Investors were caught in a tug of war between Brazil and Europe today and Brazil won.
Eleven European countries cut their interest rates overnight in a completely unexpected move prior to the advent of the Euro next month. The S&P futures were down over -15 points prior to the announcement. Before the open of the U.S. markets the futures had recovered to as high as +4 on the news.
The market would have canceled the current profit taking trend and started back upward except for the news this morning that Brazil was crawfishing on the terms of the IMF bailout package.
Brazilian legislators nixed a tax proposal that would have reduced the $64 billion budget deficit. The main Brazil stock index closed down -8.7% on worries that the government does not have the guts to passed the required reforms and Brazilian stocks suffered.
This instability in Brazil, when all things were assumed under control, and the continued Asian related earnings warnings were too much for our markets as investors raced to capture profits earlier in December than previously expected.
Instead of the holiday season rapidly approaching, investors are faced with the coming earnings warning season again. You can tell it will not be pleasant since the big names are already coming out of the closet. Boeing and GM earlier in the week took about 100 points out of the market and today Cabletron, Sears, Goodys, Footstar, Ameritrade and Cato Corp did the pre-warn blues and helped push the market lower still. After the bell today Johnson & Johnson announced a restructuring and a cut for 4100 jobs. Due to slowing demand they are going to reduce plant capacity by -20% and take a charge of $800 million.
Gateway took the wind out of the tech rally with cautious words from a Gateway executive that they were going to have to sell "a lot more computers to make their earnings targets." This not only took -$7.50 off Gateway's stock but sank the other box makers as well.
Retail sales are frozen from lack of cold weather across the U.S. Without sales of coats, gloves, sweaters and all types of winter wear the sales forecasts are dropping faster than the temperature. The extra month of fall will impact earnings significantly and an unseasonably warm December will be disastrous.
The Japan economy is continuing to shrink at a rate of -2.6% a year and the rebound has still not found a footing.
Internet stocks bled profit from the incredible, unsustainable run in the last two weeks. As I said Sunday, there is no reason for the 50-100% gains in the last two weeks and gravity reasserted itself today. The majors AMZN, YHOO, AOL are sure to recover first BUT, like in the past, the profit taking piper must be paid before we can start new positions on this roller coaster sector.
My positive outlook for the next two weeks and then down the last two weeks of the year was torpedoed by the Brazil problem. The global uncertainty has advanced the timetable for the end of year profit taking and I think we are in for a rocky December. I am no longer positive in the near term. Asia has not gone away. Credit spreads are widening again. Brazil is back like a recurring nightmare from a Terminator movie. Earnings warnings are starting early and may keep exploding in our face like popcorn in a hot skillet as we get closer to month end. No one expects the first quarter earnings to be outstanding and surprises may be negative. The European rate cut has put the Fed on hold for any possible cut here in December. It was not a strong possibility to begin with but now it has almost no chance.
The S&P is up +20% for the year. The Dow was up +25% from the lows of the year and has now corrected -4.5% from the recent high again. The recent attempts at rebound rallies have been shallow and confined to the blue chips without broad based support. The transports have failed to breakout over 3100 twice now and dropped -70 points from the last attempt in spite of the low oil prices. Continued profit taking is almost as sure as sunrise.
Rebound rallies without breadth are doomed to failure. The market was down sharply today on strong volume and closed at the low of the day. This is a bad sign. All major sectors got killed at the close. Drugs, Internets, Techs, Banks, Brokerages all suffered as profit taking accelerated. The semiconductor sector was the only green on the board as companies profited from exposure at the current high tech conference. Some of the sell off could have been caution before the jobs report on Friday but I suspect it was mostly market concerns instead. S&P futures are up +2.00 at 9:pm so all is not lost but this could lead to a bear trap bump at the open.
I am urging everyone to BE VERY CAREFUL about trading this market. It is entirely possible we could see 8600-8700 soon. There is no good news on the horizon to attract the attention of traders. A close below 9000, would have been negative and the actual close below 8900 is worse. Patience is very critical in option trading. It is better to wait for the best opportunity than just blindly jump in and out of the market without a plan just for the sake of trading.
Many analogies can be made but easiest to visualize might be duck hunting. You spend hundreds, maybe thousands, of dollars buying the right gear, guns, blinds, guides, calls, clothing etc. You get out of bed at an obscene hour. Drive many miles in the worst possible weather conditions. Wade through mud, water, ice, snow, etc to get to the proper spot. Then you wait for sunrise, and wait and wait. When the birds start flying by you hide, freezing and wet in the blind for the perfect shot. While waiting all types of birds fly by. Seaguls, cranes, sparrows and other unknown field birds. Finally a duck or two straggles over. Not the ones you want, wrong type, too far away, too high. Whatever the reason you hold your fire patiently. To blast away at targets out of range or less desirable will only scare away the flocks of desirable birds which was on track to fly right over your position. You wait patiently for the two or three shots which will make the hunt worthwhile. When you are driving home with the two or three birds that made all the expense and effort worthwhile you are not thinking about all the worthless shots you did not take but only the ones that counted.
The same is true with trading in this market. We may be faced with several days or even several weeks before really good trades come our way again. If our capital is tied up on bad trades we made just for the sake of trading then we will miss the coming opportunities. Regardless of your skill level trading in a choppy market is dangerous to your financial health and mental stability. Patience is king today.
Still no plays. Complications from our office move this week has kept me from playing in this market. Probably saved me a lot of money. As I mentioned above patience is king. Normally I am pacing about like a caged lion if I am not trading but I am at peace with being out of the current turmoil. I would advise you to wait also.