Nasdaq Wilts As Dow Shines
Investors sold new economy stocks as the old economy continued to recover. It wasn't anything to write home about, but we saw gains in the old fashioned blue chips. International Paper deserves most of the credit as it advanced nearly ten percent. Financials like Citigroup, American Express and JP Morgan also gained ground, helping to lift the Industrials. It was the tech sector that weighed on the averages today. A profit- warning by National Semiconductor last night forced the Chip sector lower. This was a weight too heavy to allow the Nasdaq to hold onto early gains. All in all, it was nothing compared to other days already gone by in October.
The Dow Industrials finished at 10,394, up 121.35 on volume of 1.16 billion shares. Advancers beat decliners 15-12. The S&P 500 also gained, although fractionally, up 2.35 points. The Nasdaq closed down 48.90 points to 3419. Volume was good, but not great at 1.83 billion shares. Today's weakness helped the VIX back up to 26.83. The bond market was equally lackluster in that trading was tepid. The 10-year slipped to yield 5.63% while the 30-year closed yielding 5.74%.
After last Wednesday's panic selling which took the Dow to levels not seen since March 1999, buyers stepped in and helped the index get on track to its current uptrend. The rolling trend that has resulted from this capitulation looks strong and genuine. Today's high of 10440 will be the next overhead resistance for the Dow to roll on through. Unlike the Nasdaq, the Dow looks like it is on the road to recovery, granted it does not break down below this current trendline.
In earnings news, online retail giant Amazon.com on Tuesday posted quarterly financial results that blew away estimates, surprising Wall Street with a smaller loss than it did a year ago as sales ballooned almost 80 percent. Amazon reported a third-quarter pro forma net loss of $68 million, or 25 cents per share, compared with $79 million, or 26 cents a share, during the same quarter last year. Analysts and investors were also anxious to hear what Amazon had to say about the all- important fourth quarter. The company said that sales in the fourth quarter will likely be between $950 million and $1.05 billion, with pro forma operating losses between 5% and 8% of sales. This news helped AMZN climb after-hours to $33.
Nortel reported third-quarter net income of $574 million, or 18 cents a share, compared with $314 million, or 11 cents a share, during the same quarter last year. Analysts surveyed by First Call expected earnings of 17 cents a share, on average. Revenue was $7.31 billion compared with $5.15 billion during the same quarter last year, but analysts were expecting total sales of $7.63 billion in the quarter. "We are extremely pleased with the strong growth in the quarter which reflected our continued strength and leadership in the key growth areas of optical Internet, wireless Internet, local Internet and eBusiness solutions," said CEO John Roth in a prepared release. Well, John can say what he wants, but the stock is getting hammered based on the lower revenue number. The stock has already traded down near $50 during after-hours trading.
The best analysis of the day goes to Robert Dickey, chief technical strategist at Dain Rauscher Wessels. "The market can move higher without the benefit of past leaders as long as some other area takes over the leadership role. The tech stars of a year ago have been replaced by the healthcare sector as the most bullish and the Biotechs leading the higher growth area of that sector. Also bullish are the energy stocks. Tech stocks are bouncing to some degree, but the sector cannot be called bullish until it has gone through a likely longer bottoming period. Put it all together and you have the makings for a market rally through year-end, although the colors on your screen will be different than the last time." The thought process here is correct. Obviously Nortel will lead the tech stocks back down tomorrow, (helping to convince investors that the bottom is in place and has been tested) but I expect it to be a short trip. It is still likely that the bias is to the upside for the rest of the year.
The key which traders will be looking for tomorrow is how the markets react to Nortel and ahead of the Thursday Employment Cost Index. That report has long been a favorite of the Fed Chief's and the number will be closely watched. Expectations are for a 1.0% rise. Also, GDP is due out on Friday and will also be closely watched. The expectations there are for a 3.4% rise. Some positive economic news could put the market back on the right track. The interesting fact of late October trading is that positive news is typically followed by a decent rally. That is because the market has already been beaten to extreme levels. If Nasdaq is quick to rally, it is a good sign and one we would want to see for the end of this week.
Yet, the Nasdaq finds itself in a bit of technical trouble. In the chart above, you can see that the Nasdaq experienced resistance at 3520 area, and then once again both yesterday and today. As a result of sellers stepping in at 3520, which is the low from August, the tech index has established a triple-top. This technical development will pose a strong resistance going forward. Not many were buying today, and the Nasdaq slipped away throughout the day. The minor bounce at 3400 is negligible. The real problem with the Nasdaq, other than the NT related selling in after-hours, is that it has a 159 point gap up from last Thursday. In conjunction with the trouble at 3520, the Nasdaq very well may backfill this huge gap. I know it's not what we want to hear, but it is particularly concerning with the Nasdaq futures down 82 points at 4:45pm MDT.
So tomorrow is likely to end underwater for the Nasdaq, but how much of it is likely to be experienced at the open? I expect most of the losses to be incurred at the open as stocks are being sold now in after-hours. The thing to watch is if the gap down is quickly bought back up by buyers. The last gap down we saw was on the 18th and buyers quickly emerged. In fact, that was the last good buying opportunity before this recent rally. A repeat of that scenario and we could be back to rally mode as investors jump in. There is nothing better than a rally brought on by fear of missing the bottom. In all cases, let the market dictate. There is no point getting caught sideways in this fast, volatile action.