The Day After Syndrome
Not unexpected, the markets had a post-Fed let down today. It looked doomed from the get-go today as the Nasdaq and Industrials both opened sharply lower. This set the tone for the day and life never got very interesting on Wall Street. You can see from the chart below that the range-bound nature of a few weeks past has returned. I like to refer to this pattern as "summer". This is no surprise and it doesn't make the trading life very interesting, but there are still individual movers and stories to add spice to the session.
Before we charge off on today's individual movers, let's run down the broad market situation. First, you have the DJIA which has formed a diamond pattern and is on the verge of a breakout one way or the other. Instead of rehashing this story, please check out the Market Wrap from last Thursday, which Jim wrote, for further enlightenment with charts. Just note that today's loss took the DJIA back down to the bottom of this pattern. The DJIA closed down 129.75 to 10,398 on decent volume of 1.1 bln. We should note that this better than average volume was likely due to institutions finishing their "window dressing" ahead of the long holiday. The support level to watch is 10,200. This has historically held us up during the trying months of March, April and May. A move below this support level could really damp sentiment and push the markets into a slide that would end...oh, let's say around Oct 10th or so. OK, that might be too extreme of a statement, but you get the picture. It's hard enough to generate buying interest in the summer and a technical debacle like that could finish any such hope.
The Nasdaq faired better, but not by much. It sunk for most of the morning before trying a late day rally that pushed it almost up to the unchanged line. To no avail though, as the sellers returned for the final hour. The volume totaled 1.5 bln. All and all, a lackluster day. Biotechs and Semis were the main culprit for leading this index down. The Semis are part of a multi-day downtrend now and the Biotechs seem to be suffering from a post-human gene sequencing letdown. The Nasdaq has been stuck in a hundred point range for five straight days now. The top is 3950 and the bottom at 3850. Today's action shows this scenario with a high of 3929 and a low of 3838.
The VIX was worth mentioning today too. It made a nice dip for some reason to close down at 22.02. This is not typical of what should happen on a down day in the market so there is cautious for suspicion. The 10-year treasury note yield sunk to 6.02% from 6.09%. Decliners lead advancers on the Nasdaq by a 3 to 2 margin and on the Big Board by a 7 to 6 margin. On the economic front, new homes sales in May fell 0.2%, slowing for the 2nd straight month in evidence the hot housing market may be softening in light of higher interest rates. Also, consumer spending surged in the first quarter. This propelled the economy to an annual growth rate of 5.5%, according to the government's final tally of the economy's performance for the period. And jobless claims rose unexpectedly last week by a seasonally adjusted 2,000 to 306,000, pointing to a possible slowdown in the jobs market.
The weak opening to the market came from earnings warnings. Goodyear, Unisys, and Ericsson all came forward with such news. Ericsson's president Kurt Hellstrom warned that growth in the mobile phone market could slow due to higher-than-expected costs operators are paying for third generation cell-phone licenses. ERICY traded down to $18.69, a loss of $1.38. Unisys announced that it's expecting second-quarter earnings of $0.18- $0.20 cents a share. That compares to a First Call estimate of $0.37 cents due to weakness in its federal government and financial services business. UIS closed down $8.25 to $14.88, a loss of over 35%. Finally, Goodyear said the quarter would not be good. It said second-quarter earnings would fall short of forecasts because of higher fuel and raw material costs and growing competition in many of the tire maker's markets. GT finished the session down $2.31 to $21.
There was widespread selling in the computer hardware sector this afternoon as Salomon Smith Barney downgraded CPQ. They cut their rating on the stock to a Neutral from Buy and lowered its price target to $25 from $45, citing second-quarter revenue concerns. CPQ fell to $25.50, down $3.00 This feels like a story told a thousand times, but Compaq did try to dispel any such talk with a statement made after the close. "Compaq's channel inventory has been low and in some cases near stock-out levels. The second quarter has been very back-end loaded due to supply constraints early in the quarter," the company said. The Goldman Sachs Computer Hardware Index fell 3.8 percent.
In general, the market had a strong feeling of indecisiveness today, and of late. Many are pointing to the diamond triangle on the DJIA as the one to watch, while others are looking at the Nasdaq for signs of a breakout of almost a month of boredom. I have to believe both sides are right. We are in a holding pattern on the markets. Does that mean don't trade? Not necessarily. There are still plenty of individual movers in this market. For example, if you decided to take last month off you would have missed some plays like RBAK which has surged over 130%. Of course, they all won't do that, but, as I have said before, it is an individual stock pickers market right now. Not all trading has gone away for the summer.
With that said, you may be well advised to take Friday and Monday off. We could see decent volume due to window dressing, but most traders will be cutting out early for the holiday. Monday should be a total sleeper. The real week will start on Wednesday. Thank goodness options expiration falls late in July on the 21st since we are essentially being robbed the first half of next week. There are some economic reports due out tomorrow morning to watch for. Personal spending and income reports are due before the bell with estimates of 0.02% and 0.03% gains respectively. Also, the Chicago PMI is due out at 10am with an estimate of 53.5%. The futures are unchanged at the time of this writing and that really doesn't surprise me relative to the dull action that may occur in the next two trading days. Be smart and don't get stuck holding any unwanted positions over what will feel like an eternity before Wednesday and the re-emergence of trading interest.