Misery loves company
Dell lead the way for the Nasdaq and the rest of the tech heavy weights. For those of you tired of hearing about the Texas based, direct selling giant, Dell, forgive us; but they were the driving force behind the markets plunge today. Dell's disappointing revenue growth produced a pang of fear (or shock) in loyal devotees as well as long term momentum players. As one of the largest weighted stocks in the Nasdaq 100, its gap down from $88.75 to its intraday low of $77.38 sent the Nasdaq into freefall.
What surprised many investors was the market's ability to hold up under this stumbling giant. Analysts had feared that the public might view Dell's shortfall as a slow down in the tech sector in general. It appears the selling was concentrated on the big name tech stocks. While Dell closed the day down 7.19, its compatriots closed lower as well. MSFT lost 6.25, CSCO fell 3.94, WCOM dipped 2.63, ORCL slipped 2.19, and SUNW plunged 6.38, while INTC managed to hold its losses to 1.75. This does not bode well for some of these stocks. Many were already sitting at support and to close lower is a dark forecast for their short term outlook.
The Dow was quick to follow the Nasdaq's lead and opened lower as many of the tech stocks on the NYSE also felt Dell's pain. However, the Dow Transports and many of the financial stocks were able to lead the Dow into a midday rally hitting 9365 shortly after 12:00 noon ET. Unfortunately, the recovery was not to last and traders took the opportunity to sell into any strength. This coupled with an afternoon sell program in the Nasdaq also led the minor recovery it was showing deeper into negative numbers.
It is the numbers that concern us. The Dow lost another 1% today and while closing close to 9200, it still closed below this support level at 9195. The Nasdaq is looking worse. From its previous close above 2300 at 2313, it gapped lower 36 points and ended the day at 2248.91 only 8 points off its lows. Today's trading put both the Dow and the Nasdaq as well as the SPX just below their 50 dma. This is not a good sign.
Aside from a couple of volatile days, the Dow has traded sideways between 9200 and 9400 since Jan. 12th. It has always managed to rebound back through 9200 every time it closed below this support level. However, now that earnings season is drawing to a close, there is very little excitement to move the markets higher. Of course, the flip side, as some traders pointed out, most of the bad news is out so our downside should be limited.
So are we range bound again? and if so for how long? One market analyst estimated that tomorrows trading will probably send the Dow to 9100 or maybe 9050. Others are not so optimistic. Elaine Garzarelli, a long time bull, seemed hesitant when interviewed on CNBC this afternoon. She remains bullish until the FED tightens interest rates. Which she estimated might not happen for another 3 to 4 months. What is distressing is her comments about a healthy correction needed to prime the market for its next long term rally. Elaine said a correction of 10% off the Dow's highs of 9600 would be healthy. Since we are already almost 5% off our highs, that would put Elaine's market bottom between 8700 and 8650.
If 10% appears to be the magic number then maybe we are closer to a reversal then you think. At least for the Nasdaq which is already 11% off its high of 2533. One market strategist, Arthur Hogan of Jefferies Securities, thinks the worst is behind us. He believes that the lack of real volume on the Dow fails to confirm any conviction behind the recent selling. Plus, he asks where is all the cash going? If the tech bluechips are getting hammered, where are traders putting the money? It is not going into any of the other sectors. He believes that investors are waiting on the sidelines to jump back in. Hogan felt that the large losses in the Nasdaq bellwethers could be seen as buying opportunities. Especially for those traders that felt they missed the move back in late summer and last fall.
The rest of the week will remain a tug of war between investors emotions (fear and greed) and more traditional market movers. On the upside for the market, Friday is options expiration which tends to push the market higher. Plus, next week we have about 12 companies splitting their stock. Six of them could prove to move investor interest back to the long side. They are Alcoa (AA), Solectron (SLR), Xerox (XRX), America Online (AOL), Ameritrade (AMTD), and Linear Tech (LLTC). On the down side, investors may be concerned about the coming G7 meeting. Treasury Secretary Robert Rubin will be speaking for 3 days in front of the G7 as they discuss how to stabilize the volatile currency markets. Everyone knows Wallstreet hates surprises and one never knows what may come out of these meetings. Next, traders, analysts, and ourselves remain concerned about the dwindling market internals. Many of the major indexes are below their 50 dma. The Russell 2000 has significantly broke below support at 400 and any rally will be short lived unless it is confirmed in the smallcaps. The advance/decline line continues to sink. Today decliners beat advancers 4813 to 2251 and new lows trounced new highs.
I'm sure many of you are just as frustrated as we are as stocks continue to suffer in the current correction. Traders need to remember that when the whole market consolidates, it affects all stocks and not just the ones you don't own. The fast mover stocks we play as they are moving up also move down just as fast. This is why we recommend stops. The majority of stock movement is driven by the broader market's direction not necessarily news on the stock itself. As we languish near the end of this quarter's earnings season, investors will be prone to take profit now that we lack a reason to push prices higher.
We remain bullish long term, but no one can predict when traders will finally step in to buy this dip and ignite the next rally. With many of the market indexes below support levels, a negative advance/decline line, and a vacuum of news events to drive the market higher, it would a safe bet to sit out rather than open any new long positions. This is the time to be patient, watch the market, and pick your plays when the time is right.
Good luck, be patient, time your plays.