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Index Wrap

Sliding Consumer Confidence Fuels Further Decline

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       10-30-2001           High     Low    Volume Advance/Decline
DJIA     9121.22 -147.52  9264.52  9065.59  1.3 bln    944/2156
NASDAQ   1667.41 - 32.11  1686.68  1646.30  1.7 bln   1276/2323
S&P 100   545.06 -  8.28   553.34   541.25   Totals   2220/4479
S&P 500  1059.79 - 18.51  1078.30  1053.61
RUS 2000  422.83 -  6.58   429.41   420.11
DJ TRANS 2195.26 - 23.70  2219.69  2168.89
VIX        34.80 +  2.41    36.28    34.43
VXN        53.41 +  3.12    65.94    62.09
TRIN        2.15
Put/Call Ratio       .91

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At first glance, it is easy to brush off today's decline on sliding Consumer Confidence numbers, which came in at 85 - far under the expected 96. Trouble is those figures were released at 10:00 a.m. a full half hour after the market opened. The equity markets had already taken a nosedive by then. The broader implication is that consumers are going to have a tough time holding up the economy.

So what happened? Probably nothing more than what Austin noted last night. Markets that close at their low will likely resume trajectory once they open again. That was proven this morning. In the course of sentiment and human emotion, it is simply time for the euphoria to get brushed aside in favor of some negativity.

Fundamentally though, there are still a bucket-o-reasons for deteriorating stock prices, most of which revolves around the idea that the "E" in "P/E ratio" is declining much faster than the "P". P will now have to play catch-up starting yesterday. Never mind the other significant stuff like slowing economy, potential Argentine debt default, and renewed warnings from government officials about potential terrorist attacks. They are all part of the ingredients for a perfect declining earnings soup. Bonds hit a new high today on falling interest rates, and even gold picked up some steam, which ought to put everyone on notice that things are not about to improve.

Is there anything that gained price today in equity land? Well, aside from gold, cruise lines did well too. As you might imagine, that probably will not last.

But note the following list of losing sectors according to briefing.com: biotech, oil drillers, banks, brokerages, PCs, machinery, telecom equipment, tobacco, networkers, retail, storage, semiconductors, semi equipment, drugs, autos, rail, and paper. Not many stones left unturned there.

More interesting stuff, but not really market-moving are the following:

Ford finally hired a Ford to run the show after Jacque (Hit the Road, Jacque!) Nasser was summarily given the boot last night.

Goldman downgraded MO by taking off its Recommended List and lowering growth estimates, which sent the food and tobacco giant down $1.98 to $47.70. It was interesting to me to note that "limited potential for multiple expansion" was the reason - interesting because MO currently trades at a 13 P/E and nearly a 5% dividend. That is much more a "compelling value" (to use a favorite analyst catch phrase) than say PG, which carries a P/E of 35 and 2% dividend yield, yet is not growing as fast. Proof that you don't need credentials to be an analyst!

ADBE warned and guided estimates lower after the bell blaming the September terrorist attacks for their weaker business. 20% came off the price tag in after hours trading as shares fell to $23.50.

The simple fact of the matter is that stocks with high earnings multiples are going to get whacked as people, one by one, wake up to the idea that the emperor has no clothes. Earnings matter and will matter more as investors question whether huge multiples should be awarded to companies with little, or worse, no earnings.

If you need proof to see that earnings matter, look no further than a stock whose price has gone from $90 to $11 in the last year. No, it is not a tech company. It is a utility with supposed "accounting irregularities" surrounding misuse of one-time, non-recurring charges (of $1 bln) on the earnings statement. Give up? Enron (ENE). There are many more companies out there employing the same voodoo to artificially swell their earnings. You can't hide an elephant in a cherry tree forever. Someone will eventually see it.

Be that as it may, that doesn't matter as much for trading as the actual charts, which are all pretty much the same. Weekly and daily charts are still showing a downleg is at hand. I'll line up all three charts tonight and note them generically. MOPO is not MOPO yet (certainly a good bearish trade though), but any strength in the 60/30 charts might make it so. So would another cycle up to resistance and rollover on the daily chart. Here goes.

S&P 500 chart (SPX):

Dow Industrials chart (INDU):

NASDAQ-100 chart (NDX):

As noted above, pretty similar on the SPX, Dow, and NASDAQ 100. All show weekly candles rolling over with the stochastic soon to follow suit from overbought. Daily charts are in full decline and happening much faster than I expected. MOPO may have to wait for another daily cycle in order to get the weekly charts to confirm, but the trend is still pretty clear - bears rule.

That said, bulls are far from dead. On the daily chart, note that all candles have come down to a level of previous support. Lest anyone think I doctored these lines, rest assured they have been in place for at least two weeks, which I think helps to confirm their validity. That becomes really apparent on the 60/30 setups with all those old lines of support holding true again today. Watch for some support at these levels especially on the Dow and SPX daily charts since the upward sloping lower Bollinger band will be there to meet any downward price action and thus also provide some support.

As for the 60/30, note that support held here too and the oscillators are on the upswing. There isn't a lot of horsepower behind the moves as the candle prices have remained pretty flat compared to the stochastic. But once oscillators reach overbought, I think it's a pretty good sign that a great put opportunity exists. I would certainly not be a call player on the way up though even though there is every potential to find some support on the 60/30 oscillators' way up as outlined above.

The VIX too is showing fear reasserting itself, as it climbed back to near 35 today. Stochastically speaking, it too has further to go in the bearish direction.

So for tomorrow, my best guess says we see some flat trading as the oscillators rise to oversold on the short-term charts. Might even see some price gains given the selling over the last two days and current support levels. I will view that as just a better entry point in a weak market - all other things remaining equal. That weakness will be ripe for the picking of put plays once the oscillators roll over from there. My only caution lies with the current support levels, which could become strong points for a reversal if it were to happen. Not likely here, but it could, especially if Colin Powell opens a morning press conference with the head of Bin Laden (gruesome, but markets would cheer).

Also, there is nothing coming out of the INTC annual analyst meeting conference call as of this writing that will change anyone's sentiment. But much can happen before tomorrow.

See you at the bell!

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