Surviving The Slowdown
Friday was chock full of announcements and speculation on how Corporate America is dealing with the economic slowdown. As lay-offs become more commonplace in 2001, the markets drift lower over concerns about corporate revenues. The intraday trend: decidedly negative. This painful decline begs the question, where will the market look next for that glimmer of hope that we had two weeks ago? The answer is Greenspan.
With earnings season winding down and most major tech players confessing their lack of visibility, market watchers once again will shift their focus to Fed Chairman Alan Greenspan and the fate of interest rates. We all know that earnings and revenues going forward, at least for the next two quarters, are going to be less than stellar, according to the standards that we have grown to expect the past few years. With the chief concern being the slowing economy in the U.S., Greenspan is thereby the chief positive catalyst and the closest thing to a panacea for the market's woes.
After Friday's dismal market performance for both the NASDAQ and the INDU, Monday will be a day of anticipation. Greenspan is scheduled to speak on Tuesday morning at 10am ET before the Senate Banking Committee. Doc Greenspan will be diagnosing the state of the economy in the Fed's semiannual report to Congress, formerly known as the Humphrey-Hawkins Report. While Greenspan will delicately tip-toe that fine semantic line during the testimony, market watchers will be listening intently for any sign of a possible intermeeting rate cut. It was the stronger Non-Farm Payroll report on Friday the 2nd that sparked market fear of not getting an intermeeting cut, which was widely perceived as certain. The FOMC is not scheduled to meet until March 20th and it seems reasonable that given the current economic condition, a month without Fed action is a month too long.
Further evidence of the slowing economy was presented Friday and dragged the markets lower. Motorola(NYSE:MOT) announced that it will cut 4000 jobs from their Semiconductor Products operation. This comes just a few weeks after the company said they were cutting 2500 jobs in their mobile phone unit. The word "lay-offs" has become all too familiar on both Wall Street and Main Street in 2001. Creating downward pressure for the NASDAQ were rumors that Dell Computers(NASDAQ:DELL) would be laying off 10% of its workforce. Reports circulated late Thursday night and set the stage for a test of 2500 on the NASDAQ. DELL denied the reports but the speculation was enough to set the tone for both the stock and the index. Whether rumor or fact, this pattern of lay-offs shows the cost-cutting measures that Corporate America is forced to take to survive in this economic environment.
As I mentioned on Wednesday, 2500 was key support for the NASDAQ. This level was overcome by selling on Friday, with the tech-heavy index now sitting in deeply oversold territory. We have reached a very precarious juncture for the NASDAQ. Both Eric and I discussed last week how the tape has been difficult to read as the NASDAQ drifted. Now, lacking a fundamental catalyst along with technical weakness, the NASDAQ is at a point where it really could go either way. Are we heading to retest January 3rd's low of 2251? Or will the NASDAQ put in a new higher low above 2400? Given the oversold condition, Greenspan may provide the necessary boost to attract buyers back this week.
Here is a chart of the NASDAQ with the exact same lines that were drawn on Wednesday. We were looking for Wednesday's rally momentum to continue on Thursday and drive the NASDAQ to resistance at 2700. Unfortunately, the momentum was short-lived in the morning and could only lift the index to the downtrend line where sellers whacked it once again. From there, the breakdown accelerated. To the downside, there is really no discernable support level of true strength. January 10th's low was 2376, when the NASDAQ began its run to 2900. More importantly, the market needs a fundamental catalyst to drive it back to its previous trading range. Even if the Fed can provide hope for the market in the form of rate cuts, fundamentals trump both technicals and the Fed. We must trade what the market gives us, and right now Greenspan's Senate hearing will be that next glimmer of hope.
In addition to the rumors surrounding DELL, other big cap NASDAQ names have been perpetuating the tech index lower. Both Microsoft (NASDAQ:MSFT) and Oracle(NASDAQ:ORCL) have been subject to the Street's critique. On Thursday morning, Merrill Lynch analyst Henry Blodget downgraded MSFT to an Accumulate from a Buy, expecting slowing software sales. Boy, this guy really knows how to make friends. Hey Henry, you liked Amazon(NASDAQ:AMZN) at $100, you must love it at $13. I'm sorry...don't get me started on that guy. Moving on, ORCL plunged below $25 a share after Morgan Stanley analyst Charles Phillips downwardly revised revenue growth forecasts going forward. These types of downward revisions are going to be as commonplace in the coming months as the word "lay-offs." However, it is a double-edged sword. Obviously, it's perceived as a negative when a company can't sustain current growth levels, yet it also allows for a better chance of an upside surprise. Bring down expectations to realistic levels. Watch those big caps. The market won't be able to advance without them.
Lucent(NYSE:LU) may have attempted to be creative in trying to survive the slowdown and now has the SEC looking its way. The SEC has begun a formal investigation of the struggling telecom, calling into question accounting practices. The issue focuses on software licensing agreements and nearly $680 mln in revenues booked in fiscal 2000. Just another financial woe for LU, which has consistently missed earning's numbers during the past year.
Looking at the INDU, 11000 has proven to be the victor this time around. Last Wednesday, I mentioned that without a close over 11000, the INDU would slip back to support near 10800-10850. Without even attempting another run at resistance, the INDU sold off more than 150 points. MSFT, IBM(NYSE:IBM), Wal-Mart (NYSE:WMT), SBC(NYSE:SBC), and GE(NYSE:GE) all contributed to the downside action on Friday. Broad selling with little buying epitomizes this market right now. No catalyst, no buying. This is precisely why the INDU was not able to break the 11000 level. There was simply no reason to buy. Tuesday's Greenspan meeting very well may create a tradable move for both indices, if only temporary. Technically, the INDU has decent support at the 10600 level, where it consolidated in late-January and from where it launched its recent rally.
With Corporate America tightening the belt and trying to survive these uncertain times, the market is seeking something to keep its apparent recovery going. Fundamentally, revenue growth forecasts will continue to be reassessed. Technically, the charts aren't painting a bullish picture. We are in an economic slowdown and in these times, we look to Alan Greenspan. Knowing that he watches the consumers' confidence in the U.S., we can count on him being on our side. So Tuesday morning at his Senate testimony, Greenspan will be conscious of Retail Sales numbers announced earlier at 8:30am ET. These events will provide trading opportunities, and given the oversold conditions on the NASDAQ, it will most likely be to the upside. However, remember two things. First, in a market environment with only short-term catalysts and a lack of long-term visibility, trade quick and be nimble. Second, it's expiration week, so expect opportunity and volatility as institutions roll positions forward. On top of that, PPI is due out on Friday. Be aware that unscheduled events, i.e. analyst calls & company announcements, have been dictating the market. Expect the unexpected and trade smart.
Jim Brown will be back on Tuesday to give us insight into Greenspan's comments and the market's reaction.