Welcome to Bungee Trading 101...
UP and DOWN, UP and DOWN, Anyone getting motion sickness? Once again volatility was the word of the day. Both major indexes opened positive before quickly falling to the interest rate bogey man. With trading screens beginning to show a large amount of red, the Dow fell to a triple digit loss while the Nasdaq slipped below 2450. However, investors fears miraculously evaporated as the FED swatted away any inflationary shadows with a strong Beige Book report this afternoon. With the bogey man gone, traders turned the market on a dime and investors who had been sitting on the sidelines finally decided to jump in.
Volume was strong with 895 mln shares traded on the NYSE and over 1 bln shares traded on the Nasdaq exchange. Market breadth almost made the turn around too with a switch from decliners soundly beating advancers to advancers pulling the day to a relative tie. The total combined between the NYSE and the Nasdaq had the decliners barely edging out the advancers 3515 to 3503.
This morning the atmosphere was gloomy. Two economic reports came out stronger than expected. The National Purchasing Management Association stated that their non-manufacturing company business activity index rose to 64.0 in April, beating March's 62.5. The Commerce Department said that their factories new orders report rose 2% in March, erasing a 1.8% decline in February. Concern that an economy that was too strong may give the FED the incentive they need to tighten interest rates sooner than later fueled the morning sell-off.
Plus, two more companies competing for the "crash of the day" did little to encourage the situation. Both Autodesk (ADSK) and Newbridge Networks (NN) warned about their current quarter outlooks. As expected, investors took them out behind the woodshed and beat them.
Leadership appeared to be missing as the selling seemed broad based. Unless you were in AT&T (T) or Comcast (CMCSK) there wasn't much to be happy about. If you were watching the market, you couldn't help but hear about AT&T's purchase of MediaOne for $54 bln. Comcast pulled their bid after negotiating with AT&T to divvy up MediaOne into a big cable subscriber pie. Comcast gets the option to purchase up to 2 mln cable customers for about $9 bln. If this deal passes government approval, it will place AT&T as "the cable guy" king heading into the next century.
With AT&T doing its best to help the Dow (they were up over 4 points most of the day and close +5.38), the day still appeared to be lost until the FED released its Beige Book report.
What is the Beige Book report? Named for the color of its cover, the report is compiled for the FED's Federal Open Market Committee and is based on reports from different business sectors across the country. With a meeting of the Open Market Committee in two weeks, traders are being very attentive to anything that might influence the FED's decision on interest rates. At the moment no change is expected but you can see today what just a little worry can do real fast.
For those of us new to the game, the fear of higher interest rates is based on the fear of inflation. The theory behind this lends that an extremely strong economy combined with a tight labor market will eventually force a rise in inflation. Why would inflation rise? If companies raise wages to keep their employees then they might raise the price of their products to pay for them. Fortunately, this has not been the case.
Today's report basically stated that inflation is still a non-issue. Our domestic economy remains robust with strong consumer spending and stable prices. The good news quickly revitalized the market and investors jumped in to snatch up a variety of a variety of industries, many beaten up in the recent sector rotation.
The Dow turned a -111 point loss into a 69 point gain and the Nasdaq came back from a -55 to close +49 at the close. That is a 180 point recovery for the Dow and a 104 point recovery for the Nasdaq! Buyers were everywhere. Sectors that closed positive were: Banks, Drugs, Semiconductors, Internet, Food/Grocery, Railroads (and to a lesser degree the transports, who closed at an all time high today), and we had some strong showings in the Telecoms as well. Surprisingly, the Oil sector was down even though oil prices continued to creep higher and are just under $19 a barrel. People may feel that at prices this high, the urge to cheat on the recent OPEC decision is just too much and struggling countries may begin to unload more than they agreed to. Just an opinion, but one that may be gaining strength.
On the horizon tomorrow, things are looking pretty good. Depending on who you speak to, what appeared to be a double bottom in the Dow around 10,780 and in the Nasdaq near 2,430 mid-day could be construed as a major reversal signal. Closing near the highs of the day is always a good sign as well.
However, we always need to be prepared for the unexpected. What is expected is for our good friend, Alan Greenspan, to make another appearance. Tomorrow at 9:25 a.m. ET, the FED Chief is scheduled to speak at a Chicago Fed Bank conference on the impact of mergers and the global financial crisis on banking. Unless you are new to trading, you know that investors will be listening. The constant fear is that Greenspan might drop another "irrational exuberance" statement just to let a little air out of the market.
Our other possible rally bomb is the non-farms payroll numbers that come out on Friday. Actually, there are about 8 economic reports between Thursday and Friday this week, but investors and the FED will be looking at the non-farms payroll numbers as the big one. Consensus now is at about 225K but if there is any unexpected signs of strength, it will be weighed as a negative. It would only give the FED another excuse to raise interest rates sooner than later.
Unfortunately, we could also fall prey to a well placed, fatefully timed downgrade of a key stock. The good news is this is just a rumor. The bad news is this is a very strong rumor. However, we (as traders) need to be aware of as much as possible to stack the odds in our favor. What we have heard is that Merrill Lynch plans to downgrade AOL's numbers from $0.36 to $.32 for the June quarter. This could very well kill any rally in the internets which would put a tremendous drag on the Nasdaq. We were unable to confirm it, so keep your fingers crossed.
Good luck, pick your entry point, sell too soon.