The market rallied back early in the morning from three days of sell off on Greenspan comments. Knock, knock! Who's there? NAPM NAPM who? National Association of Purchasing Managers with our survey numbers. BUT...you are not scheduled until Wednesday! Why are you here early? Greenspan sent us. (just kidding). You know the rest of the story. The NAPM numbers were released a day early, AGAIN, by a computer glitch and it was not a pretty picture. (makes you wonder how they are going to handle Y2K when they can't tell the difference between August and September?) The NAPM numbers were much stronger than expected. The base number was not bad with August posting 54.2 over the 53.4 for July. The real market killer was the "Prices Paid" component. This number jumped from 54.7 to 59.8, a whopping 5 point jump. This was the biggest jump in the price component in five years. Unfortunately Prices Paid is the component that shows inflation in prices at an early stage. So much for market rally! The Dow dropped over -200 points to a low of 10782.
The -200 point drop from the high of the day and +168 point climb back qualified as an entry point in my mind. I wrote in the Sunday newsletter to watch for a 100+ point drop and recovery intraday and if it was below 10900 even better. We got our wish. However by the end of the day I was becoming concerned. The -100 point drop just before the close was nerve racking but understandable. The month end portfolio adjusting was taking its toll. Most portfolio adjustments occur at the end of the quarter but some fund managers do cleanup at month end also. Today must have been a big month for adjustments. Volume today on the NYSE was 845 mln and 85 mln came in the last ten minutes. Order on close orders were very heavy and mostly sell orders. Hopefully the damage is over. Helping fuel my optimism is a healthy inflow of cash into mutual funds over the last two weeks. Almost $8 bln came in and this market drop is a great opportunity for fund managers to put it to work quickly. Since tomorrow starts a new month and the last month of the quarter it would be a good day for the rally to begin.
Another reason for a September rally would be the strong earnings forecast by First Call for a +21% rise in profits. Past quarters have been between +13-15% and the 3Q is not normally a strong quarter. Things are looking very good.
The bond rally after the Fed meeting last week was dead on arrival today after the NAPM release. Bonds dropped hard and yields went as high as 6.10%. The good news was the drop back to 6.06% by late day. The bond market and stock sell off was a knee jerk reaction to the NAPM numbers. It is interesting however to note that the Dec bond futures are now indicating another +.25% increase is already factored into the market. The Dec Euro/Dollar futures are showing a 6% Fed funds rate which would be three more +.25% increases. While we do not think this is likely, futures traders are obviously concerned.
Dow theory followers are also concerned about the falling transportation average. Since last Wednesday the transports have dropped -234 points or -7%. We feel this is simply the impact of $22 oil but without a turnaround in the transports the Dow will struggle to move much higher.
The bright spot in todays market was the Nasdaq. As usual the Nasdaq is leading us out of the sell off wilderness. Techs are the first to fall and the first to rise from the ashes. After a drop of over -40 points after the announcement the Nasdaq closed up +26 for a miraculous recovery. Some of the leaders were Dell Computer +2.50, QCOM +9.19 (Monday's play of the day recommendation), DISH +8.09 and NTOP +12.38 on news of yet another big deal signing with AT&T which will allow it to expand to 17 countries. Internets were mixed but mostly positive. Still a positive Nasdaq is a first step toward a positive Dow.
It did not hurt to have several big news announcements in the tech sector. IBM and CSCO announced a $2 bln agreement to share technology and integration services over the next five years. Competitors however took a pounding. MMCN dropped over -$19 to $30.75 after saying product development by competitors could impact revenues. IBM and CSCO were big customers for MMCN. Separately Apple Computer (AAPL) announced their new G4 PC. Actually, according to Steve Jobs, the PC is a "super computer" able to complete over one billion instructions per second. This PC is claimed to be more than twice as fast as Intel's fastest Pentium III. Secondly Steve said the orders for the new notebook computer had exceeded 140K and much more than expected. Intel was down fractionally on the news but is expected to recover when it announces a new processor this week at the technology conference now in progress. Intel is expected to announce a 700 MHZ P3. Intel and Microsoft also released news that Windows2000 is now booting and running on the new 64bit Merced processor. The Merced is the next major step up for Intel and will offer significant processor speed jumps. Chip makers were buoyed by an analyst upgrade of Micron (MU) today and did well. PC makers had a good day led by Dell. Actually three of the top PC makers have had some good moves since mid August. GTW +28%, DELL +15%, AAPL +15%. Oh, I forgot, CPQ -4%. Still a Dell takeover target in my mind.
SunMicro fired another shot towards Microsoft today. They announced they were buying Star software, a privately held maker of office productivity software. While the market liked the deal, SUNW +3.88, they may still have trouble getting users to switch from Word, Excel and Powerpoint. SUNW however has one thing going for this effort. It will distribute the products FREE over the Internet. After checking out the price of Office2000, FREE may be worth a look for the millions of home users of Microsoft products. Merrill Lynch named SUNW its "Focus One" stock of the week.
As if we did not have enough problems with the wall of worry being built over interest rates, we are now entering "earnings warning season." Yes, we have to trade through the minefield of warnings to get to earnings. The biggest company to drop a stink bomb today was Office Depot. They warned that earnings would be about -.24% less than expected. Scratch them off the earnings run list along with the "guilty by association" list of Staples (SPLS) and OfficeMax (OMX).
With the Labor Day holiday only hours away, depending on how early this week you quit working and leave the office, it might be good to focus on several key points. The DOW rally from 10550 on August 10th to 11353 on August 24th was +803 points in ten trading days. The retracement from 11353 to 10829 was -524 points in only five trading days. We have now given back -65% of those gains. The average retracement is between 50-75%. We are there. The market is tremendously oversold and is due for a technical rebound even if there is no follow through. I am looking for the bargain hunting to begin tomorrow assuming the end of month sellers are done. Today could have been a great entry point. With the market already down -500 points the downside from here is very limited. News after the market closed that the IMF had made a deal with Ecuador could have a positive impact on the market tomorrow as well. The Ecuadorian Mafia is not nearly as well organized as the Russians and the Ecuadorian people may actually see some of the money. (just kidding) The next major market hurdle is the Non-Farm Payroll Report on Friday. This could rock the market either way and would be one reason we may not see much upside movement before next week. Minor upside is ok. We just want to see a bottom here to provide a launch point for next week.
As always, please pick your entry points carefully.
Good Luck, Sell too soon.
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