Exam Time For the Dow, Will It Pass The 10K Test?
We've been expecting the Dow to test 10,000 for the first time since October and we got it today. Despite a strong opening for the markets after yesterday's record close on the Nasdaq, the Dow Industrials appeared to have its heart set on touching the key 10,000 level. Didn't take long either as the first test occurred by 11:00am EST. After that initial bounce, it retested 10K two other times before giving way to the selling around 2:00pm. So did we get a big collapse under 10K? Nope, and it might not be likely despite the analysts that you hear on CNBC hitting the panic button. A closer look at the numbers (and the most recent history of a Dow drop over 15%) may have you drawing a different, and better, conclusion than any panic- stricken analyst on the Street.
The last time we saw a major sell-off over 15% was in the summer of 98. We got a 10-12% dip last summer, but the last extended dip over 15% and longer than 5 weeks was two summers ago. Take a look at the chart below. Notice that 1998 dip did extend over 15%, but never more than 20%, and lasted 7 to 8 weeks. In the Dow's recent decline, we hit the 15% correction mark today around 9950 and are in the 6th week of the decline. The bottom from the 1998 dip was confirmed with four days where the Dow had major intraday dips only to bounce right back and create the tails on the candlestick charts. Any similarity to today's bounce back? The Dow broke 10,000 this afternoon and the bottom didn't fall out! It's because we may have already witnessed the bulk of the downside to this market. Again, it may take another week or so to build a base, but LEAPS, calendar spreads or selling puts should be the thinking here. Not "sell it all, the world is ending." Remember the words from yesterday's Wrap, "This is not real fear...missing an entry point is the only real fear on Wall Street right now." A close look at the weekly bars for these two sell-offs look amazingly similar.
With that said, let's look at what is good on the Street and it is easy to find. First, the OEX held solid at support at 720 today. This made for some very playable bounces. The Nasdaq also showed incredible support and strength. Can life really be that bad if we are closing at a new all-time high? Just think what we might see when we get through this phase and head into earnings run-ups. I shudder to think of the possibilities. The closest possible support for the Nasdaq was at 4500 and we got two textbook bounces, one in the morning and one in the afternoon. I saw a lot of bargains on my screen in the Nasdaq today. It was a good day for entry points. The VIX is saying the same thing as it once again neared 30, topping at 29.23. Volume was good on both exchanges with the NYSE ringing up 1.17 billion while the Nasdaq turned in nearly 2 billion shares. The Nasdaq closed at 4617.59, up 67.24. The S&P ended at 1353.43, -7.26, the Dow at 10092.63, -133.10 and the Russell 2000 finished at 554.03, +4.12 and less than 5 points off a record close.
The only major economic report of the day was a non-event to the markets. U.S. factory orders for manufactured goods fell in January by 1.3%. That was in line with estimates which ranged from 0.0% to -2.0%. This was the first decline since October for Durable goods, but it followed a sizzling 6.3% for the month of December. The report helped the 30-year to rally slightly. The yield was down to 6.06 before climbing to close at 6.12% Tomorrow will produce some more important numbers with January existing home sales and current quarter GDP numbers. Home sales are expected to rise by 5 million homes and GDP is expected to rise by 3.0% to 3.5%.
In the news, QCOM dipped today on word that China will postpone indefinitely the deployment of a mobile communications network that will feature CDMA technology from Qualcomm. This story was reported by the WSJ and could just be a delay tactic by China to strengthen their position to enter the World Trade Organization (WTO). QCOM closed at $139.69, down $7.19.
INTC helped support the Dow and moved the SOX to another all- time high on word that Robertson Stephens raised their price target to $150 from $125. They cited strong momentum that has carried over from January into February. INTC sees typically slow growth in Q1, but Robertson Stephen's Managing Director and Senior Computer Systems Analyst Daniel Niles said "We believe the first quarter is off to the best start seen in the last several years." INTC ended at $114.25, up $5.19, and the SOX index closed at 1063.70, up 56.21.
The SOX was the hot sector of the day, up over 5.5%. Other winners include Internet, Computer Hardware and Brokers. The losers were easier to find with Banks, Retail, Cyclicals, Gold, Healthcare and Utilities all heading lower. You would think from watching the market that stocks losing ground were the name of the game today, but that is not the case. There were lots of strong stocks on the Nasdaq including INSP +27.81, KANA +28.63, HGSI +26.38, RBAK +25.25, JDSU +22.50, BVSN +21.44, NTAP +21.19, and CRA +68.00.
Tomorrow should be more of the same. Depending on the economic numbers released before the open, I wouldn't be surprised to see the Nasdaq charge out of the gates again. Right now only 2% of Nasdaq stocks are at or near 52-week lows versus 30% of all S&P 500 stocks. This is a two-faced market right now and as long as you concentrate your positions on the Nasdaq or tech-related stocks, you should see movements and results similar to what you are used too. The Dow will come back, but until it shows a good base with signs of life, we will leave it alone.
Let the support lines in the charts above guide you for the Nasdaq and OEX. A close below those lines will do a lot to reverse the sentiment in those markets. On the Dow, we are looking at 9950 to 10,000 continuing to hold. Worst case scenario may put the blue chips down near 9800. If we don't hold these levels, then traders may start getting knots in their stomachs. Just remember, there haven't been any major fundamental changes that would signal a long-term bear market. A good capitulation day is just what the doctor may prescribe to right this index and get us started on the journey back up. When in doubt, stay on the sidelines. This market is full of opportunities every day, pick the one that is right for you.
P.S. Jim is at a management conference for the rest of the week. He will be back at the helm on Tuesday. Look For Kimo's recap of this week's trading, plus a look ahead to next week in the Sunday Market Wrap.