Another day, another 1.5 bln shares traded on the NASDAQ. . .
No record this time. The first day of trading following the Thanksgiving weekend saw investors turning their prize winning birds into turkey soup. The high flyers in the tech sector put up a heck of a fight, but could not escape the boiling interest rate caldron. First Merrill Lynch, then Warburg Dillon Reed predicted another FED rate hike, possibly by year end as a result of strong initial holiday sales reported by retailers and e- tailers alike. To give you an idea of the negative sentiment in the bond market, even news that existing home sales fell 6.6%, which would normally have traders jumping for joy and chanting "yippee, the economy is cooling off", got the cold shoulder in the bond pit. The focus is clearly on the NAPM numbers (wholesale producer sentiment) scheduled for release on Wednesday, and the non-farm payroll and jobless rate scheduled for release on Friday. While we still contend that inflation is a non-issue thanks to productivity gains, right or wrong, the market doesn't care what we think and could remain in defensive mode most of the week. Also, despite a slide in oil prices today, the prospect of generally higher prices until April still weighs heavily on the bond rate too.
Anyway, profit taking was the order of the day as higher interest rates finally put the brakes on the runaway equity train. The DJIA broke below 11,000, a technical development that Jim alluded to Sunday, which could take us to 10,750. If there is a silver lining in this, the lows of the day were at least getting higher indicating buying interest on dips is still intact. Despite interest rate fears weighing heavily on equities, the technology issues initially kept the NASDAQ afloat until the last two hours when it shed almost 50 points to close at the low of the day. That too is an ugly development until you realize that it is still above last Wednesday's close. As we've said before, as long as there is money flowing into equities, a day or two off isn't going to kill this bull market. It is healthy to have a day to regroup in light of the gains we've seen over the last 4 weeks. So, is this just standard profit taking (a.k.a. buying opportunity) or a genuine reversal? Only time will tell, but let's look at today's action for some clues.
First, the DJIA sank like a stone right from the open all the way to 10,886 before finding the strength to immediately recover to 10,950 - nonetheless a clear violation of the 11,000 support level. However, the gap down from Friday was severe enough that technical analysts might want to fill that void. The heavy morning volume as the price was rising is indicative of nobody being in a hurry to unload. There was good support at 10,900 and rising by the end of the day with volume. Chalk it up to profit taking with underlying strength. That is a positive in our book. The final score was not that bleak - down 40 points to 10,947. However, pessimists will note the horrific internals, with the A/D line showing just 10 advancers for every 21 decliners, and 404 new lows besting just 56 new highs. The deterioration doesn't look good. Of course, there are many more financial and utility companies traded on the NYSE (than on the NASDAQ), the likes of whom really took it in the shorts today on the negative bond sentiment. Only 326 mln shares traded up while 513 mln traded down. Total volume was about 830 mln shares, which we characterize as "busy".
NASDAQ was a bit stronger in appearance until the final two-hour profit taking session into the close. It finished down 26 points at 3421. Advancer here too trailed decliners, but by "only" a 23:18 margin. Still 254 new highs were way ahead of just 81 new lows. Volume was the third highest in history clocking in at 1.55 bln shares. Yes, down volume slightly outpaced up volume in the final two hours, but overall, the index nonetheless ended the day with about 800 mln shares trading up and about 700 mln shares trading down. Note again the huge volume - NASDAQ is highly unlikely to experience a severe sell-off as long as volume remains high.
In the overall scheme of things, and as we've noted before, volume will make up for and gloss over lots of problems. When the volume dies, look out below. That will be the clue that the buying has come to an end (or been temporarily suspended). Then just the sellers will be left, in which case all of us will be making hasty retreats.
Need proof that money is coming into the market? $20.4 bln flowed into mutual funds in October. The biggest month on record was January, 1997 with $28 bln of inflows. November's figure is expected to blow that record away. While close to home we have reason to be cautious (VIX continues its climb over 23; interest rates are moving up; oil prices on the rise; the market climbed to high too fast; index levels grossly exceed 200-dma; etc.), the perhaps bumpy ride is cloaked in the greater positive force of liquidity. According to TrimTabs (the research firm headed by Charles Biderman), an average of $6.8 bln weekly flowed into mutual funds over the past 4 weeks. Though margin debt climbed to an all-time high of $2.9 bln, the drop to just 1.15% of total market capitalization is a bullish sign. That capitalization has risen by $1 trillion (with a "t") with IPO's shrinking going forward is testimony to the largesse of the inflows. The net result of the research is that Biderman upped his stance to CAUTIOUSLY BULLISH, though in his own words, he runs the risk of "being the last guy on the train before it wrecks". This is a guy whose model portfolio is up 81% this year and 1836% since July 12,1993, compared to 16% this year and 256% since July 12, 1993 for the S&P 500. He's credible.
Okay, so despite the bond market making gloomy sounds, what do we need to know about today's trading? As noted earlier, retailers are off to a great start and are seeing trading volume increases in front of what is expected to be a record sales season. Hot items this year are mostly electronics from digital handsets, digital cameras, and DVDs to plain old PCs (funny - not a peep about Poke Mon). Unfortunately despite YHOO reporting online transaction volume up 400% over last year, and AOL reporting a 300% increase with over 4 mln users making a purchase last week, Henry Blodgett threw cold water on the e-tail rally which began earlier this morning by noting that AMZN's expected revenue of $633 mln this quarter is "a strong number, but not amazing". Internets finished the day mostly negative, even though the Yankee group noted that 18 mln homes would spend $18.3 bln in online sales this coming year.
On the positive side, Redback Networks agreed to acquire privately held Siara in a $4.3 bln stock trade. Siara is the former sister company of Cerent (started by the same group of engineers before parting ways in 1998), which was recently purchased by CSCO for $7.2 bln. Siara is an optical equipment maker (what else?) supplying local communications companies with IP over optical equipment. RBAK was up almost $14 today. Back from the dead too, AMD announced the release of its Athlon chip running at 750 Mhz, besting Intel's best P-III running at 733 Mhz. AMD was up $2.81. Drug stocks too got a big push at the end of the day with prices rising across the board on increased volume in the sector.
In summary, liquidity and volume still rule, but market internals are suffering a slight breakdown (more so on NYSE than on NASDAQ). Despite a much needed profit taking, there are still plenty of profitable opportunities, but you must pick your entry points carefully - not all factors are currently in our favor, and may not be until the bond market works itself out of despair. On the positive side, a healthy dose of fear can provide that wall of worry for the market to scale. We can't say whether or not this is a buying opportunity. Today's close makes it suspect for tomorrow. NASDAQ support is at 3400, then 3350. DJIA support is mild at 10,900, then stronger at 10,750. Watch the market tone, make your move. Of course sell too soon.