Two Markets, Two Bounces...Same Theme
Continuing their decline from yesterday, the Blue Chips moved down in the first hour of trading, as investor nervousness continued. The DOW managed to bounce early in the day at 9731 and moved up from there. Supported by value investors looking to buy stocks that have been beaten down lately, the DOW looked like it might post a decent recovery, up almost 120 points from its low by 2:30pm EST. The Volatility Index (VIX) moved up early in the day to just over 29 before retreating throughout the day. Ending the day at 26.14, this put the indicator right near the middle of its historical range. At least a sign that things may be cooling down after yesterday's scare.
Banging its head at 9918 in the afternoon was enough to push the index down for the rest of the session. After such a large drop yesterday, the weak recovery today seems more like a dead-cat bounce. Interest rate fears are still alive and well across most sectors. Another increase when the FED meets on March 21st is almost a foregone conclusion - the only uncertainty being...how much this time and is this the last?
Although largely a non-event, the FED survey known as the Beige Book came out today and showed little inflation despite a tight labor market. The report highlighted limited increases in the prices of final goods and services (transportation services and certain commodities excepted due to the meteoric price rise in crude oil), despite faster wage growth for some workers. Strong sales of semiconductors and other high-tech equipment, along with increasing demand for a variety of manufactured products such as furniture and electronics will only encourage the FED's hawkish stance when it meets later this month.
Continuing to express his concern about the economy, Alan Greenspan today cautioned banks not to become complacent in their lending practices. Speaking to the Independent Community Bankers of America, the FED chairman said, "A broader and more troubling risk is that many banking institutions view current strong economic conditions as no longer extraordinary and exceptional, but as ordinary and expected". He went on to voice concern about the "grave consequences" to the industry should economic conditions weaken.
This is more of the same song and dance from our lovable nemesis and represents nothing new for us as investors. Interest rates are going up, the economy is strong, and labor is tight. At the rate the tech freight train keeps roaring down the track, the continued spectre of rate hikes will bother the "old economy" stocks more than those from the "new economy".
Ok, here are the vital numbers. The DOW managed to bounce off its low of 9731 to add 49.42 by the end of the day, closing at 9856.53. Although posting 8% more up than down volume on roughly 1.2 billion shares, the NYSE internals still don't look very healthy. Decliners beat advancers by a 15-to-14 ratio, and 263 new lows swamped the mere 49 new highs. That's not exactly a resounding vote of confidence for the day after the index's 4th largest point loss. The sentiment doesn't look that great when you consider that yesterday's loss capped off a 17% decline (so far) from the high of 11722 seen in January.
All right, so the DOW didn't look so great. How about the NASDAQ? Although seeing some weakness in recent winners such as Biotechs and Semiconductors, the tech index didn't look too bad. Sellers stepped in early, taking the index right to key support. Bouncing at 4722, the NASDAQ recovered from a 125-point deficit to climb steadily for the balance of the day. Posting yet another 2 billion share day, and gaining 49.42 to close at 4897.26, the internals were better than on the Big Board. Decliners did beat advancers by 2372 to 1898, but 18% more up than down volume and 196 new highs vs. 167 new lows paints a picture of mere profit-taking ahead of the next run at N5K.
After Saudi Arabia and Iran signaled that OPEC will increase oil production when the production limit agreement expires at the end of the month, crude oil prices fell 8% from yesterday's 9-year high of $34.37/barrel. Oil and Oil Service stocks dropped in response, led by the likes of SLB (-5.13, $77.06) and HAL (-4.63, $39.88). Don't rush out to top off your tank though. It takes months for new oil to make it through the production pipeline and show up as gasoline. If the refineries don't increase production, the supply shortage still exists, and the approach of the summer driving season, means prices could still challenge $2.00 at the pump.
If you still believe what you hear from Washington, (Yes Virginia, there is a Santa Claus), Energy Secretary, Bill Richardson pledged that he will not allow gasoline prices to top the $2.00 mark. No matter how you slice it, the extreme levels will eventually trickle down and start to have an inflationary effect.
An alliance between a tech stock, a retailer, and an oil company? Believe it or not, Oracle (ORCL), Wal-Mart (WMT), and Chevron (CHV) announced they will form an online supply exchange for the convenience store industry. Assigned the moniker RetailersMarketXchange.com (what a mouthful!), the exchange is designed to reduce costs for retailers and independent stores by creating a centralized Internet marketplace. ORCL seems to be the big winner here as the company saw its shares up $8.19, while WMT and CHV closed up fractionally.
Need proof that investors are still in love with tech stocks? Look no further than the B2B deal announced this morning by IBM, I2 Inc., (ITWO) and Ariba Inc., (ARBA). In a joint statement the companies announced the deal, which calls for IBM, the world's largest computer company to take minority stakes in both ARBA and ITWO. The alliance will help firms create full-service online B2B marketplaces by providing logistics support for buying, selling, distribution, and inventory-control activities. All three companies moved up on the news, ARBA (+6.50, $331), ITWO (+22.19, $190.63), and IBM (+2.88, $105.88).
So where do we go from here? It is starting to sound like a broken record, but the strength is in the NASDAQ. The minor recovery on the DOW didn't come anywhere near kicking it out of its downtrend. The NASDAQ on the other hand needed to take a break so that it can move higher from here. We have got enough fear selling this morning to begin a new leg higher. Just over 100 points from N5K, it is only one good day from a close above this level. Keep in mind that as we approach the April earnings, we first have to navigate the earnings-warning minefield. As we saw yesterday with the carnage that followed Proctor & Gamble's warning, the consequences of disappointing investors can be severe. The other possible fly in the ointment is the Initial Jobless Claims due out tomorrow morning. If employment shows up tighter than expected, look for both indexes to have trouble moving higher. On the other hand, a tame number could be just what the NASDAQ needs to power above that millennium mark, setting the stage for another whopper of an earnings season.