Look out below!
I told you on Sunday it was too good to be true. Everything was coming up roses but the smell was not the same. The market was ripe for a negative event. When the Nasdaq set a new high on Monday and the Dow could only manage a -1.64, our destiny was clear. The negative news swamped the airwaves today starting with the earnings warning by Raytheon. Citing fixed price contract over runs that they would have to pay, the defense and aerospace company really smelled up the markets. Other stocks in the sector included both Boeing (BA) and United Technology (UTX) which are both Dow stocks. Boeing dropped -2.31 and UTX lost -3.44 to start the Dow on its downward slide.
The day only got worse from there. The interest rate worries bled over from the bond market and yields flirted with 6.24% putting further pressure on the market. With the Nasdaq up +33% for the year and a rate hike in our future, it was just too much for some investors who tried to beat the rush to the exits. Many must have gotten the Intel news before the fact with over 44 mln shares traded before the market closed. Well more than twice the average daily volume.
Oil also contributed to the rate fears again today after soaring for the second day in a row. Rising oil prices contribute to higher inflation as the price is passed on to the consumer in thousands of products. The concerns that OPEC was cheating or would raise output appear to have evaporated.
Another fly in the ointment today was the reported military coup in Pakistan. We do not really have any economic impact from the conflict but they are a nuclear power. Nobody wants to have a power struggle over who has the bomb. Still, any uncertainty weighs on the market.
The real stinker today was the Intel disaster tonight. Yes, it impacted us today as traders fled tech stocks "just in case" Intel missed it's numbers. But that is unthinkable, right? They did not warn so that means they will make their number, right? Sorry folks! The biggest chip maker in the world took on Amazonian proportions tonight. According to Intel they had a great quarter. Revenue up +8.5%, record shipments and gaining market share (sound like Amazon?) but they were not able to make their estimates. Posting only a $.55 vs the official estimate of $.57 and the whisper number as high as $.62. After all this was the best third quarter in years and Intel was expected to show the results of the booming PC market. The booming market however put Intel into a price crunch. They had lower average selling prices and lower gross margins. They cut the Celeron chips aggressively to garner market share of a PC product where they were not making a reasonable profit. (Sound like Amazon?) Sorry, Intel, you are not considered an Internet stock and real world profit margins apply to you. Enough complaining. They promise to have a great fourth quarter. A lot of good it will do us tomorrow!
Intel traded down to $70 in after hours trading from a close of $76.69. In case you haven't looked, the S&P futures for tomorrow are already down -11.00. It is not as bad as it seems because Intel is the third largest company in the S&P at 2.52%. This means that any major change in the price of Intel will directly impact the S&P. What is causing the problem is the dozens of other tech companies that will also be painted with the Intel brush and immediately be suspected of missing their earnings. Their stock prices fall in anticipation and you have a major event. Dell for instance is 1.25%, MSFT 4.36%, IBM 2.09%, CSCO 2.0% and on and on. Pretty soon you have 20% of the S&P on a decline. Some of this will be white washed by morning but the result is not going to be pretty. In after hours Dell lost -1.50, CSCO -1.25, QCOM -4.00, MSFT -1.56. Some of these recovered from these levels but the impact at the open will be the same.
Remember, we are almost right at the anniversary of the 1929 October crash, and only a week away from the anniversary of the 1997 October crash. The market psychology is changing. We went from a strongly bull market just last week to a "look out below" mentality. The earnings, except for Intel, are still in the 19% range and we still have hundreds of companies to announce. All of a sudden, it does not matter. It is old news and nothing new is on the horizon except for negative events. The Fed and the European Central Bank are both poised to raise rates. We have Greenspan speaking on the state of the economy on Friday. (An event you dream about after having pizza for supper.) We have the PPI on Friday and CPI next week. We have Retail Sales, Import and Export prices on Thursday. Industrial Production and Capacity Utilization on Friday. I do not see anything good to propel the markets upward do you? And don't forget, Y2K is only 55 trading days away. The Nasdaq also entered a negative formation today by closing below the low of the previous record high day. In theory we should have held above the low to confirm the new high. (In reality it could have just been profit taking from the six day run.)
Now put on your rose colored glasses. Surely saner heads will prevail by morning. It was only two cents! And Intel did promise a better fourth quarter. We are also sitting right on significant support at 10400. The next major support is 10200, just an intraday jog away. Analysts were complaining that we never had a serious back to back drop last month to get rid of the rest of the weak holders. Maybe they get their wish on Wednesday. The -231 drop today was the largest drop since May 27th. Put another reflex action on the calendar for tomorrow and you go right back to oversold and right where we were ten days ago. Better yet, just drop Intel for a -$10 loss and let the rest of us go on with business as usual. (I can wish, can't I?)
This is a tough call. Do you sell at the open with the idea that 10,000 is only a tick away, or do you hold on for a quick recovery? I wish I had a crystal ball and could tell you what the Dow will be on Friday but I don't.
The last piece of hope I will leave you with is this. Friday is expiration Friday and "historically" this provides an upward bias for the week. We are looking at this as an entry point opportunity in several stocks. Dell and GTW will take an immediate drop at the open and maybe more as the week wears on. We are adding both of them as call plays tonight with the idea of target shooting them on weakness. Another sidelight could be Broadvision. We have been criticized for not listing BVSN as a pick as it blazes a trail toward it's 3:1 split. I have repeatedly said we will not list stocks that have had double digit gains on a newsletter day. The option premiums have been inflated so much that they are grossly over priced. BVSN has been adding +$10 a day since Oct 1st. Well if you want to play BVSN, tomorrow is your chance. It was down -$13 intraday today and recovered to finish -5.88 at the close. It will surely dip at the open and provide yet another entry point. Before you spend the night tossing and turning over this opportunity, let me remind you that the Nov-$170 call BDV-KN is $24. (BVSN=$176) (This is not an official play because of the option price)
If you are in cash, use caution buying the dip. Wait for a rebound before putting your cash in the trap. I have vivid memories about jumping in at the close after a big multiday decline in Oct-1997 with the idea that "it can't go any lower" and waking up the next morning to the futures lock limit down at -27.00. Trust me, you do not want to go there! If you are not in cash or puts then hold your breath at the open and hope for a quick recovery. Many times, panic selling at the open will be the worst price of the day.
Good luck, sell too soon.