What if they opened for trading and nobody came?
That was the case on Friday. The Dow and Nasdaq both posted the lowest volume for the year and both indexes ended in almost a draw. The Nasdaq and the Dow traded on both sides of positive several times during the day and the outcome was in doubt until several minutes after the closing bell. With the Nasdaq posting only a -.24 loss it would appear on the surface that nothing happened. The Dow, although slightly more negative at -24.68, was also a yawner.
Was it as sleepy as it appeared? Not in my mind. The Nasdaq had a really good chance to retest the lows from Wednesday of nearly 3000 but could only muster a drop to 3150. The Dow tried to mount a rally and failed closing below 10300, only 41 points off the low of the day, and the lowest point since April 17th. Not awe inspiring for me. The Nasdaq is looking like it is trying to find a bottom here but the Dow looks like it has other ideas.
There was good news on the economic front on Friday. The April Durable Goods Orders dropped a whopping -6.4% when they were expected to increase +.5%. This was the largest drop in over eight years. Durable goods are products expected to last for more than three years and represent a large indicator for economy watchers. If orders are dropping then sales are slowing. The ripple down may be starting as a result of the interest rate increases. The other major release was the Personal Income and Spending report. Income increased only +.7% and spending only +.4% which was inline with estimates. The personal spending increase was the smallest since July of 1999.
Is the economy really slowing? We really hope so because that is the quickest way to get Greenspan off everybody's mind. Today there were other indications of a slowing economy as well. Office Depot (ODP) warned that May sales were slowing and would impact earnings. ODP set a new 52-week low. Add this to the CostCo warning of the same thing earlier in the week and you could build a case for a slowing business cycle. Fewer paper clips and staples sold point to a business slowdown? You bet! Could this be a new leading indicator for the Fed. Flush the briefcase indicator on CNBC we now have a new standard. If we can get all the secretaries in the country to count their paper clips once a month and email their answer to the Fed (complete with an email virus please) then the Fed would know immediately if their interest policy was working.
Other leading indicators this week included wood and paper stocks that were suffering from reduced orders as well as auto stocks. Sales of new cars reportedly are slowing in May and GM and Ford stock is suffering as a result. GM is a Dow component.
Microsoft gapped open on the news that the government was content to only recommend a two company breakup but bled off again as news about the case continued to weigh on the market. The judge, as though he needed another reason, took another verbal shot at Microsoft late in the afternoon as he took the case home alone for the weekend. A final ruling may be out as soon as next week. Most watchers feel he has already made up his mind months ago and is just going through the motions. With every shot the judge takes at MSFT he increases the possibility of the case being reversed on appeal. Time will tell!
One of the major factors weighing on the markets is the cash drain. Trimtabs.com reported today that a huge $7.2 billion was withdrawn from equity funds in the week ended on Wednesday. Has the investing public finally gotten fed up with the choppy market and started believing the bears? I think it is worse than that. At the Denver seminar Friday there were many investors who were suffering from a big decline in their stock portfolios and were very interested in repair techniques using options to recover some of the lost money. If the more sophisticated OIN investor is suffering from the bear market, and they are better off than the rest of the investing public because they can learn how to recover this money, then the majority of the public is really hurting. Margin calls are continuing, taxes still need to be paid and would be day traders are deciding to be money market investors instead. Factor into this the normal funds withdrawals for summer vacations and you have a recipe for continued drops. Stir in an aggressive Fed and serve with a bottle of Pepto.
Have I turned into a bear? Not hardly. The flip side to this is the cash piled up on the sidelines. Mutual funds do not win investors by stockpiling cash. The Nasdaq has now lost 40% from its March high. If that does not sound bad enough to make a growth investor drool with anticipation then try this fact. The Oct 1999 low was 2632 at the start of the big Nasdaq rally. The Nasdaq high on March 10th was 5132 a cool 2500 point, almost 100% rally. Since March 10th the Nasdaq has given back over 1900 of those 2500 points. In percentage terms this is -77% loss. 77%!!! For everybody that missed the 1999 rally this is the impossible second chance! Of course many of these stocks will never see the glory days of 1999 again but there will still be winners that will replace JDSU, QCOM, CMGI, ICGE, CMRC from 1999 fame with new winners in 2000. Take SDLI for instance. Outstanding and with the China trade pact there will be others as well. Back to the point. Many funds sold out long ago or at least narrowed their positions significantly. These funds have cash and they need to put it to work quick. Once the starters gun fires, and it could be next week, the move could be fierce.
Next week is typically a bullish week. According to the Stock Traders Almanac the week of Memorial Day is a bullish week and the best week in June. Also, June is a triple witching month and the two weeks prior to expiration is normally bullish. Thirdly, June in election years is normally a good month. Add all of this to the -77% retracement of the big gains from the last seven months and the prospects are encouraging. Now that I have stated my case I am at the mercy of the market, known as the great humiliator. So be it. I looked at hundreds of charts this weekend and 95% of them showed tentative bottoms and hopeful closing spikes on Friday. Most gave back only 25% of their gains from Wednesday and firmed as the day wore on. It is entirely possible this is just another bear trap rally and we will retest 3000 again next week. If we do I hope it is on Tuesday and I will be waiting with cash in hand.
The Dow is the wildcard here. It closed near the low of the day right under support at 10300 and looks like it could go lower. If 10300 breaks then 10000 is not far away and we could get there real quick. I do not see the Nasdaq moving up if the Dow continues to drop. Everything I said in the previous paragraph is still true at 3000 or 2900. The point is, we are real close to a bottom in my humble opinion. We should wait for confirmation before starting new positions.
The two determining factors next week are MSFT and the non-farm payrolls. It is a given that the judge will order MSFT broken into two companies. Still the actual order will cause another ripple though the markets and another shock to MSFT stock. Since MSFT is a Dow and Nasdaq component this will cause trouble again. The non-farm payrolls could cause more market stagnation as traders worry about a strong showing causing the Fed to raise another +.50%. But I think the distance between us and the Fed meeting, June 27th, should blunt this apprehension to some extent.
Another weight on the Nasdaq is Dell. The once high flyer is suffering and showing no signs of recovering anytime soon. CSCO and INTC are improving and for stock traders CSCO is a definite buying opportunity. This fact is not wasted on fund managers either but most funds already have more CSCO than they can own. If you look at DELL, CSCO, INTC, ORCL, WCOM charts as a proxy for the Nasdaq you would be hard pressed to be bullish yet. I don't think that these leaders are where the profits will be but I think these leaders will keep a cap on the Nasdaq. They will keep the index from making big gains even though selected stocks on the Nasdaq will be big winners.
I said Thursday I would be a buyer at 3000 on Friday. We did not even come close. That is both good and bad news. By not selling off again we still have that possibility in our near future, especially if the Dow craters. However, by failing to sell off on the lightest volume day of the year it could indicate there are no sellers left. My ideal scenario would be a morning sell off on Tuesday to something close to 3000 and then a rally for the rest of the week. The odds of that happening are less than 50/50 but I can at least hope for it. If it does happen I will back up the truck. If we get no dip and a positive bounce on Tuesday morning I will probably only open a few positions until we see if 3200 it is going to hold.
One position I want to open is YHOO but compared to everyone else there was almost no life in YHOO at the close on Friday. With earnings only five weeks away this is the prime time to open the position. Is this just a gift? Are we just lucky that YHOO calls are so cheap because of the market drop and nobody has caught on to the timing yet? Or has the play changed? Nothing stays the same forever and the YHOO earnings run from the last eight quarters has been just like clockwork. Has it been so choreographed that the play is dead because everyone knows the ending? Who knows but at $112 I have to take a shot and that is my play of the day!
Trade smart, don't buy too soon.
Disclosure: My current long positions: NOK, VOD, MSFT, VIGN