Look Out Below, Markets Down!
The slide continues. Bottomline: traders don't see any reason to buy. The selloff in the broader markets that began on double- witching Friday accelerated today as a variety of news drove trading. Mega merger announcements brought up the question of company valuations. PC forecasts renewed concerns about future sales growth. Negative market internals clearly show a lack of buying. It appears that this trendless market only looks to be drifting lower.
Well, the downward bias from Friday made itself crystal clear today as investors took the NASDAQ screaming down through the key psychological support level of 4000. Today's 113 point loss for the NASDAQ confirmed the classic rollover that we saw last week. After topping out near 4300 on July 17th, the tech index just didn't have the fuel to keep moving higher. Not even strong earnings helped it last week. Besides last Thursday's one-day relief rally that began with Greenspan's Humphrey-Hawkins testimony, each day gave up a little more. So today, the NASDAQ stands at 3981 after violating several key support levels.
After a quick dip in the morning, the NASDAQ moved back over 4100, only proving to be a headfake. As soon as it encountered the 10-dma at 4124, the NASDAQ rolled over and fastened its seatbelt for the freefall to come. This is technically concerning for the bulls out there still doing the "Summer Rally Dance." A downward pressuring 10-dma just shows how weak the buying interest is. The second technical level that the NASDAQ violated was the 100-dma at 4028. There wasn't much of a fight as the buyers were nowhere to be found. After a brief pause at this level, the index went for a test of 4000, where it actually managed a bounce at 4004. I wasn't convinced as the NASDAQ Tick remained decidedly negative. And with an hour to go in the trading session, the NASDAQ didn't disappoint the shorts out there, breaking 4000 on a quick downward spike.
This leaves the NASDAQ in a very precarious position. Although rather trendless during the past two months, the NASDAQ appears to be on a down leg for the moment. Looking at the daily NASDAQ chart below, I have drawn a regression line that shows the index right at the bottom of the channel. Now, if the NASDAQ is uptrending since the June 5th gap up, we would probably see a bounce back. Yet, given that there doesn't appear to be any real positive catalysts for the market in the near future, one would not expect enough buying interest to sustain such an uptrend. Short term bearishness is growing. NASDAQ decliners beat advancers 2658 to 1386, an almost 2 to 1 ratio! We may very well get a relief bounce tomorrow, considering the NASDAQ gave up 2.7% today, but it would be the type characteristic of a drifting market. To reiterate Eric's point from the Sunday Wrap, buyers beware! This leads me to the support line below at 3856, which is the 200-dma. It is also the level at which the NASDAQ teetered throughout late June and early July. That's only 125 points away. Realistically, the NASDAQ could test this level by the end of the week, especially with the nervousness surrounding the Employment Cost Index and GDP due out on Friday.
Downward pressure on the NASDAQ came from everywhere today. Not only was there technical pressure, but earnings pressure in almost every sector. Priceline.com(PCLN) announced narrower-than-expected losses of $0.01 per share, beating the Street by 2 cents. Losing just $4.4 mln in the second quarter, PCLN is nearing profitability. Yet, many analysts chattered last week that PCLN might have gotten out of the red with today's report. There are also concerns about the online-bidding service's revenue growth. As a result, investors hammered the stock for 22%, or $8.94, closing at $31.13 on very heavy volume. The selling spilled over into other Internet issues like YHOO(-5.69), EBAY(-3.63), and AMZN(-2.38). EBAY reports earnings tomorrow.
A report from the research firms IDC and Dataquest heated up the selling in the Hardware stocks. The report forecasted that worldwide PC sales will be weak, as shipments for this past quarter were just half of a year ago. While some say that the report is suspect in its forecasts, it still hurt many of the box makers. Leading the way was DELL(-5.91), AAPL(-4.88), GTW(-4.25), and CPQ(-0.81). Compaq is set to report earnings tomorrow.
Investors were looking for a reason to sell today, and they found some in the merger market. Deutsche Telekom(DT) confirmed today that they would indeed plan to buy Voicestream Wireless(VSTR) in a deal valued at $50.7 bln. Many investors and analysts have been critical of DT for paying such a hefty premium in order to gain access to the U.S. wireless market. Yet, DT has been seeking out a target for years and this premium reflects previously unsuccessful takeover attempts with Telefone Italia and Quest. In addition to this criticism, concerns have been raised about whether the deal will receive regulatory approval. The main concern: national security. But, bickering of this sort could lead to a much greater global-economic retaliation by Germany and the EU: a broader trade war. This larger repercussion may quiet the opposition in Congress as this deal progresses. Shares of DT lost $6.50, over 12%. VSTR plunged 13%, or $19.75 on the above concerns.
The Fiber Optic sector took a hard hit today on mega merger speculation between Nortel(NT) and Corning(GLW). In what appears to be an oddly structured deal worth $100 bln, NT would sell its optical-parts unit to GLW, throw in a stock swap and NT would own 50% of GLW, while GLW remains the acquirer. Now, that's a heck of a deal to hammer out! This deal is not imminent as talks continue. Consolidation within this sector has been growing with the JDSU-SDLI deal being the latest. JDSU edged out GLW in a bidding war for SDLI. The entire sector, which has run-up tremendously in the past two months, felt the heat: GLW(-33.25), SDLI(-33.00), and JDSU(-3.19). NT bucked the trend and held at $80.63, up $0.75 in regular trading. After hours, NT is trading at $82.
Over at the NYSE, the INDU attempted to rally mid-morning behind stellar earning for MRK, but was overcome by the broader market sentiment. The INDU gave up 48 points on the day, after its run toward 10800 came up short at 10778. It continues to be rangebound between 10650 and 10850, yet recently looks like it might be rolling over for a test of the 100-dma at 10604. The story remains the same for the INDU as for the NASDAQ: there is little that is sparking any real buying interest. Even a surprisingly strong quarterly report from MRK couldn't keep the INDU in positive territory. MRK beat the Street by 4 cents, posting a profit of $0.73 per share. Shares of the pharmaceutical company soared $5.81 to $69.56, a 9% gain.
Volume was light at the NYSE with 870 mln shares changing hands. The INDU just drifted lower throughout the day as specialist saw few institutional buy orders in their books. This is a telling sign as to the kind of trading we will most likely see in the coming month, which is historically slow. Decliners beat advancers 1750 to 1100 and the INDU closed just off its lows at 10685. Hardware stocks lost ground, in particular HWP, which gave up another $5.19. Oil services stocks also fell as oil hit a two month low today.
Looking forward, there isn't a lot of news that investors and traders are finding positive. Not enough to drive the market to higher highs right now. Earnings are still going to be the focus this week, yet today, traders were selling the news. Tomorrow, Fed Chairman Greenspan will speak once again, which usually is an instant replay of the Humphrey-Hawkins testimony, but traders will be listening carefully for any variations or clarifications. It should be a non-event. Even though it's only Monday, Friday's ECI and GDP numbers are already being talked about as investors can't really find any real reason to buy. It's almost like they are looking for excuses to NOT buy. Once again, buyers beware. There isn't any strong conviction so watch for continued trendlessness and technical trading. Expect increasing volatility this week. The VIX.X was up 1.05 today to 22.44, still relatively low. Short term trading is the way to go, taking your profits quickly in this drifting market. Remember, take them when you have them and be short term focused.