It was not pretty but the Nasdaq held the line.
Everything was going according to the plan until the Dow opened down this morning. The Nasdaq continued to consolidate with a small pull back on Wednesday morning, rallied right on cue into the close with a strong finish at 3835. Moving past 3800 was our buying signal and with the gap open this morning it looked like we were right on target. The odor you smelled during the day was the Dow. The Dow gapped down over -100 points and then traded sideways for the rest of the day. We tested 10650, under 10700 support, twice today. The Dow stink from lack of deodorant sales by PG, caused Nasdaq investors to hold their nose and not their stock today and the index bled points all day accelerating just before the close.
The tone was set before the open as Proctor & Gamble warned that they would miss earnings substantially for the second quarter in a row. The reasons given were over aggressive growth, restructuring, sales targets too aggressive and new brands with no name recognition. It was odd they did not blame anything on the Fed which would have been a natural scapegoat. Instead the CEO resigned after seeing the stock price drop by half in the last five months. 35 points of today's Dow drop was due to the drop in PG stock.
Microsoft tried to help. On the day after the judge reacted as expected with a breakup demand the stock opened up +$2 but lost ground during the day as dueling analysts argued over the impact of the verdict. Some are calling it dead money while others still maintain price targets between $100 and $140. I vote for the $140 level to maximize value on my leaps!
Adding to the Dow slide was the financial sector. Investors afraid of more rate hikes are moving money back into the tech sector and out of financials. This is a no-win situation. No real long term rally has ever materialized without help from the financial stocks. JPM led the drop with a -4.38 loss.
Motorola had their estimates cut by -.01 shortly after 11:AM and promptly lost -$3 intraday but appeared to find a bottom at $35.50. It was only one analyst and only -.01 but the impact was dramatic. On a side note, did anyone see Ron Ensana on CNBC last Tuesday report that growth estimates for NSM had been cut to only +6% to +8%? I saw it and reported the estimate drop in the Tuesday newsletter. But, I had several readers write in and ask me where I got the info and when I went to the news services I could not find any confirmation. None, zero, zip, nada. Did anybody else see this or was I day dreaming in the Twilight Zone? I am serious, if you heard this or have any news links for it, I would love to see them.
The PG warning today was a big, ugly, highly visible event. This should be ample sign that we are moving into that trying period called earnings warnings season. PG was not the first and surely will not be the last. The problem is the current rate hike scenario. Of the past six rate hikes only two have really been felt in the economy. Fully 9-12 months is required to see the impact of any rate increase. The last four are nowhere near being felt yet and the Fed is still on the firing line with at least one increase left in their gun. This means a total of five hikes still have to filter down from the Fed level. This equates to weaker profits, higher unemployment and lower stock prices. Since the market discounts events in advance the future hike still needs to be factored into stock prices. The Fed can almost raise rates in June for free since it is almost a 100% chance according to analysts. This would be seen as the last hike and clear the decks for the rest of the summer and fall. With an election in progress the Fed is not likely to want to take any further action until after the winner is known. The only unknown now is the +.25% or +.50% discussion.
With the PPI scheduled for Friday the Fed watchers will be looking for signs that will dictate the size of the rate increase. The PPI is expected to be +.2% and anything in that range would only rate a +.25% hike. The PPI is a leading indicator for the CPI next week and a tame number tomorrow would point to a tame number on the CPI as well. The sell off today was probably heightened by cautious investors moving to the sidelines with some of the +26% Nasdaq gains since June began. Historically today's close would have been bullish and the lack of a closing rally today is confusing. The Nasdaq did hold over 3800 and I think that is bullish. The Nasdaq has been trading in a 170 point range since the big gains last week and it is showing no signs of a sell off. I like that! The longer we hold at 3800 the more support we will create. When we do start moving up from here it is likely to be explosive. The strong moves by many independent stocks is a sign of growing investor optimism. Pray for a tame PPI and CPI and the bottom will definitely be behind us.
Good luck and sell too soon.
Current long positions include:
NOK, VOD, VIGN, MSFT, YHOO