Apple, earthquakes, gold, oil, interest rates, record trade deficit
Pick the excuse you like. Earnings warnings, earthquakes and record trade deficits gave the markets a big headache today as the Dow tested it's August 10th lows. The market suffered from attacks on all sides today with the lead negative being the trade deficit report this morning. The U.S. trade deficit soared to a record -$25.18 Bln in July. Analysts think this points to a soaring consumption rate as U.S. consumers rush to buy anything in sight. The Fed wants to see consumption slow and this record number brought back the cloud of rate increase gloom. Analysts were almost evenly divided about an Oct rate increase until today. Now the trend is indicating about an 80% chance of the Fed taking back it's third and final rate cut from last year.
The earthquake in Taiwan had all the chip companies on the run as investors frantically tried to determine which if any were impacted and who would take up the slack. After the entire sector dropped -3% several brokers came out and said there was no problem and the damage was light. Mostly only power outages. Several brokers stressed it as a buying opportunity.
One of the biggest market hits today came from the dropping dollar. The bank of Japan failed to take action to slow down the soaring Yen and the dollar dropped another -3%. This is a big negative and completely wiped out the gains from last Friday. A weaker dollar makes foreign goods and services more expensive and would also increase the trade deficit as well. The dropping dollar also hit the bond market for another loss with the yields breaking 6.10% at midday. Lawrence Summers came out this afternoon to make the case for a strong dollar and vowed not to back away.
The most visible excuse given today for the sell off was the earnings warning by Apple Computer last night. Sorry folks, I don't buy it. Apple said that business was so good that Motorola could not make chips fast enough to meet demand. So what is the problem? The problem is the rapid ramp up, not of sales, but of analyst expectations. Analysts had dollar signs in their eyes and set the bar too high. Steve Jobs said this was just a very short term problem and Motorola was ramping up production to meet the strong demand. Apple will simply move a large portion of the sales into the next quarter and Apple will have a blowout. We think this is an entry point for a play on Apple.
In the "ask Karnac" dept today, JP Morgan downgraded Goodyear because of a possible earnings warning to come. I am sure Goodyear is glad JPM can see the future and cost their stock holders about $4.63 a share today. Of course JPM will be vindicated if Goodyear does announce but you would think the perfect day would be when the cat is already out of the bag. Time will tell.
Tech stocks were dropped for a 62 point loss today as profit taking pushed the Nasdaq back down to 2821. The Nasdaq was only -6 points from another new all time high on Monday after gaining +140 points from last Thursdays low of 2755. Does +140 points lead any sane person to think that maybe profit taking was due? It should! Sure the selling was fueled by the Dow drop and the drop by the earthquake in the chip sector but there was still some bright spots which point to underlying strength. When the recent big gainers hold their own and even gain in the face of a big Dow drop, then the sell off has no depth. Check out GOTO +8.44, RBAK +8.19, JNPR +7.50, EBAY +4.63 (already beaten up), PCLN +2.69, VRIO +2.56, YHOO +1.38.
The Dow dropped -225 points to log the third worst day, point wise, for the year. The biggest point loser was HWP -4.69 to lead the NYSE tech wreck. The Dow low was 10551 and missed by only one point the low of 10550 from August 10th. By holding the 10550 level, and rebounding to close at 10600 (10598) it is entirely possible this is a near term bottom. Volume was only moderate and showed no panic. The advance/decline line was negative 4:1 and the down volume exceeded up volume by a 5:1 margin. While most capitulation events occur on heavier volume there was some significant selling today. I would not bet all the marbles that today was a bottom but I did buy some OEX calls when the Dow bounced off 10550. Call it speculation, intuition or depending on the open tomorrow, simply stupidity, but I have faith in this market. Of course what faith I have is immaterial to market direction. I simply looked at the previous lows and felt this was a good spot to make a play. The previous lows were 8/10 10550, 6/24 10475, 6/11 10430, 6/1 10408. Yes, we could easily retest any of those numbers but a break under 10550 would be highly negative. We held today. Tomorrow is another story. We have been range bound since May and 10600 is the lower boundry of the recent range. Ranges change and nothing precludes it from changing tomorrow.
Today the Dow was besieged with a virtual flood of negative events. Record trade deficit. Sinking dollar with no help from the Bank of Japan. Earnings warnings from Apple and others. Sinking transports and rising interest rates. The Fed even got into the act with comments from two Fed heads. One was heard to question if "two hikes were enough?" and Poole said after the close that "rising market interest rates may signify inflation pressures on their own." I could make a career out of being a bear with just the ammunition that came out today. Instead I bought OEX calls. I am not recommending that anyone else do the same since ALL the indicators are negative but I am going on record that I STILL expect the market to go up from here. (again, expectation may not be relative to actual events) You need to make your own judgement as to market direction and act accordingly. My justifications other than the 10550 bounce, and it was not very convincing either, are subtle things like AOL +4 intraday after confirming that subscriber growth was still great. YHOO +1.38 after hitting $175 intraday, up from $157 only three days ago. No profit taking here. The earthquake impact was over done and the chip sector should rebound tomorrow. Everybody knew the trade deficit was going to be up. We just had too many news events gang up on the market today. Heck we could have been down -300 just as easy. The lack of volume is also a clue. If it was serious the sellers would be lining up. Did not happen, only 788 mln on the NYSE. Yesterday after the close it was an Apple warning, today COMS announced blowout earnings after the close and beat estimates by +.09. Will it help? I don't know. We could have more bad news before the open tomorrow that will drive the DOW through 10550 faster than calories to hips but this is the way I see it tonight.
If you have open positions then please protect them with stop losses. If the market goes our way, sell too soon, October is just around the corner.