So much for the CPI...
As the numbers dictate, so go the markets, right? Apparently not. The CPI report was released before the bell this morning only to reveal the better-than-expected numbers. The Consumer Price Index, which is a key inflation report, was up 0.3% and showed a 0.1% increase in the core rate of prices (the core rate excludes the volatile food and energy prices). This is better than the 0.2% increase that economists had predicted. The biggest gains came from gasoline prices, of course, which rose 5.6% in August (we don't need the CPI to tell us that as our wallets are all a little thinner after filling our gas tanks). One reason for the lower number was airfare, which declined 2.7% in the month (this is should bode well if you are looking to make plans for the holidays, which aren't that far away any more). So we would have expected to see the market rally today now that we have another card up our sleeve to play against an interest rate hike. But it never materialized.
So we are left to scratch our heads and take a step back to try and figure out what is happening. This is the third time the market has done this. The first was on August 27th with the employment report. We had a major rally followed by the slow death of weak volume and no buyers. The second was the PPI last Friday which gave us a nice run up late Thursday (in anticipation) and gains most of the day Friday before selling off. And now today we couldn't sustain a rally for more than an hour.
Thank goodness for the amateur hour rule! If you resisted the urge to jump in during the first hour of trading then you avoided the bear trap. The market jump out of the gates to a quick triple-digit gain before slowly drifting lower. By 11:00 ET, the market was back to even or less and was stuck in a fairly tight range for most of the day before accelerating towards the end. The Dow Jones industrial average was down 108.91, or 1%, at 10,801.42, right at the lows for the day. The NASDAQ fared even worse by losing 54.12, or 1.88%, at 2814.17, also closing at the low. The S&P 500, Russell 2000 and OEX had similar performances, all closing down. Volume was nothing to write home either as it came in about average (except on the NASDAQ which was a little bit heavier than we would like on a down day).
Before jumping ahead to tomorrow, let's look at some of the individual stories driving stocks today. Analyst Ralph Bloch advised his clients today to sell if the market didn't sustain today's early rally. He said that a tightening range on the Dow is causing concern. The range, which is currently 10,800 to 11,300, needs to break one way or the other according to Bloch. He also cited the negative Advance/Decline line as a negative indicator. This might provide some insight to the late day sell-off.
The dollar was trading lower again today at 104.29 yen, down from 105.79 yen on Tuesday. This is the lowest level against the Japanese currency in more than three years and its slide against the yen adds to the pressure on stocks. Investors fear a weaker dollar as it makes imports more expensive and sets the stage for possible inflation. It also increases the odds that foreign investors will pull their assets out of the U.S. market in search of better returns. With how strong Japan has been recently, it is probably an easy decision.
In case you thought we were the only market sinking, London's FTSE market hit a 5-week low today. The Bank of England has raised interest rates during the past week and it is still taking its toll on the equity markets.
Some stocks in the news included Oracle. They released earnings after the close on Tuesday and while the bottom line number was ok as they met expectations at $0.16 per share, analysts were concerned with revenue growth. This caused a retracement for shares of ORCL which closed at $42.69, down $2.75. More losers included China.com which lost another $10.63 after losing $13.50 on Tuesday. This is after Beijing vowed to ban foreign investments in Internet and telecommunications companies. CHINA closed at $52.63, down 35% on the week.
VSIO was a big winner today when MSFT announced this morning that they would be acquiring the company for $1.3 billion in stock. Visio is the largest supplier of enterprise-wide business diagramming and technical drawing software. VSIO closed at $39.88, up $6.38. But not all stocks go up when they are acquired and General Instrument proved that today. Motorola announced this morning their plans to acquire GIC in an $11 billion deal, each share to be bought for 0.575 shares of MOT. Unfortunately the pending merger weighed on MOT's stock price and GIC, now tied to MOT, closed down $3.50 to $47 as MOT fell $6.69 to $86.50.
Boston Scientific was another big mover today as it fell after warning that Q3 revenues won't live up to expectations. BSX opened down $6 before finally settling at $26.94, down $8.38. This sparked weakness through out the Biotechs which have been moving lower in recent sessions. Some notables were HGSI -6.69, IMNX -5.44, BGEN -3.25, IMCL -2.63 and SEPR -4.38. But we should get a bounce tomorrow because after the close today Biogen announced they would beat estimates thanks to stronger sales of its multiple sclerosis drug Avonex.
One more stock that stands out as a decliner was US Airways who warned of missing estimates for the third time this year. They said flight cancellations and other troubles would cause them to miss estimates for Q3 and Q4. In fact, First Call had expected U to earn $0.84 per share and U said today that they don't expect to make a profit. The stock has dropped from $60 in mid-May to close at $25.44 today, down $2.19. We have played puts on U for many weeks during this decline and with the negative news still coming, it is still tempting to jump back in.
We didn't even have gains in the oil sector despite oil prices rebounding mid-day to shoot back above $24 to close at $24.13, up 0.27 cents. Dwindling U.S. oil stocks plus word that OPEC would maintain its cuts lifted the price. XON -1.94, MOB -3.19, BPA -2.88, and ARC -2.31. On the bright side, any rally tomorrow in oil prices should prompt these stocks to play catch up.
The rest of the selling was fairly broad-based as Semiconductors, Hardware, Software and most Internets closed lower. It took until the final 30 minutes though to crack the Internets as they were up for most of the day. This sector has actually been a bright spot for almost the past two weeks. In any signs of a rally, they should likely outperform the broad markets heading into some key earnings reports from CMGI on Sep 23rd and then YHOO will kick off earnings season on Oct 06 (notice the new date).
In preparation for Thursday, let's look at where we stand. The Dow closed well under its 100-dma (10,891). This is important because this support level has held during the market consolidation for the past two months. But it has also given us similar head fakes during this period where it looks like the 100-dma was broken, only to rebound. We closed today right on support at 10,800 but it is never a good sign to close right on the day-low, especially if you accelerate into it like we did today. The closing bell may have saved us from a knockout. After 10,800, we see support at 10,600 which should be stronger. The talk among traders is that triple- witching this week, rumors of hedge funds selling bonds and lack of reaction to the CPI is weighing on the markets. It is likely that we will continue to stay range-bound as worries over interest rates are combated by strong earnings due next month. That means it is a stock pickers game. Stick to your rules and find good entry points. There are still lots of good stocks to play right now. The recent uncertainty has caused an increase in volatility which in turn provides opportunity for options investors.
As Hurricane Floyd prepares to unleash a violent attack on the Carolinas, let's hope for a calmer day on Wall Street. The S&P futures are only down slightly as I am writing so we will have to wait for the morning to find new market moving news. Use your stops if your broker lets you and sell too soon.