Was this the Bounce??
That is the million dollar question that we all want to know. The markets did bounce somewhat today, and it was playable, but there is likely a lot of volatility left to come. Let's look at what transpired today to see what clues were revealed to the future direction of the markets, starting first with the Nasdaq.
Dow who? The Nasdaq is where it is at now-a-days. This market is becoming the mainstay for options and Internet players looking for big moves, but today's action made even some experienced players look foolish. We saw a typical gap down on the open after finishing right near the low yesterday. The Nasdaq headed straight down for the first 30 minutes before stopping dead at 3735. This is right in line with the support we were expecting. (See Jim's wrap from yesterday for a clear guideline of where Nasdaq support lies). From there it was time to begin the bounce. The market moved gingerly higher and sideways until 1:00pm when someone turned on the buying light and investors jumped in. Within an hour and a half the Nasdaq was back in the plus column. Basically suggesting that, when the avalanche was passed, traders were willingly to jump right back into tech stocks. After that there was a lot of teetering around the 3900 level, before closing down 24.15.
The technical picture is unfolding and following a somewhat predictable pattern. The Nasdaq bounced in the support range from 3700-3750 and the Dow bounced at 11,000, despite some venturing below that level for a short time. The Nasdaq rallied back to 3900, which being old support is now turned to resistance. Unless we can break back above that and hold 3900 as support, we may be in for a rough couple of weeks. The last thing traders want to see is a pattern of lower-highs forming. That is usually when the "C" word starts moving its way to the forefront. You know...Correction. Fortunately these markets are becoming incredibly quick to react to current sentiment. The Nasdaq at its lows this morning had already achieved a 10% correction off of its highs, another reason for the bounce. It could be that if you happened to miss the action for the last three days, that you have weathered the storm. Although, we would consider that a long shot.
More likely, we are bound to pay the dues for that last leg of this incredible bull market. Sure the economy is relatively sound, despite the interest rate worries, but life is not so sweet to grant us an 85% Nasdaq move every year. In which case, look for at least a retest of the 3735 low of today. Just for kicks, we should point out the next stop below 3700. That would be at the incredible 3520 level. Remember that strong support we bounced from on multiple times last month? That also happens to coincide with the 50-dma and would be about a 50% retracement from the latest Nasdaq move from November to present. That is a fair amount of supporting data to argue for a Nasdaq 3500 support level.
So, what if most of your screen was still red? That was the case on my watch list, but it is expected if you have been playing highly volatile stocks to capitalize on the big moves. You win big, you lose big. There were still lots of playable bounces today off the lows even if these stocks stayed underwater all day. That is the beauty of the volatility, it makes for opportunities if you have the time to watch.
The internals looked weak as you might imagine. The Industrials gained 124.72 to 11122.65 and advancers beat decliners by 18-14. That is where most of the good news ends. The S&P 500 was up 2.71 to 1402.13, but that isn't much compared to the loss from Tuesday. The Nasdaq finished at 3877.57, down 24.12 on heavy volume of 1.74 bln shares. The NYSE also had heavy volume with over one billion shares changing hands. The 30-year bond didn't help by shedding over a point to close with a yield of 6.63%. This was due to a stronger than expected Factory Orders report released this morning. Analysts were expecting 0.9%, but it came out at 1.2%. Just another bullet the Fed is armed with if it decides to attack the markets.
Today's pullback was not concentrated on any one sector either. From Internets to Banks to Semis, most sectors were lower across the board. The VIX finally showed there was some fear among investors as it rose to breach 31 early in the morning before recovering. It closed at 28.31, which is still relatively high.
Gateway puts became fashionable after the close today when GTW announced that Q4 profits would fall $0.07 cents below estimates. The problem was good, old fashioned Y2K (and you thought it was over). Could this be the first of many who blame Y2K for a shortfall as they pay for extra costs now. They already have the scapegoat so don't be surprised to see some more of this going on. Another clue this may be a one-time event is the company's comments about the first quarter and fiscal 2000. They claim the estimates for these periods are still on track. Verdict: Gateway used Y2K as an excuse to better position themselves to meet or beat estimates going forward. Needless to say, GTW was already trading down after-hours. Beyond.com followed suit with an earnings warning after the close. They claimed slower sales in December was the culprit.
Another big loser today was BMC-Software. BMCS warned that their 3rd quarter earnings would fall short by $0.09-$0.13 cents. Analysts had expected a $0.54 cent profit. Merrill Lynch was quick to downgrade the company to near-term Neutral from a near-term Buy. Unfortunately, today was the wrong day to release bad news and BMCS fell $27.44 to $49.56.
In truth, there will be only one story that will be told over and over again tomorrow. That is the upcoming Jobs report. It is due out on Friday. Some analysts are expecting a blockbuster number that will spoke the bond market. This will in turn weaken the stock market further. Either an unexpected rise in the new jobs created or a new 30-year low for the unemployment rate is what is being feared. This could prompt the Fed to raise rates by 50 basis points. Of course, the flip side is that if such numbers arise and the bond gets cooked, the Fed will want to help protect the stock market from a brutal fall. Greenspan may be itching to raise rates but he has always been there to help calm and support the markets (especially in an election year).
Conclusion: There are more waves possible in the morning as shaky investors get scared out of the market. Then comes the afternoon before a major economic report. That has typically meant buyers gambling on news and forcing the market higher. It has been a profitable strategy in the past two months as the numbers have been relatively benign, but it is still gambling. The sentence for being wrong is severe. There is no harm in waiting for the news as we still have a few weeks of earnings ahead to play the volatility. Be suspicious of any rally before the Jobs report. Money will transfer in a hurry if investors see a bond yield approaching the 7.00% level and that possibility lies with this report.
Assuming everything is fine in the Jobs report on Friday, we did get a nice "hammer" indicator on the candlestick charts today. This is indicative of a market ready to rise. Look to the earnings calendar to start compiling a wish list of stocks to buy. We have room to the upside to run if we get a good report. Yahoo is the big stock ready to kick-off the season for the Internets. YHOO reports on Tuesday the 11th.
Plan for a rally, but wait for Jobs report first!