Fasten your seatbelts. Get ready for a bumpy ride.
Bungee trading anyone? Last Sunday the NASDAQ had just put in a -415 point week and the bears were tripping over each other to proclaim the end of the bull market. This week the NASDAQ gained +500 points from the intraday low on Monday. (+357 from the Friday close) Record high to a -11% correction and back to record high in just two weeks. Over bought to over sold to over bought. The Dow however, is not quite the picture of health that you would expect. I said last week that the Dow would suffer while the NASDAQ added strong gains but I think it was worse than we expected. After posting two back to back triple digit gains on Mon/Tue the Dow has not been able to muster any support. You would think it was the Dow that woke from its slumber and stuck its head out on Feb-2nd. After seeing the shadow we are now condemned to six more weeks of drops before the April earnings run.
It may be a long time before you hear the terms "flight to quality" or "safety of bonds" again. The volatility in the bond market this week was extremely rare. Several days saw bonds gain or lose multiple points. There are rumors flying that several big hedge funds and large banks got hurt very badly. There was even a rumor that the Fed would hold an emergency meeting to address the problem. The actual problem is our fault. We are paying taxes at a record rate and the government said they would be cutting back on the number of bonds they sell and would be aggressively buying back some bonds already in circulation. The supply of the 30-yr bond is going to dry up. Companies and financial institutions, that use these bonds for hedging against the fluctuations in the financial markets, scrambled to buy and traders who were short bonds added to the panic. After the Fed announced they would not be meeting the bonds started easing.
It is official, we are in the longest economic expansion in history at 107 months and counting. The economy continues to explode at almost twice the GDP the Fed wants. The Nonfarm payrolls on Friday were off the charts. There were 387,000 new jobs created in January and unemployment dropped to a 30 year low of 4%, a level Greenspan considers a trigger point. The estimate of new jobs was 250K and the actual number was over 50% higher. A Merrill Lynch Economist, Bruce Steinberg warned that new jobs must drop to 175,000 a month in order to maintain the 4% unemployment rate. Many economists expected the rate to fall below 4% this month. The huge increase in employment will push the GDP even higher. Normally a report like this would be the kiss of death to any tech rally but not today.
Stocks continued the tale of two markets this week. The Nasdaq powered ahead but the Dow only managed +224 points. Much of the Dow's gains were made on an oversold bounce on Mon/Tue. Once the Fed meeting was over the reality set in on the Dow. The Fed may raise rates as many as three more times. Financials took it on the chin and started giving up ground. Materials stocks started dropping on fears that reduced demand caused by higher interest rates would impact their performance. Inflation might not be running rampant but nowhere is it dropping. Gold shot up +$23 an ounce after Placer Dome Mining said they were going to discontinue their hedging operation because they felt the price was going to move higher from here. Previously they would contract to sell future production at today's prices in order to protect against a fall in price. Rising gold prices are seen as a prelude to an inflationary cycle.
The competition for PC sales just got tougher and prices just became significantly cheaper. Ford announced that they would be offering a fully featured HWP PC, printer and Internet access for only $5 per mo. When you consider Ford has 350,000 employees that became a huge sale for HWP. Ford only joined the list of companies "giving" away computers as perks for only a token amount. Delta, with 72,000 employees made the same announcement this week at $12 per month. This perk gives companies one more string to keep employees tied to their job and prevent having to bid for trained workers in the work place. The downside of course is the removal of these workers from the retail PC market place. If you are HWP you probably had to give away all but a very minimum profit margin to close an order of this size. As this trend catches on, more than a dozen companies currently offer this perk, the retail PC sellers will see not only their business but their clients slip away. Of course a smarter worker with a new computer needs software, joysticks, speakers, etc and the margins on those items are fatter than the margins on a PC. The real winner if this trend continues? Microsoft. Easily a couple million new copies of Win98 will go on these free computers this year.
I told you last week that this coming Monday and Tuesday would be the key. We are four days into February and the Dow is now trending down and closed under the psychologically important 11000. The NASDAQ is showing signs of a failed rally at 4300. The NASDAQ did make a new record close by +9 points but dropped -52 points from the high of the day. The tech sector is showing signs of weakness. Not all the techs were in the rally. These heavyweights of the tech/Internet world, JDSU, QCOM, YHOO, BVSN, RHAT, VERT, EPNY, AMZN, BRCD, PUMA, ASKJ, INKT, EMLX, VIGN, INSP, NSOL, CMGI, ICGE, RNWK, CMRC, DCLK, ITWO, BRCM all ended the day down. Many were up strong intraday but fell in the afternoon. It could be just fear of darkness and pre-weekend profit taking but when that many stocks diverse stocks all fail at once I start looking under the surface.
I think there is still a lot of complacency in the market. Investors are literally selling anything non-tech to buy tech stocks. The price is not important. They just want to be in techs and get those 100% returns "everybody" got last year. The publicity blitz is upon us. Every tech fund with outstanding results last year is promoting their record gains in an effort to seduce you to move your money into their wallets. Dozens of funds generated over +100% gains. Even the Munder Internet fund posted +110% for the year. Now the hunt is on. Which fund is going to be the winner this year. Cash out my Acme Market Loser and my Lost Value Advantage funds and throw money at the techs. While this sounds like a pure reason to buy techs now it is also a reason to be skeptical of market health. Past performance is no guarantee of future results is what all the brochures say. This means give me your money and we will invest it and we might return a profit. A sure way to not show a profit would be to throw this money at the NASDAQ after a possible failed rally signal like we had on Friday. Fund managers know this. There is a tremendous amount of money on the sidelines. They are waiting for a signal. The green light. The starters pistol. Instead we get a Fed rate hike, (do not pass go). The Fed warns they will probably raise rates again in March if not before, (pay the Fed tax). The nonfarm payrolls come in +50% more than expected, (speeding ticket, pay a fine). The wall of worry just keeps getting higher when we want it to go away.
The main reason for market rallies just died. Earnings. Almost all the earnings announcements have passed. The stock split announcements and corresponding spike in prices is over. CSCO and DELL are about the only major tech stocks left to report and only one of those will be positive. Don't look now but there is another reason to sell stocks in February. Traders are faced with that yearly beating called income tax. With record gains last year and most of them trading gains, traders will have to convert a sizeable chunk of stock to cash for the tax man. If every online trader had to take only 10% out of his account for taxes, and that number is probably low, you would almost be able to hear the collective gasp as the market softened. This cash out does not have to happen in February and more than likely many will try and stretch it until the last minute in April but it begins in February. Next week is when the cash flow battle will begin. Managers will wait on the sidelines expectantly hoping for a pullback. Tech fund managers, flush with cash from people moving out of value funds, will be hard pressed to wait very long. Like a kid in a candy store with a pocket full of Christmas money they will be ready to scoop up techs by the arm full if there is no sign of a sell off. Monday and Tuesday will be key days. If we can hold around 11000 on the Dow, 1400 on the S&P and 4050 on the NASDAQ then we have a chance. If all slip under these numbers we could see yet another "correction". The most probable scenario is a tug of war between the buyers and the sellers and the result would be a highly volatile range bound market for the next two weeks. Remember last summer when we were locked in a trading range on the Dow for weeks at a time.
This was the biggest week ever for the NASDAQ both in points gained and percentage gained. Since nothing goes up in a straight line that alone would be enough to make traders nervous about next week. This probably had a lot to do with the sell off in the last hour on Friday. Tuesday is the Nonfarm Productivity report and Friday hosts the Retail Sales report. These are not the heavyweights like the FOMC meeting or the Nonfarm payrolls but they will be watched. Volume on the NYSE continues to be heavy which makes the down indications worse. Advancers only beat decliners on the NASDAQ by 21:19 on a record day Friday. The wild cards Friday were the S&P and the RUT. The S&P closed above support of 1400 and the Russell-2000 finished at almost the high of the day. These indexes could be the real picture of the broader market and the drama surrounding the Dow and NASDAQ is just to keep us confused. I think this week boils down to "if you own it, hold it" and if you are planning to open new positions try to pick your entry points carefully. Fasten your seatbelts, volatility ahead.
Trade smart, sell too soon.