Up One Day, Down The Next
Or maybe it is down one day, up the next. At any rate, the two major indices just can't seem to get this dance step down as the rotation continues. Today, the rotation favored the beleaguered NASDAQ after Tuesday's sell-off, with two tech stocks, ironically, dragging the INDU lower. But considering the news related to the two indices, one would have thought the opposite to have happened. The Chase-JP Morgan merger announced this morning confirmed rumors of the deal, but the Financials sold off, as well as JPM. Then, one of the NASDAQ generals, INTC, received a downgrade that gapped the stock down, yet the NASDAQ rebounded after three days of heavy selling. With triple-witching this Friday, PPI tomorrow, and earnings warnings abound, the markets sure do some wacky things.
The big news at the NYSE was the announcement that Chase Manhattan Bank (CMB) would buy JP Morgan (JPM) in a stock deal valued at $35 bln. It was only a matter of time before JPM was swallowed up amid constant speculation and rumors, and the suitor is now known. Specifics of the deal will give JPM shareholders 3.7 shares of CMB, valuing the takeout price of JPM at $207. JPM closed down $4.25 to $181.25. So naturally, on news of the merger, Financials rallied, right? Wrong. Actually, other potential takeover targets lost on the day. I'm beginning to believe that whatever you would expect to happen in this market won't and the exact opposite will. A la the post-Labor Day rally. I think this trend is a product of the speed/span of information dissemination, but that's a whole 'nother story. LEH, which is considered a takeover target, got hammered today, off $9.13, almost 6%. Others include: BSC(-2.56) and MER(-2.69). Getting a boost on the news, however, were online brokers. Ameritrade(AMTD) and E-Trade(EGRP) soared, up 7% and 4.4% respectively. But the big winner was Knight Trading(NITE). NITE is thought to be the most attractive target, being the leading NASDAQ market-maker. The top two candidates that might be looking at NITE: Citigroup and Morgan Stanley. NITE was up a whopping 22%, or $6.56, to $36. Bottomline, there isn't a lot of big fish left in the industry with the ability to buy some of these targets, nor find them as a strategic fit. There may be some nibbling from across the pond, as foreign companies attempt to get into the U.S. markets. But, we may see a slowdown in consolidation for the Financial sector.
Helping JPM drag down the INDU was tech components HWP and INTC. Just a week after the Ashok Kumar downgrade of INTC to a Buy, Semi analyst Rich Whittington of Banc of America slashed his rating on INTC and AMD. The downgrade from a Strong Buy to a Market Perform weighed heavily on the stocks, taking INTC down another $3.69 on almost triple the ADV. To put that in perspective, since the Friday before Labor Day, just eight trading sessions ago, INTC has sunk 17%! $60 appears to be a good support level, and institutions were actively battling to distribute and accumulate the stock today based on block trades. Its 200-dma lies at $59.08, which hasn't been tested since October 1999. Traders will be carefully watching this NASDAQ general as a barometer of broader tech health. AMD fell $2, about 6.5%.
The HWP decline was fairly hefty. Continuing its perilous fall, HWP dropped $5.88 to close right on its 200-dma of $105.13. You would think we could blame it on an earnings warnings, right? Well, kind of, but not HWP's. The culprit actually was SCI Systems(SCI), which warned it would miss Q1 earnings estimates of $0.38 by 4 cents. Investors punished the stock by hacking its share price by 18%. The warning was attributed to weak September sales and seasonal weakness in consumer electronics and PCs. So what about HWP? HWP is one of SCI's biggest customers. This may be an indication of what's to come for some of the hardware companies.
As a result, the INDU slid lower as it consolidates in the 11100 - 11200 area. On Tuesday, the INDU tested support near the 11100 area, and buyers stepped in to move the index higher. Yet, the new trend that has been developing since running into resistance at 11400 last Wednesday has become concerning. With earnings warnings, and the quickness in which investors abandon stocks at any sign of weakness, i.e. HWP, fear may be mounting. The INDU lost 51 points today while the VIX.X gained a quarter of a point to 21.43, still extremely low. We will be watching support at 11100. A break will certainly bring the INDU to 11000. Otherwise, the index will need to break above this short-term trend to settle investor fears. The former looks like the most probable move considering the increasing earnings warnings, and the fact that September historically is a down month. Sherwin- Williams(SHW) warned today, citing higher raw material costs, while McDonald's stated in after-hours that its 2000 EPS would be 2 cents lower-than-expected due to the weak Euro.
Shaking off the second INTC downgrade in the last two weeks, the NASDAQ rebounded after four days of selling. Many stocks that had been hit hard during the recent selling, got a bit of relief. CSCO, which dropped through the key support level of $60 Tuesday and its 200-dma on Monday, found buyers waiting at $58 and it climbed higher throughout today's session. This action buoyed the NASDAQ, yet CSCO is still under its 200-dma at $62.34. Right on the open, the NASDAQ gapped down and traded below the 3800 level. The low of the day was 3794, just 5 points below the 252-dma, noted in the chart below. This is a technical that many traders use because it is roughly based on the number of trading days in a year. The bounce was steady throughout the day and slightly off its highs. Adding 44 points today, the NASDAQ did not quite make it to test 3900. The overall sentiment in the tech sector has grown more cautious. Yet, today, investors bought many of the high-fliers with reckless abandon. CIEN(+14.75), ITWO(+10.88), NEWP(+14.81), MUSE(+12.31), and CHKP(+11.13) all surged. Caution should be taken though since the downtrend is still intact. Jim said today that this is a trading market, given that September is historically a down month. We will be watching to see if the NASDAQ continues to break down and violate 3800, or if higher volume drives the index higher, breaking this short-term downtrend.
Looking forward, tomorrow morning will have the PPI announcement. Expectations call for an increase of +0.1 and +0.2 for the core rate. A benign or positive number will only reassure what most people on the Street already believe, that the Fed is out of the picture until next year. A negative number would give investors another reason to unload some of their holdings. Key earnings tomorrow will come from ORCL and ADBE, which are expected to be strong. As we progress through the dreary month of September, keep up your radar for more earnings warnings. This not only hurts the individual stock but also related sectors, as in the SCI-HWP case. Bargain hunters showed up today, and with valuations coming down on favorites like INTC and CSCO, they may continue to nibble. Exercise caution as it appears investors are quicker to sell than buy. It is expiration week and Friday is triple witching, so look for some good action in those September lottery options. Good luck.