Living On The Edge
Today's market activity made me think of the times when I've been on a scenic vacation. The kind that takes you in the country or wilderness. Taking a hike along a beautiful trail in one of this country's great national forests. It's a time to relax and reflect. But they all have one thing in common. All of these hikes inevitably come to a cliff where the view is breath-taking and lifts your spirits. Now, as it is in life, some people are more brave than others and step to the edge to see the view below. It is this point we hold our breath as we lean over to look down. Today was one of those days in the market. The Dow opened down and headed lower to test our key and definitive support at 10,500. It was lurking just under 10,500 for a few minutes and I found myself holding my breath, waiting for a bounce or a collapse.
Fortunately, with my finger on the mouse and accounts on the screen, I was able to capitalize on the bounce with some timely buy orders. In reality, the market wasn't ready to collapse with its first assault on support since we bounced 3 times in June off this level. The volume that ensued also points to many eager traders ready to jump in at these prices. Volume was above average and nearing an almost heavy indication. The NASDQ reported in at 1.029 bln, while the NYSE counted up 814 million. On the chart below, you can see the solid bottom at 10,500 in the Dow. This is not to say we won't pierce that mark but it was not likely to occur on its first attempt without a major news catalyst to propel the markets lower. That is what gave me confidence in an initial bounce.
The Dow Industrial Average was less than impressive all day long but it was fighting a different kind of battle with specific sectors suffering like Tobacco, Cyclicals and Consumables. These groups were moving with industry news and weighed on the Dow all day. The Dow finished the day at 10524.07, down 74.40. The NASDAQ was the market of choice today for investors as it opened higher early only to turn positive as the Dow looked over the cliff. The NASDAQ hit an intraday low at 2802 before turning around as the buyers stepped in. It finally ended at 2858.16, up 37.06 to close right at the high for the day; a positive sign for tomorrow. The S&P 500 also ended higher by 2.93 at 1310.51 after bouncing support at 1300, which it has visited many times in the previous 3 months.
There were some worries for the market to digest on Wall Street this Wednesday. The Tobacco industry was surprised today with word that the Justice Department is ready to sue 'Big Tobacco'. Attorney General Janet Reno announced that government findings indicate that the tobacco companies did engage in consumer fraud by conspiring to conceal the risks of cigarette smoking from the public. The civil suit forthcoming is estimated to be in search of $25 billion (with a 'B') in annual claims to recoup losses for smoking related health care expenses. As you can imagine, companies like Phillip Morris (MO), R.J. Reynolds (RJR) and Loews (LTR) said the suit is without merit. That didn't help their stocks though as they dropped -1.13, -1.19 and -1.94 respectively. The real losers in this battle may be us, the investors, as we have to sit through another painfully long trial which we will undoubtedly hear about everyday.
On a technical basis, one worry that has really reared its ugly head this week is the Advance/Decline line and New Highs vs. New Lows indicators. The A/D line was still negative on both the Dow and NASDAQ today. And new lows were exceptionally high with 186 issues hitting new 52-week lows vs. only 19 hitting new highs. These are the kind of numbers that send the technicians running for the door and for good reason. It shows that market rally has left it to just a few strong stocks to carry the market higher. If these stocks run out of gas, we will inevitably go lower.
The dollar also played a big part in today's action as the Bank of Japan refrained from intervening in the currency market. This prompted the dollar to another loss versus the yen as news of a record U.S. trade deficit in July pressured our currency. This move is also a reaction to investors who are changing their sentiment towards Japan. After years of watching the Nikkei market sink, some investors are finding value and better growth opportunities in Japan rather than the U.S markets. This will continue to hamper the dollar, which will soften the bond market, which will then weigh on stock market. But relief may be in sight as the G-7 will meet this weekend and likely defend the dollar but it is just another weight for the markets to carry.
For a look to the positive side, all we need to do is turn to the internets. This was the hot spot in the markets today. The DJ Internet index gained 4.7% while TheStreet.com Internet index gained 5.2%. Investors are always quick to return to this group that is considered by some to be the future of business. We saw DCLK gain +$10.44 after Banc of America started coverage with a Buy rating and $140 price target. YHOO was up +$9.94 after positive comments from Internet analyst Henry Blodgett who sees Yahoo beating estimates for their earnings report scheduled to be released on Oct 6th after the close. This is stock that usually produces a classic earnings run in anticipation of better- than-expected results.
The other news in the Internet sector came out in the final thirty minutes of trading and produced the nice moves in the sector. It was the announcement from Merrill Lynch that they will be creating a tracking stock that will be comprised of a basket of 20 Internet stocks. The symbol will be HHH and it will be traded on the AMEX. Some of the stocks in the basket will be EBAY, AMZN, YHOO, and AOL. Like we have said for the past few weeks, internets have been strong and news like this can only help the sentiment.
For further proof that Internet fire is alive and burning, let's look at 3 Internet IPOs that came out today. The symbols are EPNY, BBSW, and KANA. They are all e-commerce related companies that had a successful first day of trading. E.piphany Inc. was priced at $16 but closed at $45.19. Kana Communications was issued at $15 only to close at $51.50. And finally Broadbase Software priced at $14 and ended the day at $27.25. Maybe euphoria has returned!
A quick check of other sectors in the move reveal Software, Semiconductors, Wireless and Biotechs in plus territory. The Semiconductors are obviously a bounce back after falling on Tuesday over concerns of production facilities in Taiwan that were affected by the devastating earthquake. While Wireless and Biotechs were up on positive analyst comments. Software companies doing well has turned into a re-occurring theme in the last week.
On the economic front, we got the Beige Book report this morning that showed the economy maintaining its moderate-to-brisk pace. This was in line with expectations. It also showed that wages and prices aren't accelerating like the Fed has been fearing. Overall, the Beige Book paints a picture of a strong economy that little is changed from the reports of a month or two ago. The other key news today was from Treasury Secretary Laurence Summers, who said the "thick of the economic crisis is behind us", referring to the plague of foreign economy collapses. So there was nothing alarming to drive the markets lower. As far as tomorrow goes, we will be getting the Weekly Jobless Claims numbers at 8:30 a.m. Analysts are expecting 290,000 new claims which would be up slightly from the 288,000 from last week. Any number significantly lower would be considered inflationary.
So where do we go from here? Probably up from strength in the NASDAQ and Internet stocks but use caution. If this bounce off 10,500 is as strong as volume suggests, we could march back to 10,800 in the short-term where we will meet a decent amount of resistance. Obviously most Tech and Internet issues are in the NASDAQ but the Dow has been signaling the buying and selling moves off of its support and resistance. The reason to use caution is the descending range on the Dow. You may have noticed it moving lower in the past weeks. First it was 11,000-11,300, then 10,800-11,100, then 10,600 was the bottom, etc. You get the idea. The problem is after 10,500, support disappears. That is why the comparison to the cliff above. So it is time to ask yourself the question, how close do you like to walk to the edge of the cliff? If the answer is not very close, you would be well advised to sit out or use lots of stop orders. Others that are more comfortable with the cliff can benefit from the volatility, but still use stops. Stops are your parachute against a fall in the markets. Unfortunately, parachutes are never guaranteed to open.