The Dow struggled all day and fought valiantly for every positive point trying to put as much distance as possible from the 10567 low from Wednesday hoping to make that the low for the month and position itself for October. A positive warning from MMM this morning gave the Dow a needed lift and retailers WMT and HD joined druggies MRK and JNJ to power the Dow for a +77 point gain. The Nasdaq never traded in positive territory and struggled to stay above 3800. The profit taking from the +200 point intraday gains since the 3702 Monday low weighed heavily on the tech sector.
The battle between the bulls and bears for control this week took a serious turn for the worse after the market closed today. Intel warned that they would miss estimates for this quarter due to higher expenses and weaker demand. Remember the Ashok Kumar downgrade on Sept 5th? The stock and the market died for over a week and we are trading -425 points below those levels today. The warning today, based on those key words "weaker demand" may be a real party pooper for Friday. They could have said higher oil prices, lower Euro, price competition, anything but weaker demand! The qualifier on the headline news event was weaker demand in Europe but investors will disregard the Europe comment and focus entirely on the "weaker demand" words. They also said expenses were +7%-9% higher than expected due to higher raw material costs. Can you spell inflation, most likely oil induced but still a Fed magnet.
Stocks from all the related sectors were trading down substantially after the announcement. DELL -5, CSCO -5, AMD -5, AMAT -12, KLAC -9, JNPR -18, NTAP -14, TXN -6, EMC -7, CPQ -3, MOT -3, IBM -3, ORCL -5, HWP -5, MSFT -4, CLRS -10, ALTR -6, MU -11, SUNW -7. When Intel was released for trading after closing at $61.50 the drop was instant and on large volume. Huge blocks were moving in the $48-50 range or -13 from the close. The impact of the warning on the markets at the open will be drastic. With Intel, Microsoft, IBM, HWP, CPQ all in the Dow the cumulative impact will be something like -150 points assuming the after hours drop of -30 points for those stocks holds.
The Nasdaq will fare even worse. With every major Nasdaq stock down huge the damage could be severe. DELL, ORCL, CSCO, MSFT, INTC, SUNW, KLAC, NTAP, AMAT are down over -75 points in after hours and these are just the headliners on the Nasdaq. The "me too" stocks will all suffer the same fate. We could blow through 3700 on the open with no effort at all. No sector appears to be safe. Even the bullet proof fiber optic sector is down in after hours. CIEN -10, GLW -22.
The bright side will be the buying opportunity. With significant events like this there is always the tendency to over react and we see a big sell off in after hours. The open can produce a big follow through and then the bargain hunters jump in. There is a lot of money on the sidelines and a serious downward move could produce a buying reaction. The dark side is October still ahead. Only two weeks from October we could see that same money deciding to wait to see if any other high profile warnings are in the wings. If Intel is warning then does that mean DELL, SUNW, GTW or ??? are about to warn also? Yesterday Sprint warned and today we have Intel and Goodyear Tire. Morgan Stanley missed their estimates today by -.08 cents due to lower trading volume.
My headline for tonight was going to be "CURBS IN" after seeing the trading curbs forced onto the market on Wednesday after what seems like months of less volatile trading. Friday could be a lock limit type of day as well. The Nasdaq futures are down almost -100 and the S&P Futures are down -32. There is a lot of darkness before daylight and the market open in the morning and anything can change but the odds of a serious gap down are about 100%.
We have had several cancellations recently because we were too bearish about our September outlook. Personally, I think a -500 point drop on the Nasdaq and a -900 point drop on the Dow would qualify as bearish. I would be the first to admit that I am never right all the time (and no one else I know either) but I have been warning you about September since two weeks before Labor Day. This is a rough month for just exactly the reasons you saw today. Summer is a tough selling season and third quarter profits are normally hit and miss. The warning season will be over in about two weeks and the markets will focus on the actual earnings which start the first week of October. It is then that the real surprises will appear. Those that miss estimates after not prewarning will be punished severely.
The number one question tonight is how to play the morning drop. First we need to determine when the drop is over. Normally we will get a huge downward spike at the open followed by an upward spike as the first wave of sellers dries up and the first wave of bargain hunters rush in. This could take 10-15 min. The size of the upward spike, if any, will impact the sentiment of the remaining sellers and buyers waiting on the sidelines. A weak spike will create a second wave of selling and dumping by the bargain hunters that jumped in too early. The second dip would be the one to buy but only after the ticks turn positive and the market heads up again. The possibilities are endless for combinations and many scenarios would contain increased selling as the day wears on. Investors may not want to hold any positions over the weekend and the possibility of another warning before the Monday open. I expect Intel to try and sugar coat the news to prevent a total stock melt down. They will probably be on CNBC talking about the good growth, strong sectors and hot products. Whatever they can say to provide optimism. Investors looking for any hope whatever will cling to these comments and use them as an excuse to buy. This may take the sharp edges off the disaster but I doubt they can make it go away.
Before you decide what to play on Friday you should consider the broader market direction. Yes, the Dow was up strong today but the broader market S&P-500 dropped -2.29. The S&P has been falling and is sitting exactly on its 200DMA. Same with the Wilshire-5000. Both were poised to break under these critical points and Friday could be the last straw. The S&P-100 is already under the 200DMA and only 4 points above the June/July lows. This looks like a recipe for disaster if investor sentiment turns negative tomorrow. Consider carefully the risks before you commit your funds.
If you must trade you should only do it on a small scale. One way to eliminate some risk is the target shooting approach. Pick a stock you would like to own and enter a limit order for significantly less than the after hours closing price. JNPR for instance closed at $211 in regular trading and fell to $200 in after hours. First support is $192 with strong support at $183. Setting a limit order at $190 could catch a selling spike which may only last several minutes. More conservative traders could set a limit closer to the $183 number but would have a much smaller chance of being filled. This works the same way with options. The Oct $190 call closed at $30 but that was based on JNPR at $211. Take off the $11 drop and you have $19. Assume an opening spike downward and cut that $19 to $15 and put your limit order there. If you get filled you are positioned for the rebound. Pick a stock that does not relate directly to Intel. Dell for instance would not be a good target. A stock like a biotech or drug would be good. They will drop with the market but will rebound as money rotates out of PC stocks and into other sectors. The problem with this strategy is the possibility of a continued drop. If the bargain hunters elect to remain on the sidelines until warning season is over then the market could continue to sell off. If we do get a big negative number but above 3700 near the close I would take a chance on a Monday rebound. Under 3700 I would steer clear. Fasten your seatbelts. Any way you play it Friday should be really exciting.
At the October Advanced Options Workshop in Denver we will be discussing strategies to take advantage of market conditions like we will see on Friday. Strategies for entering trade and also repair strategies for trades that get caught by disasters like this. Just because your options are worth half what you paid for them does not mean you cannot escape with a profit by applying the correct repair strategy. Come, have fun and learn how to be a better option trader. For more information: http://www.OptionInvestor.com/workshop
Good luck and sell too soon.