Are we having fun yet? The volatility has returned and those slow and easy profits from August are now history. The Nasdaq has now lost over -400 points from its intraday high on September 1st and is approaching a -10% sell off. Multiple support levels have been broken and large caps are leading the sell off. We anticipated that the two weeks after Labor Day would be rocky and the results have certainly been even worse than expected. The Dow dropped -79 points at the open but rallied back mostly on the JPM news to close up +37 points. Considering the JPM gain of +16 was equivalent to almost +80 Dow points you can see where the Dow would be without the merger news. Chase is the rumored partner today for a $30 billion price tag. The Nasdaq did rally slightly at the open and struggled to maintain 3950 until early afternoon. Around 2:PM the bottom fell out and it closed -100 points off the high.
The unthinkable? Cisco closed under $60. Many analysts have pointed to CSCO as the GE of the Nasdaq and warned that a close under $60 would be a lights out signal for the Nasdaq. August 3rd was the last day CSCO traded this low ($58.50) and June 1st before that. CSCO is now significantly under the 200 DMA at 62.27 and investors are confused as to why. Cisco is the largest company in the tech sector and has no earnings problems, very strong growth, good management and great prospects. Quite different from many of the high ratio companies with little or no earnings. The volume was quite strong with over 76 million shares trading. Average daily volume for the last ten days was 33 million. Once it broke $60 this afternoon the volume was huge. There are many who feel CSCO at $60 is a bargain and I would not be surprised to see a pre- open recommendation of some kind tomorrow. Still the general is wounded and the troops will be looking for a sign of life.
Other disturbing factors included SunMicro which closed negative yet again after trading up most of the day. After that huge drop yesterday the bounce back to $119 was encouraging but the CSCO drop was a death blow to the SUNW gains. Oracle which opened positive also started down much earlier in the day and finished down -4.06 and appears to be accelerating. The 200 DMA is 70.37, a number we hope not to see soon since there is strong support at $73. Microsoft was no help with a -.69 and neither was Dell with a -.88 but at least neither were heading south at the same high rate of speed as CSCO and ORCL. Oracle has earnings on Thursday and this was surely part of the exodus problem. With warnings galore traders were deciding not to hold over. We were blessed with one miracle with WCOM closing even for the day. It appears to have found a bottom at $30 and should not do much more harm to the Nasdaq until that bottom erodes.
On the good news side of the ledger Intel managed to post a small gain even as CSCO was falling. Is the PC sector sell off over? I would not bet on it. Gateway was up fractionally and HWP may be showing signs of recovering from the drop but it is too early to take them off life support. They say that as the chip sector goes, there goes the Nasdaq. Other than Intel the chip sector was heading south at the same high rate of speed as CSCO today. AMCC -6, PMCS -2, MU -1.56 (that is actually good), RMBS -2.44, BRCM -6.12 and AMAT -3.50 on heavy volume. Are all the bottom fishermen chained to their desks? How much lower will these go before the bargain hunters show up to nibble?
Worse than the chips was the fiber optic sector and they need more than Band-Aids to stop the bleeding there. SDLI -19, down -100 points in the last three weeks. GLW -8, down -52 in two weeks. CIEN -5, down -51 points in two weeks. Did somebody invent something to take the place of fiber? I think not. Michael Murphy's latest release says that the fiber sector is only 10% of what it will be in the next couple years. I agree but investors are running for cover like somebody discovered a fiber eating virus. (My bullish self sees a possible bottom forming in those three stocks beginning about 2:30 this afternoon but WAIT FOR CONFORMATION)
Corning, the world's top producer of fiber-optic cable, is entering the market for gene-research tools known as DNA chips, joining Affymetrix and Incyte Genomics. Corning has developed a high-speed manufacturing process for DNA chips, allowing researchers to analyze thousands of genes simultaneously. Spurred by the mapping of the human genome, chipmakers are supplying research tools for biotechnology and drug companies racing to discover disease-causing genes and to develop new drugs. To make its chips, Corning combines technologies, including a process used in making automotive catalytic converters, a glass redraw process used to make hair-thin strands of optical fiber, and a micro-printing process formerly used to apply decorative patterns to consumer cookware. Imagine the quantum leap from dishes to DNA chips!
Chips are down, fiber is down, software is down. About the only sector not in the tank was biotech, again. This love-hate relationship with the biotech stocks is enough to give you ulcers. They were up today but with different degrees of gain. Some were spiking up into the close which is a sign of sector rotation out of the techs while others like PDLI and FRX are at recent highs and holding. Still, proving it is a stock pickers sector AFFX, HGSI and DNA look like they could use some antibiotics against sellers.
PRI Automation Inc. shares fell 39% after the largest maker of automation tools for semiconductor plants announced that fiscal fourth-quarter sales and profit would miss forecast. Chipmakers, rushing to add capacity for the thumbnail-sized chips that power computers and cell phones, have pressured equipment makers like PRI to build tools faster. Demand for chip equipment moves in sharp cycles of boom and bust. Analysts and PRI executives said these warnings don't indicate that demand for chips is slowing. Want to bet?
When the bears are in control there may not be any safe place to park your money except cash. Cash looks really good right now. This is a triple witching expiration week and those are normally bullish. If this is bullish then I don't want to see bearish! Recently traders have been buying as we approach the key economic reports hoping for a good news rally. Do you think somebody let the cat out of the bag and that is why the big money was leaving in billions today? Since the recent PPI/CPI rallies preceded market friendly numbers, a bad PPI report Thursday would definitely have us scratching our heads. How did the sellers know in advance? Hopefully the numbers will be good, +0.1 headline and +0.2 core rate and the market will breathe a sigh of relief and relax. There is simply a lot of pent up anxiety this week and we are still three weeks from October.
The Nasdaq always corrects quickly and sharply. The last six days qualify as that. The other scenario that shows best on the Nasdaq is the bear trap rallies. After 2-3 sharply down days we get a relief bounce and then another drop. After today the market is approaching oversold once again. The Nasdaq has support from here to 3725 and then 3655 and then we will run out of rope at 3500. Under 3500 is no mans land and we don't want to go there! The next three days are economic minefields with the Import/Export Prices tomorrow, PPI on Thursday and CPI on Friday. Add Oracle and Adobe earnings on Thursday and you have a volatile mix. The Nasdaq appears primed to go lower without the intervention of a lot of bargain hunters. The positive side, gloom and doom. When the gloom is so thick you can't see your screen and the generals are falling left and right, the end should not be far off. When traders finally decide that they can't stand the pain and move to the sidelines we then get the high volume drops like CSCO today. These climax selling sessions normally lead to rebounds. We just don't know if tomorrow will be an even bigger selling session or the beginning of the rebound bargain hunting. The Nasdaq has given back about -60% of the August gains and could find a floor at any moment. The continued threat of future earnings warnings is now priced into the market with the almost -10% drop from the Sept-1st high. Remember the Fed is on hold unless we get a disastrous set of economic reports. Once those are past investors will breathe easier, at least until October! Now repeat after me, "CSCO is a bargain at $60."
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Good luck and sell too soon.