Looks Like Buy The Rumor, Sell The News
I know, I know. It's a cliche that you here on the Street all the time, but I think the past two trading days are a perfect example. With a quiet, low volume NASDAQ rally in August, it appears that investors piled in on the buyside prior to the Labor Day weekend. After being bombarded with the not-so-subliminal "post Labor Day rally" mantra, investors not wanting to miss the boat bought the rumor, attempting to get in front of a perceived rally. Well, Labor Day has come and gone, and those myths and legends about the return of volume have come true...but on the sellside. Those money managers just weren't ready to spend those summer savings on stocks that are at sky-high valuations, at least in the tech arena. But that's not to say that they aren't spending. In a search for value, the two major market indices have once again diverged.
The buying continues at the NYSE, driving the INDU higher and keeping its uptrend intact. Traders snatching up interest rate sensitive issues, especially the Financials, have been shifting out of tech issues in what has been a two day rotation. Keeping the Financial sector hot is the continued consolidation and speculation as to which outfit will be swallowed up next. Rumors surrounding JPM during the past week have fueled the stock's new highs. After last week's announcement that DLJ would be acquired by Credit Suisse for $11.5 bln, the spotlight shifted to JPM. Today, a German weekly magazine reported that Deutsche Bank was planning to bid for the Wall Street investment bank. This sent the shares of Dow Component JPM up $7.81, almost 5%, to new highs. With the Fed all but out of the picture for the rest of the year, investors have been flocking to brokerage stocks and banks. The news trickled down to others like BSC(+2.38), also seen as a takeover target.
Citigroup(C) also made a deal today, announcing that they would buy Associates First Capital(AFS) for $31.1 bln in stock. Share holders of AFS will receive 0.7334 shares of C, making the buyout price of AFS $42.49, a 56% premium over Tuesday's closing price. AFS is the largest consumer finance company in the U.S. and also has a strong presence in Japan. This acquisition will give C further global reach in its credit card business, consumer and commercial finance, and it will provide "recurring and predictable earnings," according to Citigroup's CEO Sandy Weil. AFS finished up +10.63, or 38%, at $38.63 while C sold off $2.56 to $55.
In the wake of this news, JPM's gains managed to outweigh C's loss and the INDU continued its run. Today's trading activity found the INDU bound between 11300 and 11400. The INDU has been climbing higher on the back of its 10-dma, currently at 11211. Profit takers ravaged the index early last week, but since bouncing from 11100 last Thursday, the INDU continued onward. Shaking off a Drug sector downgrade and the negative INTC comments on Tuesday, the INDU has turned to the Financials and Cyclicals. Traders did, however, reverse the INDU's course at 11400, the site of the April 12th's top before the Spring sell-off. Volume at the NYSE was just shy of a billion shares, 999 mln, and the breadth was positive 4-3. The sector rotation that we saw last Spring appears to happening again, as traders move to better value. And until the NASDAQ valuations become more attractive to investors, this trend may continue as we await 3rd quarter earnings.
A Big Board debacle that caused more hurt on the NASDAQ was the DLJ Hong Kong analyst call on Micron(MU). With the Semiconductor Sector still reeling from USB Pipper Jaffray's Tuesday downgrade of INTC, DLJ's Boris Petersik lowered his rating on MU from a Buy to an Underperform. Huh. Sounds like "Sell" to me! Especially considering that he slashed MU's price target to $50 from $122! Sounds like this guy didn't do his homework the first time around. Citing an earlier-than-expected drop in DRAM spot market prices and expected weaker pricing into September, Petersik essentially commented on the entire sector. He claims that inventory build-up among manufacturers will possibly lead to a DRAM flood in the spot market, pressuring prices down. But, DLJ seems to be the lone ranger on this call. Many other notable semi analysts came out in defense of MU and the DRAM market as a whole. Merrill's Joe Osha acknowledged recent pressure in the DRAM spot market, but doesn't see it as a meaningful indicator several months out. And that's probably because it's the spot market, being short-term in nature. MU got crushed with an 11% drop of $8.63 to $69.88. Falling in sympathy were: INTC(-3.56), ALTR(-3.38), KLAC(-5.75), and AMD(-2.75). The Semi Index(SOX.X) lost almost 6% today.
This news spread through the NASDAQ like wildfire, and profit takers sold first and asked questions later. After making an almost 20% recovery from the lows in August(3521 on 8/3) before the Labor Day weekend, the NASDAQ was a little top heavy, to say the least. The fabled buying volume that investors were waiting on has yet to materialize. In place of that buying volume has been negative news a la CIEN and INTC, whispers about 3rd quarter earnings, and a general shakiness. As a result, we have seen some interesting technical developments in the NASDAQ. The selling started right at the open, which was also the high of the day. The close: exactly on the low of the day. A 129 point range. A 129 point loss. The NASDAQ hasn't had a triple digit loss since July 28th. But what really is technically concerning here is the double top near 4300 and the break of the recent trendline. On July 17th, the NASDAQ made a high of 4289, and then on September 1st, 4259. With the clean break of the trendline that led the NASDAQ higher in August, this combination raises some red flags. The 200-dma, currently at 4001, will be watched closely by traders and technicians. Below that, the 50-dma lies at 3966. Volume on the NASDAQ was a healthy 1.7 bln, with breadth negative 24-17. The question remains: how low will money managers let this go before bringing back that buyside volume?
We have been mentioning for weeks, even months, that the VIX.X was reaching historical levels that typically trigger selling. Today, the VIX.X closed at 22.56 as selling bred fear in traders and investors. An increase in volatility will likely cause a bumpy ride for the NASDAQ, not to mention opportunity for option traders.
Looking forward, as fear increases and investors begin to question their faith in the "post Labor Day rally," the NASDAQ appears to have a downward bias. The VIX.X has been screaming overbought and a breather like this isn't out of the ordinary. Are the money managers in the huddle picking their plays and licking their chops? Probably. They will be the ones to breath fire back into the NASDAQ stocks. The NASDAQ's technical picture deteriorated significantly today, and everyone seems to be standing back waiting for the dust to clear. Given a 4.5% drop in the NASDAQ during the past two days, a bounce may come, but be sure that it isn't a dead cat bounce. Is the selling the news over on the NASDAQ? That is a question that all traders are asking themselves, and an answer that we all nervously await. But, it isn't all nailbiting trading. The INDU has been pushing forward on the heels of the Financials. As a side-note, YHOO was quite active in after-hours trading on comments made by CEO Tim Koogle at the Robertson Stephens Internet Conference in San Francisco. Jim and I have decided to initiate a special news-related play this evening. Please see below for the play.