What an ugly week!
Friday was a fitting end to a really ugly week. The economic news on Friday morning was bad, very bad. The GDP jumped to +5.2% from a June adjusted growth rate of +4.8%, a +8% jump. Soft landing? Slow down? What slow down? The economy is alive and well and thumbing its nose at Greenspan and company. Existing home sales are up, durable goods orders up, retail sales up, unemployment dropping with wages and benefits rising at the fastest rate in a decade. Just guess what the number one topic on trading desks will be next week? You will hear it on every media outlet and from every talking head. You are absolutely right, another interest rate hike at the August 22nd FOMC meeting. The markets saw the writing on the wall with the GDP report and traders not on vacation ran to the sidelines. Money market funds swelled by over $8 bln last week and that was before the GDP report.
Before you read the rest of this remember "it is always darkest before the dawn." All the market news was bad. Support points were evaporating as though they were written in disappearing ink. The Dow dropped to support at 10500 at the open and was never able to mount any serious rebound for the entire day. Closing only slightly off the days lows at 10511. The critical support at the 200 DMA of 10760 failed on Monday and the technical outlook is grim.
Tech traders on the Nasdaq ran for cover early and bargain hunters were obviously on vacation. After the opening drop of -150 points, -430 points for the week on top of several hundred from the prior week, you would have expected the bargain hunters to be out in force. There was not a buyer to be found with the low for the day occurring only ten minutes before the close. The 200 DMA for the Nasdaq is only a distant memory at 3862 over -200 points away. The Nasdaq has now fallen -15% as expected since the 4287 intraday high last week.
Technical traders looking at the broader market and the S&P-500 saw that index close below the critical 1421 level which is the 200 DMA as well. The selling was not limited to tech stocks with the SPX breaking a long term up trend in place since last February.
The Wilshire Total Market Index (TMW.X) of 5000 stocks broke through strong support at 13500 with a strong -298 point drop. This index is the broadest measure of market strength and direction and the drop confirms that the sell off is not just Nasdaq tech stocks or old economy Dow stocks. The only sectors that appear to be holding their ground are the defensive areas of insurance, food, beverage and drugs, traditionally pockets of strength when the market outlook is negative.
Other pressures on the market that have nothing to do with the economic reports include the money flow and the IPO calendar. Over $8 billion moved into money market funds last week as investors sought the safety of the sidelines during the summer doldrums. In addition to the withdrawal of cash by investors, there was a strong group of new offerings which took over $3.5 billion in cash out of the existing market. With the success of the recent IPO surge, there are no less than 33 scheduled to make their debut next week. The total cash expected to pour into these new offerings is over $5 billion. Add to this the huge secondary offering by Goldman Sachs of $4 billion and you can see a huge drain on the market for next week. Take $10 billion more or less out of the market and a lot ho hum, mediocre stocks are going to see investors leave and never come back. Investors who have been hanging on to losers as they continued to drift lower will eventually decide to close those positions, take the loss and try to find something more exciting like a sexy new IPO.
Ugly, ugly, ugly. Maybe that is the bright side of the analysis. If things are always darkest before the dawn and traders wait for the leaders to capitulate before moving back into the market, then look out for the stampede. CSCO held firm all week when the rest of the market was heading south. On Friday, CSCO dropped -5.19 to a low of $62.81. Dell concluded a -17% slide from $54 to $43 with a -1.81 drop. Intel which had resisted the drop finally capitulated with a -7.88 loss on Friday and closed at the low of the day. WCOM slid from $50 to $36 last week and optical powerhouse JDSU traded as low as $115.50, a number not seen since the announcement about the S&P 500 inclusion. JDSU closed the day with a -12.38 loss which equated to a whopping -$54 loss for SDLI when taking into account the upcoming buyout. If leader capitulation is required for re-entry into the market, then look out for the stampede!
As if we did not have enough to worry about, the Asian markets are silently dropping and the economic recovery in Asia may not be as hot as we thought. Some of the drop is related to the Nasdaq and the tech weakness. Since much of the Asian economy is built on the assembly of tech products for world consumption, any slow down in cell phones and personal computers could hit them hard. If the Nasdaq weakness is a leading indicator for Asia, then they have a tough week ahead. The Nasdaq lost -431 points for the week, the second largest drop ever, and did it on strong volume. Friday's volume was 1.77 bln shares and almost 1 bln on the NYSE. Ironically, put contract volume is up only slightly but call volume is up as well. In spite of the big sell off, investors still appear to be complacent and not afraid of any further drops.
If we need further reason to worry, we need only look to the economic calendar for next week. Every report will be examined microscopically for evidence of growth and inflation beginning with the Chicago PMI on Monday, Personal Income/Spending and Construction Spending on Tuesday. New Home Sales on Wednesday, Factory Orders on Thursday and, drum roll please, Nonfarm Payrolls for July on Friday. With the market on Fed watch, the nonfarm payrolls will be a big stumbling block. We do not have the census workers to blame things on any more. We will have to live and die by the number, good or bad.
Rising interest rates, economic reports, earnings warnings, money flow, IPO flood or just summer doldrums. What ever reason you want to apply to the drop last week at least that week is over. Now, where do we go from here? I would not touch that with a ten foot pole, as they say. Emotionally, I would expect to see a relief rally on Monday. Nothing goes up or down in a straight line and a -15% drop on the Nasdaq should be a huge buying opportunity. However, if you bought at -15% back in March or April you would have lost a lot of money. With those drops in recent memory, traders are being a lot more careful about buying the dips. So, where emotionally you would expect a relief rally there may not be one. Analysts are now pointing to levels I mentioned last week of 3500 and some even lower. Just remember those same analysts were looking at 4500 just last week.
The problem as I see it is simply the season and investor psychology. Many investors got burned severely last spring. Many have yet to re-enter the market. Every summer we get a lot of subscriber cancellations with notations, "going on vacation, back in September." When September comes, these readers come back ready to whip the markets and ride the fourth quarter wave. This summer has been worse after the beating investors took in March/April. Actually, I have spoken with other site owners who claim their site traffic has dropped -25% to -35%. Carry this on through to brokers that have seen order volume from retail traders drop as much as 50% and you can see why the dip was not met with bargain hunters. Look back at the Nasdaq rally in June. Compared to the 1999 Nasdaq excitement, this was a yawner. Slow, steady, no excitement. The pre-earnings jump for a week in July actually created some interest but when the first signs of trouble appeared investors sold into the rally and moved to the sidelines again. Investors who are not on vacation are simply much more cautious and are protecting their capital.
Technically the Nasdaq is oversold. Emotionally, traders want to buy but are scared. The farther the market drops the more likely a bounce will occur and the more confident traders will become. They will feel the possibility of a further loss is minimal. If the market bounces at the open on Monday, I would not be a buyer. That would be an emotional bounce. If the market opens down and we get a decent downward spike, I would be a buyer on any rebound, BUT ONLY AS A TRADING BUY, not as a buy and hold. If we get a drop to 3500-3550, I think that would be a buy signal. The close at 3663 on Friday is exactly a -50% retracement of the gains since May. Technically, this is a make or break point. The next technical signal would be a 61.8% Fibonacci retracement to 3518. This fits in well with targets of 3500-3550 and would be a convergence of technical and sentiment indicators. Just remember any early week rally is likely to meet serious selling and another pull back before the Friday nonfarm payrolls. As I mentioned above, get used to hearing about the Fed meeting on Aug-22nd. It will be the topic of conversation in every analyst interview. I heard on a weekend talk show that several analysts are already expecting a hike at the following meeting as well, despite the election. The fall back was another +.50% hike in August to avoid raising again before the election. Either scenario will not be well received by the markets this week.
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