8 weeks and counting?
We are now in the middle of our 8th week as the Dow trades range bound between 9200 and 9400. Anyone familiar with charting techniques knows that this "basing" pattern won't last forever and when the market finally moves it usually moves big. Most investors are hoping that it will be a move up. However, hope may not be enough to get us there. We could just as easily see a sell off to the 8500 to 8700 level as some market pundits claim we need for a "healthy" correction.
Some see this basing pattern as a coiled spring. The longer the market trades sideways the tighter the spring is wound so that when it finally breaks free it surges one direction or the other. We just might see this breakout come sooner than you think. Investors are waiting anxiously to see the Jobs Report on Friday. If the report is too strong, then that would indicate the U.S. economy might be "overheating" and the Fed would probably raise rates to cool the economy down.
As if that wasn't enough to make traders nervous, 3Com's (COMS) earnings warning yesterday set a negative backdrop for the techs to trade against along with negative comments yesterday for the future of Intel (INTC). However, the Nasdaq actually gapped up this morning as yesterday afternoon's steep dive took most of the brunt from COMS announcement and INTC's weakness. After the recent multi-day beating that Intel received, analysts from Robertson Stephens, Morgan Stanley Dean Witter, and Prudential all came to its defense claiming that the sell off was over done and Intel rebounded over 4 points [Sometimes you just can't win].
Most of the stock market appeared mixed after a roller coaster day of trading. However, the retail sector was strong today as well as the oil sector on the news of lower than expected inventories. Crude prices jump $.37 to $12.88/bbl and that sent airlines down after yesterday's strong showing.
For those of you that did not get a chance to watch the markets today, the Dow dipped to 9240 earlier morning. Yet by midday was in rally mode only to have it sell off in the afternoon and hit the lows of the day at 9211. With clockwork efficiency the Dow bounced upward off the bottom of its trading range and added another 64 points in the late afternoon to close at 9275 - right back in the middle of the trading range again. The Nasdaq was a mirror of the Dow other than a slight gap up at the open. However, the techs showed some resiliency after COMS earnings warnings to hold the bottom at 2235. Bolstered by the positive comments on Intel, bottom fishing in big name techs sparked a late day buying spree that drove the Nasdaq to close positive by 6 points.
We continue to "cry wolf" concerning the advance/decline line. Tracking the advance/declines show that the broader market has been selling off for weeks now. We are approaching strong oversold conditions. We doubt anything serious will happen before the Jobs Report is released on Friday. The numbers on Friday could be the catalyst to propel us one direction or the other.
Thus, we remain very cautious. Bonds, at 5.69%, continue to be a drag on the stock market. Plus, we are entering the dreaded earnings warning season. If warnings start to pop up in unexpected places (as they always do) traders will be on the defensive and institutions may continue to keep their money on the sidelines. We suggest you do the same unless you can get in and get out very quickly.