What a difference a day makes! From apparent rampant buying on Thursday to obvious rampant selling on Friday. The bipolar Nasdaq screeched to a stop right on major support at 2400 again. The good news of course is the volume on each day. On Thursday the volume was a strong 2.1 billion but Friday the volume was only 1.8 billion on a down day. Did we get capitulation and a successful retest of support at 2400? Was the downdraft simply a reaction to Nortel and traders going flat before the weekend or are we looking at another leg down next week. Stay tuned!
What a confusing day for traders! The Nyse:NT and Nyse:SGP warnings the night before and a massive miss in the economic reports. Traders already on the run from the severity of the NT warning were blindsided by a PPI report that came in much higher than expected. At +1.1% the PPI posted the largest gain since September of 1990 when we were last in a recession. The estimates were only +0.3%. The core rate estimated to be +0.1% also posted the biggest gain since 1998 at +0.7%. All of a sudden the fear of inflation has surged back into the forefront of investor sentiment. Many analysts brushed off the report as a fluke brought on by higher energy prices and companies raising prices to offset slowing sales. The flaw in this theory is the tendency of manufacturers to lower prices in times of soft demand to induce buyers off the sidelines instead of raising prices when buyers are watching costs closely. Still the warning light is back on and now all eyes are focused on the CPI report next Wednesday. A tame CPI will ease the tensions slow heart rates among bond traders again.
Other economic reports included a drop in Industrial Production by -0.3% for the fourth monthly drop in a row. The -0.3% was slightly stronger than the -0.5% in December which could mean the pace of the decline is slowing. The estimates were for an unchanged report but analysts feel the cold December and warm January skewed the figures. Capacity utilization fell to 80.2% and is now nearly 200 basis points below its 1967-1999 average. The reduced utilization should actually be helping reduce inflation as supply bottlenecks have gone away.
Housing starts soared to 1.65 million which was the strongest month since last April. This was due to the warmer weather and the falling interest rates. This is a positive signal because of the impact on the broader economy. It also shows consumer confidence may have bottomed even in the light of continued job cuts. This could work against us as the Fed could see this as evidence of a rebound. One of the most damaging indicators is consumer confidence which fell to 87.8 in February from 94.7 in January. This is the lowest point since 1993. Greenspan specifically singled out consumer confidence in his recent testimony and reasoning for the recent rate cuts. Historically downturns tend to feed on themselves as falling confidence turns into a death spiral unless some outside influence stops it. Aggressive Fed rate cuts function as an antibiotic to the confidence plague. By cutting rates aggressively consumers relax with confidence that uncle Greenspan will save them again. The Fed fund futures predicting a -50 basis point cut in March jumped from a 35% chance to a 70% chance after the economic reports on Friday.
NT was dropped for a huge loss with a -$10 drop to $20 on a volume of over 120 million shares and a loss of $30 billion in total market cap. One third of the company's value just evaporated overnight. The dire outlook for NT rippled through the fiber/networking sectors. Corning, Nyse:GLW, dropped -9 or -21% to $32.88 and Nasdaq:JDSU dropped -9 or -21% to $35.88. Nasdaq:JNPR dropped -12 or -13% to $80. Nasdaq:CIEN, which just announced earnings and guided analysts higher, was also dropped for a -$6 or -7% loss to $82. The tremendous Ciena news had provided the huge rally on Thursday and CIEN had jumped from Wednesday's low of $69 to Thursday's high of $94. The pull back to $82 at the close is a clear entry point on very light profit taking in my opinion. (I own it) For those of us who were looking for a fast mover with excellent earnings and prospects, this was a gift. When the market rallies this stock will be a favorite. CSCO also fell on the NT news back to its 52-week low of $28 which has been a base since Feb-9th.
Nasdaq:DELL held up rather well considering the lack of guidance going forward and lost only -1.50. Nyse:HWP also did well only losing -2.85 after warning about future growth. Nasdaq:SUNW suffered as much as Dell and HWP as analysts downgraded estimates for SUNW after the negative forecasts. SUNW will host its quarterly update meeting on Thursday and the stock is likely to drift lower as investors fear the same kind of warning from them.
It is clear now that the bump on Thursday was short covering after the CIEN earnings surprise. There was no follow through and there was no bad news bounce like we saw with AMAT earlier in the week. This does not mean I am negative on the markets. At least I wasn't negative on Friday night. News was out on Saturday that CSCO CEO John Chambers is on the talk circuit again stirring up trouble. In Stockholm Sweden Chambers said "It makes no difference what the Federal Reserve or the latest statistics say. What we see now is absolutely NOT a soft landing. Ask anyone in American manufacturing industry and they will say we are in a recession. If the situation does not change before the half year stage there is a risk of a domino effect whereby the rest of the world will be imminently affected." Add that statement to the NT/DELL/HWP warning from last week and we have some really negative sentiment.
According to First Call there have been 294 warnings for the next quarter compared to only 37 for this time last year. The outlook as reported by the financial world is bleak. Now here is where I wonder about reality versus hype. Several economic indicators are already showing a bounce. The Weekly Leading Index (WLI), which was developed by Greenspan's former economics teacher, Geoffrey More, is sending recovery signals. This indicator which dates back to the late 1980s gives a real time snapshot of the economy, not what happened a month ago. It has correctly highlighted the turning points since forecasting the 1990 recession in real time. It is now up four weeks in a row and at 124.0 actually higher than the peak in the economy in June 2000. My point here is companies are making increasingly bearish statements while the actual indicators are already showing new life. Is it possible that we are seeing executives taking the opportunity to talk down future earnings and lowering the bar they have to reach for several future quarters? Am I smoking something funny here or is it really possible that leading indicators and leading companies are moving in different directions? At $28 how much does CSCO and Chambers have to lose? The bad news is priced in and the stock is not likely to drop much more. Does this mean Chambers can take a free shot at trying to get Greenspan to lower rates again and also make earnings targets easier to hit? I would probably do it. He has nothing to lose and everything to gain.
Next week we have two big Dow components, Nyse:HD and Nyse:WMT announcing earnings. Home Depot is already expected to post terrible results and the bad news is already priced in the stock. However Home Depot is seen as a leading indicator for the health of the building industry and guidance will be critical. Wal-Mart however could be a major event. Seen as a major indicator of the health of the retail sector WMT could impact the markets recovery views going forward. If they meet estimates and more importantly margins then we could see another sigh of relief. If margins dropped materially due to dumping of retail merchandise in the holiday quarter then their guidance will be critical. If they have a positive outlook then maybe we have seen the bottom of the economy. They already have said that higher energy prices have impacted customer counts to the downside and with energy prices falling investors could be expecting a better forecast.
Are you confused yet? Don't worry, one of our best contrarian indicators just changed direction. Barton Biggs, or "Always Wrong Biggs" with MSDW, changed from a rare bullish stance to bearish again on Friday. After predicting a strong rally several weeks ago that never appeared he is now calling for new lows on the Nasdaq, Dow and S&P before moving up again. Must be a rally ahead!
In real life however there is no clear indicator. According to market forecast expert, Dick Arms, the Nasdaq is the most oversold it has been since the October 1998 crash. Using the indicator he developed, the Arms Index (TRIN), and various moving averages for that indicator he is predicting at least a short term 1-2 week rally and a good possibility of a longer term rally of several months. Dick was on CNBC Friday saying we are at or very near a bottom. The Premier Investor Network, which OIN is a part, was joined by Dick Arms and his new website just last week. (ArmsInsider.com) We welcome him to the network! Dick will also be teaching at the April Trading Expo in Denver.
Back to next week, I agree with the extreme oversold context. I went long on Friday afternoon based on the dead stop at 2400 again. After the John Chambers comments on Saturday I wish now that I had entered the weekend flat. I think the reason we did not see a bigger bounce at the close on Friday was the bombing of IRAQ and traders deciding that the unknown was more dangerous than missing a gap open on Monday. Little did they know that it was not Saddam Hussein we should have feared but John Chambers.
There is still no catalyst to make buyers return to the market. The CPI on Wednesday could help if it comes in at a much lower level than the PPI but I think the WMT/HD earnings will cause a bigger reaction. We are in that trading limbo area again. At 2400 we should be bouncing. The keyword there is "should." If buyers are still on strike then we could see the Nasdaq drift even lower based on the Chambers comments. How low? 2300 has strong support and 2251 was the intraday low back on Jan-3rd. Either of those levels are so close that we are at the bottom for all practical purposes. Can you buy lower than our 2425 close on Friday? There is a good possibility after the Chambers comments but I just don't think it will be much lower. While there is no catalyst on the earnings/economic front to cause buyers to return, the lure of a sub 2400 Nasdaq is a siren call to bargain hunters. The biggest problem I see is not when we bounce from here but how long will the bounce last. We are back in that pattern of bear traps and until traders quit selling the bounces we are doomed to keep repeating the pattern. That is also our clue for a trading plan. Aggressive traders should buy any rebound and look to close those positions on any weakness 24-48hrs later. For conservative traders I am going to lower my 2700 entry point. Resistance is now at 2550-2600 so a rally over 2600 ON STRONG VOLUME would be a buy signal.
I recognize that there is a lot of room between 2425 and 2600 and conservative investors will be frustrated watching stocks rally several dollars before reaching that area. The same thing happened this week. We saw the Nasdaq rally from 2400 to 2600 on the CIEN news and several readers emailed me with complaints that they had missed the boat and 2700 was too high. Don't look now but we are at 2400 again. 2700 was picked for a reason and I picked it when we were in the 2500-2600 range. Resistance at that point was 2650-2700 and until resistance is broken why do you want to take a long position? Aggressive traders can play with these 200 points swings but they must always be aware that the trend was still down. Until that trend changes those with a more conservative risk profile will do better to wait for that resistance to be broken. Once broken it becomes support and provides a base for future moves. For longer term investors, waiting costs nothing. Buying too soon can be expensive. Those high profile stocks you may have bought when you thought the market was running away from you this week are as much as $15-$20 cheaper now. (BRCM, JNPR, JDSU) Still, I know how human emotions work and these are only suggestions not commandments. I bought the dip but my risk profile may be different than yours. Whatever your profile, conservative or aggressive, we are at key support levels with major support at 2251 and 2300. The last bounce from 2251 on Jan-3rd was +700 points. Will it happen again? Nobody knows for sure but with the Fed on our side there will be plenty of traders betting on it! Dick Arms and I are betting on it too!
Trade smart, enter passively, exit aggressively!