Window Dressing or Window Breaking??
Now is the time for the quarterly housekeeping by mutual fund and money managers. The time to re-evaluate just exactly what they are holding and how much. Will they feel comfortable explaining in the quarterly prospectus why they bought each stock in the accounts or funds they own? This experience can cause a change of heart among the big money managers of the financial world. So it is typical for volume to rise as they clear out the cobwebs that are hindering performance and replace them with the biggest and brightest stocks on Wall Street. For better or worse, it is an inevitable phenomenon.
The question is, what impact on the markets does this really have? If you take the historical view, not much. A quick check of historical prices or charts show that there isn't a trend one way or the other. One man's trash is another man's treasure. Even if our friends at Fidelity start throwing a certain stock out the window, our pals at Vanguard may be standing outside with a basket catching all they can. It is the same game with the possibility of being magnified by higher volume. The only point of interest to be taken from this event is if the market leaders get trounced tomorrow as an indication that money managers fear the growth giants of the past couple years. This be would an indication of an obvious reversal in sentiment. But it is a way to force these behemoth mutual funds to tip their hand to what direction they are taking for the future.
Either way there is one constant that remains unchanged. This market stinks. If it walks like a duck, looks like a duck and quacks, then I'm going to call it a duck. This old saying is ringing in my ears as we watch gold soar, new lows dwarf new highs and the dollar sink in the Japanese sky. The indications for this market are not favorable. Your caution lights should be blinking red at this point. That is not to say that there aren't any opportunities in this market. As we have said in the past, this is a stock-pickers market. There are stocks that are moving higher for good reason. It is no surprise to see VOD soar $7.19 to $234.19 with 3 days remaining until their 5:1 split. It wasn't unimaginable to see the Internet sector up again after a month of great relative strength against the broad markets. (We must be in a new era when Internet stocks become defensive plays) But this has to be construed as proof that not everything is going wrong on Wall Street. The growth potential of the Internet is still attracting investors and has to be viewed as a positive sign.
A recap of the market action (or lack there of) shows the Dow closing right at the low at 10213.48, down 62.05. The Nasdaq ended at 2734.17, down 22.08, but still well above support at 2700. While the S&P 500 finished down 13.83 at 1268.67, or a new short-term closing low. And for you technicians, this is just above what some analysts are pointing out was the low on August 11th at 1267, which is considered the neck line to a head and shoulders pattern. Any close substantially below that level signals another 10% correction to believers in this pattern. Volume was strong with the Nasdaq counting over a billion shares and the NYSE reaching 855 million. The one bright spot was the Russell 2000 that was up 3.03 points.
Today's trading was much less volatile for a change as we bounced above and below unchanged for a good part of the day. There was an overall sense of hesitancy among the buyers who were shying away from taking a position ahead of the FOMC. The sell-off really started to gain legs around 3:30 ET. We dropped right out of the day's range as indicated on the charts below.
Despite the overall lack of direction for most of the day, we did have individual issues making moves on the Street. Starting with the less fortunate, Gillette announced after the close on Tuesday that they would miss sales estimates for Q3 based on an excessively strong dollar and weaker sales on Braun shavers. Merrill Lynch and Salomon Smith Barney added salt to the wound with downgrades Wednesday morning. Both short- term ratings now stand at Neutral.
The closing bell couldn't come fast enough for Avon Products who lost $9.88 to close at $25.81. AVP warned that both sales and earnings numbers will be missed for the fourth quarter. HWP also fell on rumored earnings concerns. Some analysts are pointing to HWP's strong gains for the year as a reason for the profit-taking. All we can see is Hewlett Packard had a similar sell-off at this time last year.
Amazon.com had the most notable gains among the big names in the market today. AMZN closed up +14.38 at $80.25 after announcing a strategy to allow manufacturers and retailers to sell over 500,000 items online at their new Zshops for a monthly fee. This is not expected to add much to their top line growth but should do wonders for their profit margins and earnings. Other strong Internet players included ETYS which soared $10 to $70.00 on word that it would help entice buyers with family-friendly content on their site. This spurred Goldman Sachs to raise their rating to Buy from Outperform with an $80 price target. The DJ Composite Internet Index gained 7.02% today.
Rising oil prices brought the oil service companies back to life today. Prices rose after Tuesday's API report showed oil reserves diminishing providing further evidence that the above $24.50 which, in turn, breathed life into most all of oil glut of the past two years is ending. Oil prices closed the drillers. SLB, HAL and RIG were up $2.13, $1.69 and $1.69 respectively.
The dollar gained for the fourth straight day up to 107 versus the yen. This is up from 106.52 from Tuesday alleviating some fear in the markets but is still low to historical prices. The advances in the dollar were overshadowed by 30-year bond which fell. The yield is now at 6.13%, up from 6.08% on Tuesday. Some of the losses are being attributed to complex strategies where investors are selling the Treasuries to avoid having to cover short positions on gold. Others are pointing to nervousness over the Fed meeting next Monday.
This brings us to tomorrow where today's late day sell-off and close right near the low doesn't bode well. We do have three economic reports to digest in the morning that may either curb the slide or sink us even faster. Before the market, we will get the final revision to 2nd quarter GDP along with the weekly jobless claims report. At 10:00 a.m. ET, we will get the September Chicago Purchasing Managers report. It would likely take some extremely positive numbers to help us out of this rut. The overall trend in the markets are still pointing down. Support is tougher to find for the Dow and S&P 500 but the Nasdaq has support at 2700 where it bounced both Friday and Tuesday. But the lower-highs pattern setting in shouldn't encourage you to want to buy any bounce as it may be short-lived. Honestly folks, you may be better on the sidelines until we hit 10,000 on the Dow. This is a psychological level that may need to be hit before we get a true capitulation. With the FOMC meeting on Monday, we may get there sooner rather than later so protect your capital and sell too soon.