Investors Cautious Before Greenspan Testimony
It seems that investors woke up on the wrong side of the bed again today. I know I did. Investors ignored a slew of earnings reports, good ones at that, and continued the selling from Tuesday. It was a steady bleed for the NASDAQ today as tech stocks were dumped with a vengeance. So what struck the fear? Good ol' Uncle Alan. Scheduled to speak tomorrow at 10am EDT, Fed Chairman Greenspan will be giving his semi-annual Humphrey-Hawkins testimony before the Senate on Monetary Policy.
After a dismal day yesterday for the NASDAQ on concerns over the CPI data, Wednesday proved to be even rougher. The NASDAQ sold off 121 points today as the waiting game continues. And as the investment community awaits Greenspan's testimony, we wonder, will he really give us any hint to the Fed's next move in August? Possibly a nervous grab for his glasses, or maybe a certain inflection in his voice. Certainly far-fetched, but as for him revealing some subtle clue, I wouldn't bet on it. In fact, he probably doesn't even know what lies in store for the next FOMC meeting. Nevertheless, all eyes will be glued to CNBC analyzing every move Greenspan makes. In the meantime, profit takers have been raking in their recent gains since the NASDAQ made its move to 4100 last Wednesday. The victims: high-flying tech issues.
Looking at the 60-minute chart of the NASDAQ, we can see that we have had one heck of a run since July 12th. Quite impressive. The NASDAQ has now gone, within that week span, from in the red for the year to up 5.5% on the year to back below the starting point for 2000, 4069. Today's close of 4055 broke the 10-dma at 4094, after a midday bounce from that level. Sellers knocked down the market to close near the low of the day, yet the NASDAQ did manage to stay above the 100-dma at 4046. We will be watching closely tomorrow to see if a test of this level occurs. A break and close below the 100-dma would indicate that the summer doldrums Jim has mentioned in his Wraps could be arriving right near expiration. To reiterate Jim's point, once July expiration passes, historically, the markets become relatively inactive as traders packed up their trading tools until late August and early September. With a lack of numbers, buying power typically just doesn't hold in an illiquid market. Not to mention, markets get whippy due to the low volume. We would be cautious with long positions, keeping tight stops, as a breakdown may be around the corner.
As for the INDU, the index continued rolling over, closing just below 10700 at 10696. After trading in a tight range between 10750 and 10850 for most of the past week, the INDU began slipping yesterday and continued its descent today. It is beginning to look like 10800 resistance is winning this battle. Today's close has brought the INDU under its 10-dma, currently at 10711. Note from the chart below how congested the 10800 level has become. This type of trading pattern is only making that resistance stronger. If the INDU were to give up its gains since rallying on July 7th, like the NASDAQ, it wouldn't be out of the question to see 10500 as the next stop. Then what would we have to show for our much hyped "summer rally?"
Well, it's earnings season and earnings are what should be driving this market. There was a handful of techs that reported last night that gave up ground today. MSFT, mentioned in last night's Wrap, reported better-than-expected earnings but lost $5.38 today, accounting for 30 points in the NASDAQ. Investors were concerned about lower margins and future business with the Office suite of software. Adding to the pain, SG Cowen downgraded the stock from a Buy to a Neutral, and Prudential cut its rating to an Accumulate from Strong Buy. INTC shed $4.88 after better-than-expected earnings.
Helping out the INDU minimize the losses today were IBM, KO, and C. IBM ran up $4.44 in anticipation of its earnings after the bell. Big Blue came in six cents ahead of estimates at $1.06 per share, yet they reported that their revenue declined by 1%. This is particularly alarming to analyst. Traders are not afraid to let it be known that they have they eyes fixed on what the 3rd and 4th quarters will look like for major companies, rather than concentrating on the 2nd quarter headline numbers. Dow component KO also added nice gains of $2.31 today before beating the Street estimates by three cents, $0.44 vs $0.41. C announced earnings this morning and topped analyst estimates with $0.87 per share. In addition to stellar earnings, the financial service company decided to raise its quarterly cash dividends and declared a 4-3 stock split. C added $1.31 to close at $68, just off its all-time high.
Today's earnings slate was chalked full of friendly tech issues. On the NYSE side, EMC announced this morning with at 50% jump in earnings from the year previous with $0.19 per share, surpassing estimates by two cents. The news that really drove investors to rewarding the company was the revenue forecast, predicting that it would accelerate for the rest of the year. EMC closed at $84, up $5.44. AMD also beat estimates as semi demand has outstripped supply in recent quarters. They also announced a 2-1 stock split effective August 21st.
At the NASDAQ, QCOM reported earnings of $0.27 per share, in line with Street estimates. The company cited record shipments of its phone chips, yet concerns over weaker sales in South Korea and China have investors running. QCOM closed NY trading at $63 and has shed $1.38 in after-hours. Continuing the trend of beating the estimates in the Networking sector, EXDS posted narrower-than-expected losses of $0.10 per share vs $0.12. The revenue news was very strong, with a year-over-year increase of 321% and an 34% increase from the first quarter. After-hours
In deal-making today, CNET agreed to acquire one of its top rivals, Ziff-Davis(ZD), in a $1.6 bln stock deal. The deal unites CNET with ZD's subsidiary ZDNet, which will give CNET a major presence in 25 markets throughout Europe, Asia, North America, and Latin America. CNET not only knocked off one of its biggest competitors for users, but also for advertisers. Dan Rosensweig, CEO of ZDNet said, "marketers will be able to target the most active buyers through our powerful, trusted brands." This Internet deal added $1.88 to ZD as arbitrageurs sold off CNET by $2.56.
Two pieces of news rolled in after the market close today that really moved some stocks in after-hours. First, CNBC reported that Deutsche Telekom(DT), who has been scouring the wireless landscape for a takeover target, made a bid for Voicestream(VSTR) in a $53 bln stock and cash deal. The German telecom is prepared to pay $205 per share of VSTR, a 41% premium over today's close of $145. VSTR is trading up to $170 in after-hours. The second piece of news that jolted some of our favorite fiber-optic stocks was the announcement that JDSU will be added to the S&P 500 after the close on July 26th. It will be replacing Rite-Aid, which is being removed for lack of representation. JDSU soared in after-hours on the news, trading up to $122.50 from its NY close of $106.75. SDLI, which trades in tandem with JDSU due to their recently announced deal, traded to $410 a share in after-hours, over $60 higher from its NY close. SDLI will be reporting earnings after the bell on Thursday, so watch for some fireworks in the fiber-optic sector tomorrow.
Looking forward, trading activity is being watched closely with a short-term outlook, given the current market environment. We have expiration on Friday, which typically is one of the last active times during the summer. After two huge days of selloff for the NASDAQ, we will be looking to see if investors shift their focus from the Humphrey-Hawkins testimony to the real catalyst, earnings. There is a good chance for a rebound tomorrow, yet any move higher will mostly likely be short-lived. We have reached a point in the year where the markets trading behavior begins to change. So keep your stops tight and take your profits when they're in front of you, as this market sentiment can change on a dime.