Fear of the Fed causes late afternoon pullback.
The non-farm payroll report due out Friday almost stopped the current rally dead in its tracks today. After both major indexes charged off to triple digit gains this morning the air slowly leaked out of the balloon as the day progressed and the Dow fell back into negative territory briefly just after 3:PM. While the Nasdaq did not go negative it dropped -68 points from the intraday high before rebounding at the close.
After the release of the weekly jobs report today, which fell 6000 to 260,000, a 26-year low, the focus immediately shifted to the non-farm payrolls tomorrow. The abundance of bearish estimates along with the party line parroted by Greenspan at the New Economy luncheon yesterday put fear of the Fed back into traders. Official estimates are running from +375K to +425K new jobs created in March with the unemployment rate dropping back to 4.0%. Unofficial estimates, the "whisper" numbers, are as high as 600K jobs and 3.9% unemployment. Traders will attempt to justify a blowout number by pointing to a five week period instead of four weeks and warmer weather compared to the storm plagued February numbers. Still with February clocking in at only +43,000 new jobs, a +600K number will send ripples of Fed fear through the markets. Greenspan said on Wednesday that he felt the market would ignore even stronger measures by the Fed to stop the runaway economy. Stronger measures equate to +.50 rate hikes instead of +.25% or hikes between meetings. If the jobs numbers blow out and the PPI/CPI next week are elevated then the Fed could react before the next meeting. If the Fed feels the market will ignore stronger measures then they will be less inclined to use small increases. This caused many traders to take profits from the rebound and go flat before the announcement.
Goldman Sachs released a "Super Seven" technology list for stocks that will perform well in periods of extreme volatility like we had this week. The list includes Cisco Systems, Dell computer, EMC Corp, Oracle, PMC-Sierra, Teradyne and First Data Corp. "During this period of extreme volatility we recommend that investors remain focused on those larger cap technology names where we continue to have high conviction in the fundamentals," Goldman said. Today's close for the Super Seven, CSCO -.31, DELL -2.03, EMC +6.50, ORCL +4.59, PMCS +15.69, TER +9.25, FDC +2.63.
After Clinton joked that he and Prime Minister Blair tanked the biotech sector recently on a misunderstanding and confirming that they supported patenting new discoveries, the sector has rocketed. Today CRA announced they had finished sequencing the human genome, a breakthrough that opens the door to precise understanding of what causes diseases of all kinds. The sector again rocketed with many stocks adding +20, +30, even +$40 or more.
The semiconductor sector just keeps surprising with worldwide sales of +$14.6 billion in February. This was an increase of +33% from year ago levels and only fueled increases in estimates for coming quarters. Some of the stocks that benefited were NSM +6.44, KLAC +7.75 and TER +9.25 after also being named to the Super Seven list.
European auctioneer QXL.com, which had dropped from $180 to a close of $70 on Wednesday received an upgrade from SG Cowen with a $1000 price target. They split 3:1 after the close yesterday to around $24 but traded today as high as $117 this morning after the news. The stock closed at $52 ($156 pre-split) and was trading up +$9 in after hours.
Alcoa was the first Dow stock to announce earnings this quarter and posted +$.95 vs estimates of +$.91. Alcoa said operating efficiencies and higher prices drove first quarter profits +60% higher than a year ago and giving them the strongest quarter ever. AA finished up +$1.75 today after a big sell off yesterday in front of the news.
In the "I am glad I did not hold over earnings" section Yahoo posted record earnings yesterday and then sold off over -$11 today to close at $153.69. If you have been reading this letter long then you know YHOO has a history of a significant gains before earnings and then a drop after earnings. Even though we preach it in the letter and teach it in our seminars, even some of the staff continues to hold over earnings, even when the trend clearly shows otherwise. The refusal to acknowledge facts will eventually lead to serious losses. The crowd continually expects big price explosions after strong earnings because the few companies that actually have strong gains are burned into their subconscious while the majority of stocks that decline after earnings are ignored. Learn from history and profit from it.
The Dow, Nasdaq and S&P all closed on the upside for the first time in weeks. The volume was light but we will take anything we can get compared to the alternative. The VIX is still hovering in buy territory around 30 but there is not really any follow through yet. The jobs report and CPI/PPI are providing resistance to the current earnings cycle. We are nearing the end of the rally if this is just a dead cat bounce or bear trap rally. The Nasdaq seems to be running out of steam and even with the +98 close today it was not convincing. With most bear traps lasting 2-3 days Friday will be a key day. We are rapidly approaching a liquidity crisis around April 15th and with overhead resistance the Nasdaq has an uphill battle ahead. The Dow, despite the 700 point swing on Tuesday is locked into a trading range between 10900-11200 and showing no indications of a breakout. Traders should be taking advantages of any earnings runs but be prepared to step aside quickly if the Nasdaq rolls over. Traders should also be ready to step aside as the 15th approaches if the market starts moving downward again. As you have seen this week, when everyone heads for the exits at the same time we can see some serious down drafts. Recognize the warning signs and act quickly.
Nasdaq and S&P futures are both up strongly but there is a lot of darkness before the morning jobs report.
Trade smart and sell too soon.
Current long positions: None