Barbecued words anyone? Please pass the ketchup.
Famous last words, "I think the market may have put in a near term bottom here at 10550." So much for trading on a gut feeling. I went out on a limb last Tuesday with speculation that the bounce off 10550 and close at 10598 could have been a successful retest of a previous low, in spite of strong market indicators to the contrary. (Only those among you that have NOT broken one of the Ten Rules of Option Trading this week are eligible to send me an "I told you so" email.) The market tried hard but finally was overwhelmed today by comments from a source you would not expect.
The Dow traded between 10500-10600 all day Wednesday but the lack of market breadth was a telling sign. Today we opened a little stronger as the most optimistic buyers rushed into the market at the open. Unfortunately it looked like Custer's last stand as the sellers arrived in waves and the Dow dropped to a level not seen since 6/11. Ah Ha! A buying opportunity for the hardcore bulls. The rush in to pickup tech stocks and some Internets was on. Another ambush was sprung and sellers again triumphed. Once the Dow headed south and once 10500 was breached again the carnage began. Maintenance men at the exchanges needed mops instead of brooms today to clean up from the bleeding tech stocks. Support? What support? 10450, 10400, 10350, guess again, 10300! The Dow bottomed at 10302, a number no one expected to see again until October. Normally after a sharp drop like today, especially after a protracted slump like we have been seeing, you will see a bounce back at the close. Not today!
We did see a dead stop and level at just above 10300 but there was NO LIFE SIGNS apparent. Several analysts said they saw some buyers taking small positions in some of the hardest hit big names but NO large buyers. Futures are down -1.80 as of 6:PM. Not a pretty picture developing for tomorrow.
So what was the final straw? We have a new applicant for the post of Fed Chief if Alan Greenspan does not get reappointed next year. Steve Ballmer, President of Microsoft, endeared himself to all investors today with some very bearish comments. Saying "There is such an overvaluation of technology stocks, it is absurd." Ballmer was speaking at a technology conference given by the Society of American Business Editors and Writers. He also said that Microsoft could be put in that category. OOPS! In a market living on the edge of a 10,000 point cliff, this was not politically correct. These comments, coming from a multi-billionaire with an inside track, and a lot at stake, seemed to be taken more seriously than dozens of like comments from analysts every month.
The Taiwan earthquake caused still more damage today as analysts for the chip sector downgraded earnings estimates for several chip companies. Intel was the hardest hit with one analyst saying that deliveries of Intel motherboards could slide by one to two months. The chip sector and PC sector were crushed by the domino impact of multiple downgrades and decreased expectations. PC makers like DELL -3.06, GTW -5.19, MU -4.56, and AAPL -7.00 which already had chip problems, were hardest hit. Intel gave up -5.31 on volume of 37 mln shares. In reality the PC sector was the target but the entire tech sector took the hit. While the PC sector may take sometime to recover, the rest of the tech sector, including Internets, may have just gone on sale. Many Internets, which had been up strongly this morning, did give up some ground but looked like they were straining against the ropes. YHOO for instance, closed -13 off it's highs but was up from -15 just before the close. In after hours YHOO was up another +1.50 at one time. Stocks like QCOM which had a high of $199 after announcing a new deal with Lucent, fell with the market to $182.88 but rebounded at the close to $186.63, almost +4 from the low of the day. There are buyers but they are going to be VERY selective with October just around the corner. If you have a weak stomach just skip this Nasdaq chart.
The -108 point drop today was the fourth largest in Nasdaq history. Chartists would probably be quick to point out that any drop that sharp is just asking for a technical bounce. The Nasdaq is still up +25% for the year.
Some very bearish things happened today. Technically the S&P-500 broke it's 200 day moving average. This is not a good sign. Twice before the S&P bounced when this average was hit but today there was no relief in sight. The 200DMA was 1301 and the close today was 1280.77. Strike one.
The Dow dipped to only +40 points above it's 200DMA of 10257 and could touch it tomorrow. The real key number here was 10466.93. This was the Dow theory floor and a close below this number could cause a major correction according to Dow theory. Richard Russell of the Dow Theory Letters said a drop as low as 9733 was now possible. The Dow has not been this low since April 9th. Strike two.
The transports closed at yet another new low for the year of 2895. Oil prices continue to rise and OPEC appears to be holding the line against new production. The UTIL index has rolled over and broke under 300 for the first time since April. The utility index is closely watched as an indicator for interest rates and the outlook is not good. Strike three.
The dollar is still weak against the Yen and Japan is still unconcerned. Bonds were up today but more than likely as a result of investors seeing the writing on the wall for next three months and moving out of stocks. Fund outflows last week were reported today to have exceeded $600 mln as investors moved into money markets. The real Taiwan effect is still not known and analysts are just speculating about real delays. The market breadth, as you can imagine, was very bad. The advance/decline line was plummeting with a 3:7 ratio. The new high/new low indicator is off the scale at 22 new highs to 248 new lows. Top all this off with a Greenspan speech on Monday and Friday is looking worse all the time. And on, and on, and on. Strike ??
So what is the good news? The good news is....all the bad news. Really! The wall of worry that builds strong foundations for future rallies is assuming monumental proportions. The VIX has rocketed to over 30, a number we have not seen since Aug 10th. Take a look at these two charts, the VIX and the Dow for the last six months. Notice the inverse relationship? Where was the Dow when the VIX was high in August? In the tank at 10500.
It has been said that the VIX is only important at the extremes but if we are not there now, we are real close.
The ideal situation would be another large drop at the open on Friday to clean out the rest of the sellers and weak holders. If that does happen you can bet I will be clicking away, looking for good stocks on sale. My targets would be QCOM, YHOO, EXDS, IBM, VOD, SNE and CMGI. There, I have done it again. Stuck my foot in my mouth and implied that there might be a rebound in the wings. I better quit before I say too much. I still have some words on the grill from last Tuesday. So pass the ketchup and bring on the sellers! You are only beat when you quit and Hell will freeze over before I quit taking advantage of major market moves.
Just in case, sell too soon!