With an explosion of relief buying the Nasdaq gapped open almost +70 points in the first 15 min of trading. This put the Nasdaq dead on support at 3800 and it struggled to hold this level all morning. Once traders came back from lunch and saw 3800 holding, the race was on. The over sold rebound was fueled in part by an upgrade to Intel and AMD. The Dow however, even with strength in MSFT +2, INTC +4.56 and HWP +3.50, could not manage a positive close. After spending most of the day under 10800 the Dow managed to make a nice run into positive territory just before the close but fell back on end of day selling.
The major factor for the rebound in the tech markets, other than just seriously over sold, was an upgrade by Bank of America on several stocks they downgraded just last week. Confused? Last week BOA downgraded INTC to "market perform" and set a price target of $55. INTC was trading in the $67 range at the time. After the downgrade INTC dropped over the next several days to a low of almost $55. Same with AMD which was downgraded to a "market perform" with a price target of $25. They cited slowing PC growth, weak chip sales, bad product mix, etc. But that was last week. I wonder if they were short those stocks? Today BOA upgraded both of these stocks and set a price target on INTC of $70 and $40 on AMD. Now you are really confused. How could an analyst put out a market moving research report one week and then entirely reverse it only a week later? Did he cover his shorts? AMD rose +13% or +3.50 and back to $30 and Intel +4.56 to close at 60.31.
Adding to the semiconductor rally was the Bear Stearns conference call in which they stated that they are positive on current PC demand. They felt the semi cycle is not over and still has room to run. They said demand had picked up in September for Intel and Micron. DRAM prices are still strong and prices are stable to up. They set a price target on Intel of $90.
These two pieces of positive news were strong motivators to the Nasdaq rally. The Dow however dropped on a profit warning from Alcoa. AA said profits would be "well below" estimates due to energy costs and slowing orders from some big industrial markets. The soft landing in the materials sector is turning in to a crash. The majority of the recent earnings warnings have been in this and related sectors. The following companies have already warned; AA, DD, ETN, DANA, FMO, IR, ROK, TRW, WHR, CR, BWA, SOI and BGG. 255 stocks have already prewarned according to First Call but only 60% of those or 153 were negative. The problem is the brand names that are warning. Names like Alcoa, Dupont and Gillette are much more widely held than JAKK. These high profile warnings in a quarter known for earnings problems just confirm the bearish sentiment.
I am sure you are all excited about China getting preferred trade approval. The markets however yawned as Clinton held a news conference to trumpet the news. The real news for the day was an earnings warning from JAKK. Jakks Pacific Inc warned that there was a slowdown in sales of its main product. That product? WWF action figures. Wow! If The Rock, Kane, Hardy Boyz, The Undertaker and Stone Cold Steve Austin are not selling we must really be in for a recession. There go my role models! I wonder how Barbie and Ken are doing over at Mattel?
The Euro has not hit bottom yet and posted yet another new low today. At the same time natural gas posted a new high. Let's see, energy costs more but money is worth less. Yep, sounds like a definite economic problem to me. Add in oil futures bumping up against yesterday's high of $37 and we have some real stress. The current oil problem appears to be a lack of tankers to transport it along with requirements increasing daily. A couple hundred SUVs rolled off assembly lines while I was writing this commentary. Colder weather in the north has started the run on heating oil supplies and rumors of hoarding are already appearing. Now, how would you hoard heating oil? Yes Sir, just fill up my basement please and that big hole I dug in the back yard as well. All jokes aside, some analysts are still calling for +$40 oil soon and that will continue to pressure the industrial sector.
Helping the Nasdaq today Cisco CEO, John Chambers, said CSCO had no exposure to the weak Euro since all sales were made in U.S. Dollars. Actually he said there was a slight positive for them since they paid their expenses in Euros. This works for a company that sells its products to corporations but does not work for a company like Gillette which sells a much lower priced consumer product. Gillette of course warned on Monday. Microsoft got a boost today as well when Assistant Attorney General Joel Klein announced he was leaving the U.S. Government to find another job. Klein launched the landmark case against Microsoft and was a leading podium pounder against an Appeals Court hearing. With Klein out of the picture investors saw a sliver of light under the breakup door. MSFT gained +2. Dell bounced off its 52 week low set yesterday with a +1.88 gain on news that component prices were softening. This is a plus for them and will enable lower prices for consumers while maintaining profit margins for Dell. Ironically, the "lower prices for components" comment was ignored by the broader market as investors were busy in the chip feeding frenzy. Seems to me the lower prices would mean that Ashok's warning on Sept 4th regarding Intel is coming true just as others are upgrading them. Is the right hand reading the left hands reports?
SunMicro actually went up after announcing a purchase of Cobalt Networks for about $2 billion. The move will position SUNW in the low end server appliance market. Investors liked the move and both stocks were up. SUNW has bounced off support at $112 for a week now and this news helped rally them off the bottom.
The best scenario I mentioned on Sunday came to pass. The big sell off on Monday giving us the buying opportunity we wanted, followed by the big rally today. Unfortunately the gap open this morning made this rally hard to play. Up +30 at the open and +70 ten minutes later, those of us who like to confirm market direction after amateur hour before opening a play were left holding the bag. With a +70 point gain and a history of selling off before the close, the prudent decision would be to wait. When traders returned from lunch they wasted no time in buying more tech stocks. Must have been the three martini lunch. Either that or they were just so surprised to come back from lunch to a positive market they just lost control.
Our problem now becomes how long will it hold? With the Dow still sick and sure profit taking due tomorrow on stocks like SDLI +38, PMCS +23, JNPR +18, GLW +17, AMCC +17, RBAK +16, there is a strong possibility this could be yet another bear trap rally. I hope not but we really need to put a couple positive days together before we start throwing caution to the wind and buying everything in sight. The Dow selling at the close as the Nasdaq was soaring shows us that there is still some weakness in the market. Sure, some of the Dow weakness was investor rotation back into techs but I don't think that was the whole problem. At 3865 the Nasdaq is +163 points above the double test of 3700 on Monday. That is a +29% recovery of the recent -553 point drop since Sept 1st. The Nasdaq has never been known for doing things slow yet recovering almost one third of the loss in one day is pretty strong. Lets hope all that cash on the sidelines decides the market is about to run away from them. 3900 is still the next critical level. Once over that I will feel much more comfortable. The Dow is facing a critical test of ascending support dating back to January. If it falls under 10750 we could see another round of retesting Dow lows in the 10500 range. October, although known for big drops, is also known as the bear killer month. Historically bearish Septembers are forgotten with end of the month October rallies. I can't wait!
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Good luck and sell too soon.