What a difference a day makes!
Yesterday we traded almost the entire day in a narrow 30 point range while earnings worries were cussed and discussed. Today the barrage of earnings downgrades hammered the market early and did not let up. We were down -160 points by 11:00. The 9725 level provided some support for most of the day but the sellers took over and pushed the Dow down as much as -260 points just prior to the close. We closed well below 9700 and only 20 over support at 9650.
The one two punch of multiple analyst downgrades on Coke (KO) this morning started the run for the exits. Fears of slowing growth and weak sales in Latin America and Japan, where they get 40% of their profit, prompted Merrill and Morgan Stanley to reduce estimates. The next blow was a downgrade of Texas Instruments. TXN gets 10% of its revenue from disk drive sales and soft PC sales will impact this profit center.
BellSouth warned this morning that earnings would be on the lower end of previous estimates due to the increased costs from building high speed access. The warning was not a big factor by itself but coupled with everything else was just too much for the market to handle.
Need I say decliners are overwhelming advancers severely.
The last nail in the Dow coffin today was of course the war beginning in Kosovo. Experts are worried that the conflict could escalate quickly and involve surrounding countries. Russia is strongly opposed to the NATO intervention and could cause trouble for NATO. Analysts are concerned that this will eventually require land troops and long term occupation.
These things on top of a +750 point Dow advance, when we are right in the middle of the two week earnings warning period were just too much for the blue chips to bear. The broader market had been selling off for some time. Now instead of focusing on Dow 10,000 we may be faced with Dow 9,500. Instead of the broader markets catching up with the blue chips, it appears the blue chips may be trying to match the broader market. The good news today was a possible bottom by IBM and Intel. Both leaders in the market, failed to fall substantially even though the market was selling off.
The reason that earnings warnings appear to be having a stronger impact may be because the tide is mounting toward more negative warnings than positive. Last quarter we had more positive than negative but this quarter First Call says we are having more negative warnings than usual among S&P 500 companies. Already 14 of the Dow 30 stocks are expected to have flat or down earnings this quarter. This is not the kind of trend Wall Street likes to hear. Another trend that is promoting caution is the sell off severity trend. Five of the last six times the Dow corrected the bounce came at the 200 day moving average. If we are really going to correct again on the basis of weak earnings then the real bottom is the 200DMA of 9,000. A whopping 700 points down.
Without a real earnings disaster or someone joining the wrong side in Kosovo, I can't imagine dropping that far. There is far too much cash on the sidelines looking for an entry point. As we all know, cash in our accounts promotes itchy trigger fingers. Fund managers are the same way. They do not win any popularity contests turning in returns that look like money market numbers.
The key imperative again is "watch and wait". We need to see the fallout from the bombing. (hopefully just a pun) If we get a quick halt for more "peace talks" the market will likely recover very quickly. The NATO spokesman on the news said, "when they want the bombing to stop, they know our phone number." Hey guys, I will gladly pay for the call if it will turn the market back around! Until somebody calls a halt I expect the market to fall as long as bombs fall. This is not like launching a few cruise missiles at a toothless, friendless IRAQ. This could get really messy.
You should all be in cash now. A serious drop like we have had this week should have closed out all your stops. You should be analyzing new play possibilities and preparing for the eventual relief rally. If you did not have stops, either profit or stop loss, and you are still in the market, then you are going to have a restless night. If "it will come back, I know it will, I know it will.." is your lullaby tonight you could have a very restless night. Nothing ever has to come back! Hope has no impact on stock prices. Real market and world events do have impacts on prices. Buying is easy, selling is hard. This is a prime example of why we preach stop losses and waiting on the market. If you place stop losses you may lose money, but not all of your money. You can still come back and play again when the market rebounds. Instead of waiting on the edge of your chair for weeks and hoping your option gets back to what you paid for it, you could be profiting from the coming market rebound. It could be this week or several weeks away but it will be profitable for those ready to seize the moment when it comes. I got several emails today from traders who made money today as the market went down. I did too and it was great to be on the right side of a major market move. Now we are all waiting for the next signal and hopefully you are also!!
If you have never read the Market Sentiment Section before, you really need to read it tonight. Pinnacle has listed all the market factors that point to the likely direction. It could save you a lot of money!
Good Luck, Don't buy too soon!
Jim Brown Editor