Have you heard this tongue-in-cheek definition of insanity before? "Doing the same thing over and over, and expecting a different result next time." Such is the false hope investors have pinned on Alan Greenspan's repeating last week's "Humphrey-Hawkins" speech on Capitol Hill to the Senate Banking Committee.
The testimony is word for word identical to what was said last week, but investors were holding out hope that the question and answer period to follow would produce some piece of information different than last week.
I know for certain that the words, "The period of sub-par economic performance, however, is not yet over, and we are not free of the risk that economic weakness will be greater than currently anticipated, and require further policy response. That weakness could arise from softer demand abroad as well as from domestic developments" are still contained in the speech. (Gee, I guess he means it.)
Furthermore, the Fed's reaction to that condition this week will be no different than last. Why investors believed pearls of wisdom would be uttered this session is beyond me, but pearls they wanted and the result was the same. Is the market insane? (Wait! Don't answer that! It is just a rhetorical question.)
Big cuts are over. Small reductions of say 25 bp on possibly two occasions by the end of the year are still the most likely outcome. In the end, no change from Alphonso The Great.
It took a lot of space to outline the above, which ultimately meant nothing to the market. But here is a little ditty that says a mouthful. Lucent (LU) announced earnings this morning $0.14 cents worse than estimates, announced another 15-20K layoffs, eliminated their dividend, noted a $7-$9 bln restructuring charge for the next quarter. They also outlined planned sales of two divisions for a total of $3.4 bln.
From the same guys at LU who could not even feed analysts their own achievable numbers, they also indicated that their "Phase II" restructuring should put them on the path to positive cash flow and profitability in 2002. Once again, a case of saying the same thing over and over, yet expecting a different result next time. Funny, they did not mention, "Phase I" in the first round of layoffs and charge offs. LU has a credibility problem, and as we noted back in March, they were behaving as though they were bankrupt, but without benefit of court jurisdiction. Nothing has changed there either.
Speaking of earnings craters, How about that Amazon last night? They made "the numbers" but guided revenue down while noting they would achieve "pro-forma" income. In a non-traditional switch, investors actually took it as bad news and punished the stock heavily. AMZN lopped $3.96 off its price to close at $12.06 on the highest volume we have see in over a year - 32.5 mln shares.
AT&T (T) was no better as their outlook was worse than anticipated, resulting in a $0.59 cent loss today to $19.46.
After the close Lam Research (LRCX) reported earnings under a new set of accounting rules (SAB101) that do not correlate well to the old method. "LRCX said it attempted on its own to come up with an algorithm that could be used by the analyst community in helping to figure forecasts [using SAB 101], but that its attempt to do so was unsuccessful" according to briefing.com. So much for visibility, but it does not look to be getting any better.
Rather than go on with the details, suffice it to say that companies are missing their own low-bar estimates and investors willing to accept past transgressions are beginning to call companies to the mat about the smoke and mirrors accounting practices. Clearly much work in needed to eliminate the obfuscation departments in many of those companies. However, accounting issues or not, earnings of many are still just plain crummy and likely to remain that way longer than investors realize.
Earnings are winding down, reality is setting in, the engines are not going to magically fire up starting tomorrow. More than likely not until mid-2002, and that is a guess at best using the SWAG method of analysis (scientific wild-[ask me no questions] guess).
In short there is no rational reason to buy now or for the next six months. Or is there? Those lamenting that the usual news refrain of "this was not a pretty day in the markets" need only have been in puts today to make it a true statement. For those that were, it was beautiful day! For whom will it be beautiful tomorrow? Shall we look at some charts?
Dow Industrial chart (INDU):
Starting with the Dow, weekly charts show tenuous support and oscillator reversal from nearly oversold position. I say tenuous because if the 10,200 level fails (and closes under 10,200), it could usher in the next big wave of selling that would take the Dow back under 10K, and send the weekly stochastic back south until it is oversold. The daily chart shows the same thing.
But notice an interesting pattern from last time (bright green circles). Two days of hard selling following a recovery attempt were met with a 1-day rally suitable for shorting into. It was followed by another major selling day, and then a nice move back up that lasted for over a week. If history repeats, tomorrow could be an up day in which shorting into strength might be rewarded on Thursday. The 60/30 oscillators are certainly poised to cycle back up, which would allow just such a short entry. The 10/5 is already leading the charge. However as long as the daily stochastic remains pointed down, sustained recovery is not a likely prospect.
Summary: Shorting for swing trades when the 60/30 oscillators hit overbought is likely going to be profitable for the next 2-3 days. Watch support at 10,200 then 10,000 for a possible long entry so long as it coincides with bullish daily oscillators.
NASDAQ-100 chart (NDX):
Whoa! And what is up with the NASDAQ actually showing some resilience today in not following the goose step of the Dow and S&P? Do not get us wrong, the weekly chart is still in descent mode, and one day does not create a new trend. However, the hard hit and bounce from the lower Bollinger band on the daily chart is pretty good and so is the loss held to only 25 points today in comparison to the other major indexes. But the daily oscillator still shows weakness. Not so with the 60/30, which have shown their first signs of rising out of the hard dirt bottom of oversold. Just look at those day-end white candles! The 10/5 oscillators are leading the charge.
Still, we may be better served to wait for the 60/30 to actually emerge above 20% oversold in conjunction with the 10/5 before taking a long position. Resistance is pretty stiff at 1630 and the bulls may not last long. If bears say, "1599 or less", don't beat 'em, join 'em.
S&P 500 chart (SPX):
Much to read into the S&P 500.
For the bulls: historical support at 1165; descending trendline support at 1165. Spike through and back up from the lower Bollinger band at that level. Confluence of the three adds more credibility. Weekly stochastic also shows a bottom forming, but it is too early to tell. 60/30 stochastics have done one better and are turning up, but not yet emerging from oversold.
For the bears: daily stochastic is pointed down as SPX rests at support. Market my not have enough fire in its belly to halt the overall decline.
Summation: a coin toss here. Further declines certainly possible, but even the descending daily trend line is more likely to provide support now. Downside damage may be limited for the remainder of the week.
A bit more good news for bulls can be found in the VIX. How so? It is nearing a level that reflects excessive pessimism. After touching nearly 29 today, a level outside its upper Bollinger band, it fell back to 27.63. A reading of 30 is considered to be an overly pessimistic contrarian indicator signaling the possible return of the bulls.
For tomorrow, our best guess is that there is a small relief rally as suggested by the 60/30 oscillators. From there, it is anyone's guess as the longer-term daily oscillator trend dukes it out with historical levels of support. Personally, I will be looking at any strength tomorrow as an opportunity to short or buy puts.
The only economic news tomorrow is existing home sales, and of course the continued earnings onslaught, most notably for remaining techs, GLW and CPQ. Unless those numbers come way out of left field, they are unlikely to have much influence on the markets.
We will just have to wait for the trade setups until after the market opens tomorrow. Trade what the market gives.
See you at the bell!