oh yes, BMC software (BMC) warned too.
Still bullish? Fundamentally, there is no reason to be and bears may be about to get their due again soon. Let us go to the charts.
Dow Industrials (INDU) chart:
Do not look now, but the Dow just slipped under support at 10,500 to close at 10,478. The stochastic took a downward tick too, which looks a bit ominous for the future, but bulls can hold out hope until the fast over slow cross takes place and the slow line goes into decline. The technical good news is that the 60/30 oscillators are buried and begging for some upward relief in the near-term following today. Support comes in at 10,400. Resistance is at 10,500 with lots of congestion overhead.
NASDAQ -100 chart (NDX):
Not such good news on the NDX either. The 1800 level of support did not hold by a longshot today. The daily stochastic crossed fast over slow and rolled over like it was pole-axed in its tracks. Recovery from that will be tough. Well, as we noted Tuesday night, the gap between 1760 and 1800 could be filled as early as Thursday or late as Thanksgiving, but would need to be filled. Thursday (today) wins! That could actually be good news in that NDX now trades just under historical support and its ascending trendline and could bounce on any flicker of hope. However, with the earnings warnings coming in tonight, it could just as easily become resistance, and it does not appear likely that the 60/30 oscillators will make an advance under the circumstances despite their current oversold condition.
S&P 500 chart (SPX):
As for the SPX, still rangebound, but support was breached early in trading as SPX fell below its ascending 60-min trendline. Wow, whatta put for the daytrader! Support remains at 1210. Not that it is guaranteed to hold its trading range, for the daily fast stochastic has rolled over though it has yet to cross. Until it does, bulls can hold out hope. Not only that but the 60/30 oscillators have become buried and may yet allow rangebound trading to continue. Still, fundamental reality of earnings warnings may weigh heavy to keep further advances in check.
Now for the VIX. . .finally, it has moved up from roughly 20 to 22.95, indicating that bears were selling calls or buying puts and getting their pound of beef flesh. The only trouble was it came in the form of a gap up on low market volume. It is tough to draw conclusions that the market has turned bearish in one day. It could go either way from here, but earnings warnings could favor the bears, increase the weighting of puts, and send markets down. Just don't base your trading decisions on the VIX, alone.
For tomorrow, earnings warnings will likely play heavy on sentiment in the early going. However, the 60/30 oscillators suggest a very short-term upside bump because, well, oscillators oscillate, darn it! Flimsy reason, but since when have markets behaved rationally? Emotion is what it is about and that looks like it may be about to change in favor of the bears for another daily cycle downward to oversold. Nonetheless, low volume does not suggest a major trend downward is sure to stick. What are we trying to say? Without volume, establishing a direction is going to be tough, which leaves us still in a rangebound, listless market.
Buying cheap volatility in the form of straddles can work well while waiting for high volatility, and thus time premiums, to return. Butterfly positions also work well in rangebound markets. Be careful playing directional.
See you at the bell.