A New Perspective
Let's try to stay away from the usual market rhetoric. You know, the market declined on unusually light volume over concerns of the Federal Reserve's future interest rate policy. Instead, let's focus on the internal picture of the market. The trading range we've come to love in the DJIA is narrowing. The Industrial Average ran into resistance Tuesday at 11,000, right on schedule. Wednesday's consolidation may have been warranted, considering the four day rally we enjoyed. If the pattern of higher lows is going to continue, the DJIA should next find bottom somewhere near 10,450. The wedge formation in conjunction with declining volume is indicative of a trading range. With the DJIA quickly approaching the apex of its wedge, we should see a breakaway from congestion in the next few weeks. Whether it's going to be up or down remains to be seen.
The NASDAQ is forming the same wedge pattern, except it is much tighter than the Dow's. If the NASDAQ's trading range is going to hold, the next bottom should be traced near 3450. Despite the recent rally, many of the NASDAQ's generals, such as CSCO, MSFT, and DELL are trading just above key support levels. The next several trading days will be critical for the NASDAQ. If the index traces a higher low, and rebounds, we may see a small breakout above congestion. But with so many market participants sitting on the sidelines, it's going to be hard to make a move with any substance.
The consensus among Wall Street professionals is that the market will remain range bound well into the Summer. The uncertainty surrounding the Federal Reserve and continued questioning of the high valuations in the tech sector has many market participants straddling the fence. The indecisiveness among investors points to range bound trading. Many analysts believe that a sideways market is good for the long-term health of the market. In that, the sky-high multiples seen in the tech stocks will come back to earth as earnings catch up with valuations. While the churning of the market may be good for the long-term bull, it has many traders stepping away from the market. Margin and momentum players have been scared away from the market, and day traders have been humbled. That doesn't mean you can't make money in this market, it's simply a matter of working harder than the next trader, and honing your skills. And continue doing the things that make you money.
Profit taking and interest rate worries were the themes on CNBC Wednesday. But there were a few other factors that weighed on the major indices. HWP was a drag on the DOW after reporting results Wednesday. Some analysts questioned the quality of HWP's earnings report. Pointing out the slew of one-time charges to profits. HWP was also hurt by the sell-off seen in Agilent (A), H-P's spin-off. Revenue concerns surfaced after A reported earnings that met expectations. Analysts cut their price targets over concerns of problems in the healthcare group and flattening margins in its test and measurement unit. LCOS set the tone for the Net stocks Wednesday. LCOS tumbled 20% after analysts downgraded the stock. Analysts said the stock is reasonably valued for the short-term considering the buyout offer from Terra Networks (TRRA) and the risk associated with the deal. Additionally, LCOS reported better-than-expected earnings after the bell Wednesday. The Internet portal reported 7 cents per share profits, versus a 5 cent estimate. LCOS edged slightly higher in after-hours trading.
The controversial Salomon Smith Barney analyst, Jack Grubman, sent a shock through the telecom sector Wednesday. Grubman lowered his revenue and earnings estimates for AT&T (T). Grubman said T is unprepared to meet the demands for high-speed data transmission. The bearish comments sent T lower by $0.69 to $38.06, just above its 52-week low. But the rest of the telecom sector suffered greatly. NXLK lost 12%, NXTL fell 8%, and WCOM lost $1 closing at $42.
As the light trading activity continues, the online brokers suffer. Stocks such as SCH, NITE, EGRP, and AMTD have been in a downward spiral since volume began drying up last month. And Wednesday proved to be another slow volume day, consequently the online brokers continued to slide. SCH dropped $1.94 to close at $43.75 and NITE lost nearly 4%, closing at $29.94.
There were a few bright spots in the market Wednesday. INTC reversed early-day losses after the Board of Directors declared a stock split and dividend increase. INTC said the 2-for-1 split will be payable on July 30th. Shareholders will vote on the proposal to increase authorized shares at the company's annual meeting.
Mattel (MAT) jumped over 13% after the company named Robert Eckert as the new Chairman and CEO. Veritas (VRTS) rose $7 to $111 after the company announced a deal with IBM to supply enterprise computing solutions. Shares of Analog Devices (ADI) bucked the earnings sell-off cliche and surged 8% higher Wednesday after the company beat expectations and forecasted higher third-quarter results. ADI said that the booming demand for chips should continue and revenues could rise more than 65% in the next year.
Another event to keep an eye on is the MSFT courtroom hearing expected to commence next week. MSFT has made it clear that they plan to appeal Judge Jackson's findings. MSFT claims the proposal to split the company isn't warranted by the evidence that has been presented by the Justice Department. Instead, MSFT has counter-proposed a plan to restrict its business practices. Jackson set a remedy hearing for May 24th. The government filed its final arguments Wednesday.
So what is it going to take to get us out of this trading range? About a month ago, Jim suggested that we will be stuck in congestion until second quarter earnings season. We're still about a month away until we get the next wave of earnings reports. And there is no major economic news due out for the next couple of weeks. Simply put, there is no reason to buy or sell right now. With the Summer slowdown approaching and a lack of catalysts to push the market either way, we're probably stuck in this trough for a while. Unless a few of those money managers who have been stockpiling cash put some money to work before their Summer retreat to the beach. With such an illiquid market, institutions can move stock prices very quickly. If the professionals decide to commit to new positions, we could see a break from congestion.
While there isn't any major market moving event in the next few weeks, we will face options expiration on Friday. The May expiration probably won't move the market substantially, but it will provide more volatility. And where there is volatility, there is opportunity to profit. Speaking of profits, there are still a few remaining earnings reports yet to be announced. ADC Telecom (ADCT), Barnes and Noble (BKS), Ciena (CIEN), and Network Appliance (NTAP) will report earnings Thursday followed by Sycamore Networks (SCMR) on Friday. The Trade Gap numbers for March will be reported Friday. Wall Street's consensus estimate for the Trade Gap is $29.4 bln.
So what is a trader to do? I agree with what Matt suggested in Tuesday's Market Wrap. Watch for entry and exit points near support and resistance levels. Money can still be made in a sideways market, it just requires more work and a lot of patience. While there is volatility, there is room for taking profits from the market. There are still plenty of stocks trading with wide intra-day ranges. And believe it or not, there are a few stocks emerging from congestion and tracing new highs. In fact, right now may be a good time to look for new market leaders before the next bull run begins. But before you commit your hard earned capital to new positions, consider your risk tolerance. Wait for the stocks that you are watching to cross key pivotal points and practice patience in this market. No one ever became poor taking profits. Sell too soon, and save your money for another day.