On the sixth day the Nasdaq rested!
After a five day winning streak, four over 3900, the Nasdaq finally gave up some ground. Many analysts think it is simply profit taking after the +33% gains of the last four weeks. After rebounding from 3050 on May-24th to the high today of 4073 the +1000 point gain was due for a rest. The Dow however is still firmly mired in a pattern of lower highs and appears determined to retest 10300 and that could happen as early as Friday.
The market internals were very bad with declines beating advances 2:1 AND on heavy volume. The NYSE traded almost 1 bln shares and over 1.6 bln traded on the Nasdaq. This is not a good sign. Volume is seen as a sign of conviction and traders have been hoping for strong volume on the upside but it never appeared. The selling was heavy across the board with almost all sectors losing ground. The main reason I feel the market was week is still the Fed meeting scheduled for next Tue/Wed. Even with most analysts expecting no rate increase there is still Fed dread ahead. Traders feel now that should the Fed raise rates one last time, even a slight +.25%, that it will be the straw that broke the back of the rally. With all signs showing the economy slowing they fear is the Fed has already gone too far. The result of too much tightening can be a recession. Even lawmakers got into the act today with sixteen sending Alan Greenspan a letter asking for no more hikes. Citing the rising unemployment and slowing inflation they feel the economy will fall even farther as the last several hikes filter down through the system. Not that I am complaining but did I mention this is an election year? The markets lost ground early in the day with a rumor that Alan Greenspan was involved in a traffic accident this morning but recovered midday after the Fed denied the report. That would be a really bad deal. As much heat as Alan gets, he is still credited with structuring the current bull market by keeping the economy on track and pushing the speed limit for many years.
With the Dow closing at the low for the month, 10382, about -500 points off the high, we are still locked into a down trend that started back in April. The prospects that a slowing economy will impact earnings for old economy stocks has prompted flight back to the sidelines. Stocks like HON, GM, IP all set new 52-wk intraday lows today. GE, which is seen as a proxy for the Dow, is at the low point of a down trend that started in April and only a couple points from a breakout to the down side. There has been no bargain hunting on the NYSE and the advance decline line has taken a decided move downward.
Summer rally, summer rally! This term keeps coming up in the analyst press. Don't hold your breath. We are one week from the start of the July earnings cycle and mid July the last two years has produced significant drops, not rallies. Summer rallies recently have been as hard to see as the Loch Ness monster or gas under $1. Profits are going to be squeezed as we get farther into the year and the optimistic +18% growth for the S&P has already started shrinking. Profits lead price and shrinking profits only have one result.
Microsoft announced their long awaited MSFT.net program today and promptly tripped up their recent rally. The "bundling" of the browser and the operating system into web devices as the Internet generation goes forward was not what investors wanted to hear. While the concept is good and they are really behind the curve on this, the hue and cry from their competitors was immediate. "They just don't get it" one analyst said. The government is not going to let them shift out of the current operating system structure into one even more restrictive to other competition. It makes no difference if they had announced hammers, chisels and stone tablets, someone would complain. The end result is a range bound stock for years to come as the "expedited" supreme court effort gets under way.
Texas Instruments announced an acquisition of Burr Brown last night and BBRC soared +27 today. The individual gain for BBRC was not material, unless of course you owned it. What was material is the continued broadening of the chip market into other than PC chips. TXN is already a leader in the DSP area and the BBRC acquisition will only help their lead. After the close today Rambus announced a settlement with Hitachi on a patent suit. The settlement includes a cash payment as well as future royalty payments on their technology. The Rambus technology is spreading into chips in many different devices other than computers. RMBS was up +$40 in after hours trading on this news. The chip sector was active today with Micron announcing blowout earnings after the close. Announcing $.47 vs estimates of $.34 on a +30% increase in sales on megabits of memory chips. This and the Rambus announcement could power the sector again tomorrow. Intel also announced today their dot.appliance which will use the Linux operating system instead of windows. OOPS! Is this a sign of things to come? Intel dropped over -$4 on the news. Not all news was good after the bell with TDFX pre-warning that earnings would not meet estimates due to a shortage of components. They make 3D graphics chips.
The news was not as good for biotechs. The sector was up +60% during the recent rally but news that there would be a shuffle in the Russell-1000/2000 sent portfolio managers scrambling to adjust their holdings. Many lost double digits with AFFX -$21, CRA -16, ABGX -13, INCY -18, IDPH -14, MLNM -19. This type of drop is a prime example for stop losses. Once strong profits can turn into strong losses in just one trading day on no warning.
Transports continued to slide with oil still over $31 a bbl. The transports have dropped to numbers not seen since March and continued high oil will keep the Dow theory traders negative on the market. Politicians galore are calling for new incentives to promote new drilling and conservation in the U.S. Gosh, I can't wait to drive 55 again.
Financials are still leading the market, down. The hit today came on lowered estimates of trading volume and reduced brokerage fees. The bull market is turning into hamburger as far as brokerage profits are concerned. MER dropped -5, MWD -2.44, LEH -2.56, GS -2.38. Until the interest rate picture is clear the financial stocks will not be able to mount a rally and the broader market will suffer.
As I write this tonight the futures are up slightly on the semiconductor news but with the Fed decision not until Wednesday of next week the market is not likely to make any major moves. Using the 3900 bench mark from last week you should have been long for the last three days. If the Nasdaq drops under 3900 or the Dow under 10300 I would consider closing open long positions. If the Dow bounces off 10300 again then we could see another range trade back to 10600 and lead to a pre-Fed rally. The two days before the last several Fed meetings have been positive even in the face of impending rate hikes. I would be careful in this market. I did not like the high volume and 2:1 declines today. Buyer beware!
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Good luck and sell too soon.
Current long positions include:
NOK, VOD, MSFT