Tail Wags Dog? Or Dog Wags Tail? You Make the Call.
As news that there would be no DOJ settlement with Microsoft hit investors like a ton of bricks prior to today's market opening, the sharp decline of MSFT on the news (-15.25, 91) was just a catalyst for choking the life out of the NASDAQ today. While it would be easy to kick sand in the face of Joel Klein, the lead prosecutor for the DOJ, and Judge Thomas Penfield Jackson for cratering our tech-heavy trade and IRA accounts, the finger could more justifiably be pointed toward the IRS and Treasury Department as tax payers are now forced to get out the checkbook in front of April 15th. While you may not like the outcome that the Judge's anticipated decision had on your account, we think the real culprit is tax bill driven.
(As we write this, the condensed version of the Judge's decision is that Microsoft violated the Sherman Antitrust Act by unlawfully maintaining a monopoly on the browser market. Microsoft is expected to appeal. Neither of these actions is a surprise. However, in the meantime, the DOJ may seek injunctions preventing MSFT from continuing its behavior. Remedy hearings won't likely begin for at least six weeks, which will keep MSFT under a cloud for a while longer. As after hours trading neared an end, MSFT was trading up $2 at $92.75. Total shares traded today? 131 mln shares or 7.5% of NASDAQ volume.)
Lest you think we're nuts, follow the logic for a minute. Almost anyone who made money in last year's market has a humongous tax bill due on April 15th and the money is still tied up in stocks. The original plan was to hang on as long as possible prior to tax day, then sell to cover the amount due. Now that selling has knocked the stuffing out of the NASDAQ, the prospect of further drops is scaring out yet another level of taxpayers that don't want to wait any longer. Maybe you fit into that category - certainly that thought plays out in the Denver office. Multiply that sentiment by some million number of households, and the result can be devastating to the issues with the biggest gains so far this year.
Adding gasoline to the fire, maintenance margin calls are occurring with regular frequency to investors as positions further deteriorate. If you can't bring in the money, your broker has the right to sell or close anything in your account to satisfy the requirement -- more downward pressure. Now, adding some nitro so we really feel the burn, we're likely to get stopped out as prices continue to fall. It becomes a vicious circle as the once high-flyers caving in on themselves, becoming an investor black hole. Nothing escapes the gravity. Yes, MSFT makes up a big chunk of the NASDAQ 100, but it can't do today's damage alone without outside influence.
If you are a buyer in this market, you are likely sitting on the sidelines awaiting MSFT's fate while hoping to get another buying opportunity tomorrow. After all, who wants to jump in with both feet while the NASDAQ puts in its largest point sell-off in history - down 349 at the close. It also qualifies as the 5th worst day percentage loss too at -7.3%. For contributing sectors, we need only look to the following: Internets fell 8.28%; computers lost 8%; chips were crunched 7.2%, while the B2B sector was bombed for an 16% loss. . .kinda conjures up scenes of Slim Pickens riding an H-bomb as its dropped from the belly of a B-52 in the movie, Dr. Stangelove. Also adding to the negative sentiment, Legato Systems (LGTO, -24.06, 20.56) lobbed its own grenade at investors, telling the street that they would have to restate sales and earnings because sales representatives of the company acted outside their authority. Parametric Technology (PMTC, -9.75, 10.81), a good sized player in the collaborative product commerce B2B solutions sector with sales of over $1bln annually, also contributed to negative sentiment by warning that they would miss revenue projections by 15% - OUCH!
Anyway the good news was only as loud as a whisper and went largely unnoticed today. What good news? Shhh, lean in a little closer so you can hear it. . .Charles Schwab and Co. pre- announced blowout earnings of $0.31 vs. analysts' estimates of $0.26, which should have jumpstarted the whole on-line brokerage sector let alone SCH, which eked out only a $0.25 gain for the day. Here's another piece of big news from an influential analyst that couldn't escape the surrounding noise. . .DLJ's Tom Galvin announced today that he sees the NASDAQ up 20%-30% this year from current levels. Party hats and horns? A month ago when the index reached a new high of 5132, that would have been greeted with cheers from the street. Not even a tip of the hat today.
Let's take a moment to examine the carnage. The NASDAQ closed down 349 points at 4222, it's largest point loss ever by a long shot. Decliners pounded advancers 3168 to 1138, while down volume was about 7.5 times greater than up volume on a total of 1.74 bln shares traded. While volume seems normal, remember MSFT, LGTO and PMTC made up about about 200 mln shares, leaving just 1.54 bln for the rest of the market. While on the surface, that may appear bullish given the numerical damage, (you know, "it has to turn around since the tech issues have been hit so hard") it raises skepticism that the sell-off has not yet run its course.
The NASDAQ blew clean through points of support at 4550 (gapped under at the open), 4500, 4400, 4300, and 4200. Once under 4400, that figure acted as resistance for the next move down to 4300. While struggling for support there at mid-day, 4300 finally gave way just before the last hour of trade and final descent below 4200. We hate to contemplate it folks, but despite a mild 31- point bounce in the last five minutes, 4192 is the old high that offered resistance back on January 3rd, and today offered support. Otherwise, the NASDAQ is in no man's land. If we can't maintain that tomorrow and make a move back up over 4300, better start looking for the next level of support around 4000-4050. And if the unthinkable happens, look for support at 3750 to 3800. While we don't think it will get there, we didn't think it would get back to 4300 either. As of now, the index stands corrected 18% off its February high. 20%, the standard definition of a bear market gets us to 4100, but has no historical basis of support. Even the 50-dma of 4542 isn't going to help now. While we don't like to force a moving average to fit a chart, the 100- dma could offer support if it's embraced. Reaching back to December of 1998, and May, June, August and October of 1999, there has been empirical, support at that level, currently at 4118.
Based on the above, you'd probably think the whole market collapsed today. Nope. The Dow, S&P and the NYSE held up pretty well. When was the last time you saw the Dow gain 300 points? If you weren't looking, it was today! The last time was on March 16 with a 491 point move. Particularly impressive with today's Dow gain was the extremely bullish candlestick engulfment of the five previous days. That's when a move from open to close and high to low on the candlestick exceeds the movement of the previous day or days' trade range. Engulfing five days is a major accomplishment. While the S&P wasn't nearly so powerful, it too closed with a gain -- plus five points to 820, while finding support in the 810 range..
The Dow for its part moved up exactly 300 points to finish at 11,221 on respectable volume of 1.03 mln shares. Heck, had MSFT finished flat for the day instead of down $13, the Dow might have gone to +365 for the day. Advancing issues edged out decliners 1568 to 1488. Up volume was nearly twice down volume as 69 new highs bested 51 new lows. Not all technology was bad today, especially here -- HWP finished unchanged, while IBM tacked on $3.63. Take that you little NASDAQ pipsqueeks! Begin to look for the next level of resistance at 11,300, then again in 100 point increments up to 11,700. Don't be surprised though by a little intraday breather to say 11,150 just to consolidate the gain.
There you have it. . .divergence like we've never seen before. Not much on the economic front tomorrow to move things either way, though YHOO will report earnings on Wednesday (and they better be good, otherwise kiss the Internet sector goodbye). However, since jumping into a 12-lane freeway at rush hour isn't good for your physical well being, neither too is doing the financial equivalent with your trading account. Remember to trade only when it is profitable to do so. That is, make sure the market is moving in your direction, advancers beating decliners, and a positive movement of your stock. Today was a rough day for NASDAQ plays and good for Dow/NYSE plays. That could reverse at the drop of a hat since the Dow is exhibiting a bullish trend, while the NASDAQ is stochastically oversold and due for a turnaround. Remember, just when your positions are as low as they can go, they can still go lower. It would behoove all of us to review the 10 rules of trading, especially #6, #9, and #10. (see Web site, left hand column, reference section, top 10 rules) While it won't work in every gap down, a stop loss is a must in this market until the damage runs its course. It's never too late to sell too soon