Ready, Aim, Fire...
Round two of last week's post earnings sell-off started off this morning with a bang. For the early birds out there, the S&P futures this morning would have been our first clue. The futures were trading down several points while overseas markets sold off in reaction to Greenspan's comments and the looming threat of another rate hike by the Fed next month. The European markets were negative with the London FTSE down almost 68 points to 6,138 while the German Dax slipped over 120 points to 5,187. The Asian markets faired the same. The Hang Seng index dropped almost 230 points to 12,866 while Japan's Nikkei tripped down 43 points to 17,491. Exporters on both the Pacific and the Atlantic sides of our country hurt the worst as the dollar fell against both the Japanese Yen and the Euro.
The Dow index promptly fell at the open but managed to halt its descent near current support near 10,850. The actual low today was 10,831. However, the Dow did managed a climb back into positive territory by mid-morning but the 10,925 level proved too much as traders were turned back twice from this new resistance. Once just before 12:00 noon and again just before 2:00 PM ET. The Dow has been bouncing off its 50 dma for three days in a row but the bad news is it looks like it might be rolling over. The only positive sign was during the last hour when the Dow 30 managed to hold 10,850 again with a small bounce upward near the close. Part of the buzz on the floor today was the incredibly low volume. The NYSE only managed 616.5 mln shares traded today. That is the 2nd (or 3rd depending on the news source) lowest volume trading day of the year. Either everyone is gone or no one wants to buy heading into August (more on this later).
The Nasdaq was the real loser today. The tech laden index appeared too tired to carry the load and dropped a bunch of big name stocks into a pool of red. Actually, if you were a tech stock or a big cap stock investors sold it. If you were both a big cap and a tech stock, then look out! I may be exaggerating a little, but the Nasdaq was awash in red today. After a 6% loss last week, the index fell another 2.7% today alone. With a 36 point gap down at the open, the Nasdaq quickly slipped another 16 points to land at 2640. The drop was too much to resist and buyers immediately started buying the dip. Yet by 11:00 AM the game was over and the market headed down hill from there with the selling picking up speed near the last two hours of trading.
On a day when interest rate worries took center stage it was surprising to see a rebound in many of the financial stocks. Whether it was merely a bounce off support for many of the major banks (which many were at) or whether it was some reaction to AXP's record earnings investors were unsure. American Express reported a 12% increase in their quarterly profits while beating analysts estimates of $1.40 by a penny. This has the markings of a one day bounce as these stocks merely do a little cycling. (Everyone remembers his or her stock cycles class, right?)
While it's not a Dow 30 stock, TX also announced earnings today. Q2 profits were down, but the oil company still managed to beat estimates by $0.03 with an EPS of $.52. The oil sector failed to rally in response and TX closed the day down $1.50. Analysts continue to believe that $20/bbl for oil will still be here for the near future (and is bound to help these companies out next quarter), but comments from Venezuela clouded the picture and traders sold stocks throughout the oil patch. Venezuela, the world's third largest oil producer, warned that higher oil prices may be too much of a temptation for OPEC members to resist. Chavez, Venezuela's president, may be forced to cheat on OPEC output limits if he plans to revive his depressed economy. The next OPEC meeting is September 22nd.
The tech traders took a dim view of the interest rate fears and proceeded to drag the Internet stocks out behind the woodshed and beat them. DCLK fell -5.13, INKT dropped -7.38, YHOO plummeted -11.44, AMZN dived -8.63, CMGI skipped lower for -8.44, ELNK tripped down -4.44, RNWK was slashed for -6.00, and BRCM crashed -11.69. The volatile formula of lofty PEs and fears of higher interest rates proved explosive yet again. The two big Internet stories of the day were EBAY and AOL.
The infamous EBAY, with their service outages and growing competition, reported earnings today. First Call estimates had been set at $0.03. EBAY reported $0.04. The initial reaction to the call appeared positive. EBAY claimed a sharp rise in membership along with a 154% increase in revenues. After hours trading quickly vaulted to +6 but the gain was short lived as profit taking quickly ensued turning that +6 to -6 in minutes. EBAY did manage to trade off its lows in Instinet trading but the well worn practice of selling on the news appears to be healthy even for a stock that is already 55% off its 52 week high.
AOL was also under fire today (-7.81). More and more, Internet heavyweight, AOL appears to be butting heads with software titan, MSFT. This time AOL was hit by an article in the Wall Street Journal reporting that MSFT, YHOO and Prodigy were all introducing their own version of the instant messenger (actually YHOO's has been out for awhile). If that wasn't enough to damage the stock, which is already suffering due to post earnings depression and a weak sector, news that AOL insiders were selling helped push the price even lower. Reports stated that Chairman Steve Case, President Robert Pittman, and one of their senior V.P.s all sold sizeable positions from their stake in AOL. 9%, 13%, and 25% respectively for a grand total of 4 mln shares. While insider selling is common among the larger companies (just look at Gates and his systematic selling of MSFT stock), to have the report come out now is terrible timing for the entire Internet sector.
What is on the horizon for tomorrow? As I mentioned earlier, volume on both exchanges was very low. Traditionally, many traders usually pick August as their time to vacation before the kids go back to school so many try to lock in their profits from the June/July earnings run with plans to buy the same stocks back cheaper three or four weeks later. Not only is there no compulsion to buy stocks now, but traders may already be gone. We have been preaching for weeks that after the July earnings season there is not much left to keep stocks afloat and each and every international incident or economic report will be viewed in the worst possible way. This year is special with the added excitement over Y2K concerns.
Believe it or not, Elaine Garzarelli continues to remain bullish. She acknowledges that Greenspan was less than kind last week and prone to raise rates sooner than lower them despite the official "neutral" bias. She also acknowledges the affect that a bond yield over 6% does not endear traders to the stock market. She continues to look for an S&P 500 level of 1600 and a Dow of 12,400 over the next 6 to 12 months. What else did she have to say about a correction in the market? She said, "we believe 10 percent to 20 percent corrections are possible at any time but think they would create excellent buying opportunities."
I don't know about you, but as an options trader, experiencing a 10% to 20% correction at any time does not do wonders for my time sensitive call plays. This week already has several land mines for us to tread through and more does not make merrier. Tuesday, analysts will be dissecting the Consumer Confidence Index and the Durable Goods report. On Wednesday, Greenspan returns to give his Humphrey-Hawkins report to the Senate. You can bet that those senators will grill Greenspan on anything Congress missed last week and Wall Street will be hanging on every word. With the VIX up 9% today and two key economic reports out tomorrow in addition to a repeat of Alan, I'd rather sit out than get wiped out. Nevertheless, we can probably expect a flat day tomorrow with a possible bounce from the Nasdaq as it hits its 50 dma. Wednesday looks very uncertain and brave traders with access to the markets might want to consider an OEX play. With the Dow under 10,900 real support appears to be at 10,500. Just remember that nothing moves in a straight line. In days like these, picking your entry point is paramount.
Sell too soon.