Are We Back Yet?
Today was thought to be the essential day of confirmation, but we wouldn't be so lucky. The trading session was characterized by a very narrow range for both the NASDAQ and the INDU. But, the follow-through that we wanted and needed would not materialize today. A downgrade of INTC and one on the wireless sector impeded the NASDAQ's momentum after Friday's massive gains. Major NASDAQ general MSFT continued to fall from its ranks, breaking the key $50 level intraday. However, the INDU held tight. The earnings season is now in full swing, but jitters abound, investors remain cautious and we ask ourselves, are we back yet?
In last Wednesday's Wrap, the question was are we there yet? The very next day the market tanked, and then with a little luck on Friday the 13th, it came roaring back to close at the day highs. Market watchers greatly anticipated today's session to help confirm what appeared to be capitulation from last week. Yet, the NASDAQ couldn't finish the day with a gain, which would have been the first back-to-back gains for the tech index since September 19th and 20th. Falling 26 points, the NASDAQ gave up the key 3300 level, closing at 3291.
In the chart below, notice how the NASDAQ put in a double top on an intraday basis at 3340. This will continue to pose as resistance as sellers step in. With a low of 3262, the NASDAQ range was only 80 points today, far less volatile than sessions of late. As a result, the VIX.X dropped below 30 since breaking out last Wednesday with a close of 29.50. Investors' fears eased a bit even as many of the talking heads on CNBC continue to caution that retests of the recent lows are probable before moving higher. Sound bites like "sell into strength" and "still need to shake out" were heard all day. Looking at the technicals, support at 3250 will be essential, as it represented resistance multiple times last week. A break through this level would most likely take the NASDAQ back for a retest.
While I'm not bearish on the market, I do remain cautiously bullish, acknowledging the longer term potential and the short term concerns. Volume today wasn't spectacular, coming in at 1.75 bln shares with breadth about even. Strong volume is going to be the indicator to confirm a follow-through from Friday's gains. While the NASDAQ will likely remain volatile throughout the week, especially considering option expiration on Friday, we have begun the process of putting in this elusive bottom. A retest of Friday's lows would not be far-fetched in these market conditions.
Dragging down the NASDAQ and the INDU were INTC and MSFT. Both of these "generals" have seen their market caps halved during the past year, and the carnage continued today. INTC's woes just don't seem to end, neither does Jonathan Joseph apparent distain for the chip giant. The Salomon Smith Barney analyst, who made himself infamous with his summer call of a semi cycle slowdown, came out today and said that INTC is facing slower demand due to sluggish demand in Europe. He added that an anticipated rebound this month doesn't appear to be materializing and lowered his 3rd quarter earnings estimate from $0.38 to $0.37. Joseph also hacked INTC's 2001 estimate by 20 cents to $1.55 and lowered his price target to $50 from $75. INTC is slated to post 3rd quarter earnings tomorrow after the close. It would be quite a statement if INTC missed downward revised estimates, indicating that the Semi and PC markets may have bigger troubles ahead. Yet, the 4th quarter will be the decisive report, given holiday sales will be incorporated into these numbers. CS First Boston's Charlie Galvin also expressed caution today going into the earnings announcement tomorrow. Only time will tell.
MSFT's downtrend continues to get worse with every tick. This is disheartening for many investors to see the once prominent tech leader going nowhere but down. The continued selling in the software giant's stock has been fueled recently by earnings concerns, which are due out on Wednesday. MSFT spent much of the afternoon trading below the $50 level, considered to be a psychological support for the stock. It is amazing to see stocks like MSFT and INTC at their current levels. Earnings estimates for MSFT's Wednesday report is $0.41 per share.
On the wireless front, concerns came from both a brokerage house and a company. Verizon Communications(VZ) and Vodafone(VOD), parent companies of the Verizon Wireless, decided to delay their IPO launch of the wireless entity. This is due to the current volatile market conditions that have not been kind to wireless and mobile phone companies. To echo this sentiment, Prudential lowered its rating on the wireless sector, downgrading AT&T Wireless(AWE), Nextel Communications(NXTL), and Voicestream(VSTR) to Accumulates from Strong Buys. These comments were amid concerns over the ability to maintain average revenues per unit over the near term, which is six to nine months. Prudential does, however, remain positive on the stocks in the long haul.
Over at the NYSE, big news other than the Middle East conflict hit the oil sector. In a deal of mega-proportations, Chevron(CHV) agreed to buy Texaco(TX) to form the second largest U.S. oil company valued at $35.7 bln. Under terms of the deal, TX shareholders will receive 0.77 shares of CHV, valuing shares of TX at $64.87 based on CHV's Friday close. This represents an 18% premium for TX. The merged company, ChevronTexaco is expected to realize $1.2 bln in annual savings and will create synergies that should greatly enhance shareholder value, at the expense of 4000 employees being laid-off. TX added $3.88 to $59 while CHV lost $2.25, closing at $82.
Investors quickly forgot about the Middle East crisis and came back buying the NY stocks, sending the INDU higher by 46 points and giving a nice follow-through day. Clocking in at one bln shares at the NYSE, buyers returned from the weekend to pick up the likes of WMT(+2.31), HWP(+2.06), and IBM(+2.06). Traders bid up shares of IBM ahead of their earnings scheduled tomorrow. Also encouraging investors of Big Blue was the company's unveiling of its newest product, boasted as the fastest UNIX web server. IBM's performance helped the INDU maintain a very nice, steady intraday trend which was far less dramatic than Friday's parabolic move. The +46 points brought the INDU above 10200 which was intraday resistance on Friday. Now, this level will be important support going forward. On the upside, 10375 will likely be the next major resistance level given the rapid decline on Thurday, indicative of panic selling. Yet, trading should be volatile as earnings numbers continue streaming in, either encouraging or disappointing investors.
Looking forward, earnings will be the driver. We have some big time companies reporting during this option expiration week, so expect some volatiliy and some extremely profitable trading opportunities. Lottery plays all week: cheap premiums and huge news events to move stocks. TLAB kicks off earnings tomorrow before the bell, followed by MERQ, IBM, INTC, and XLNX to name a few. Wednesday is another big day for earnings with MSFT, ARBA, SUNW, EMC, AAPL, and AOL all reporting. This high profile earnings slate could very well move the markets in a big way, giving us option traders those high percentage trades. On top of those Wednesday reports, the CPI is due out. It should be a fantastic week for trading. As for the market, it looks as if volatility will reign as king, as the NASDAQ tries to find direction. While we might not be entirely back yet, we do know that the process has begun and now we must weather that final storm. Good luck this week as it should be an exciting one!
See you at the Seminar in a couple of weeks!