I have to admit the Dow rebound at the close was impressive. If only it was really a rally. The charts show strong gains on several of the leaders but many of them show only short covering spikes. Nothing goes up or down in a straight line, although the Dow has been trying of late, and after a big move there is a normal squaring of positions. Shorts, highly profitable from a -1600 point Dow move, were eager to take profits with a growing rumor that the Fed could cut rates again any day. This is not likely on Friday but closing positions for a big profit and avoiding the risk appealed to many bears.
Short covering examples - not investors buying on excitement!
The Dow was positive for only a few seconds at the open before falling off a cliff to an intraday low of -381 points. Then the miracle recovery appeared. About 2:PM the minutes of the Jan-31st FOMC meeting were released showing that the Fed saw "favorable prospects for an appreciable recovery" and the rebound began. It did not hurt that Joe Batipaglia, Abbey Cohen and several other analysts and brokers were pounding the table about the severely oversold conditions and raising their weightings on tech stocks. Once the rebound began the shorts began seeing the windfall profits from the last week and the almost -400 point drop from today, begin to shrink. Trailing stops began to be hit and up volume spiked significantly as buy orders quickly outpaced sell orders. A classic short squeeze!
The magnitude of the recovery was amazing. After seeing market internals as bad as 7:1 decliners over advancers on heavy volume of 1.734 billion shares on the NYSE, the ratios quickly dropped to a bad but much more realistic 3:1 declines over advances. At the close there were 54 new highs and 270 new 52-week lows. Still the +280 point rebound off the lows was met with excitement by traders. The Nasdaq was never in much danger and held onto gains or minor losses even as the Dow fell into bear territory. The internals on the Nasdaq were still not much better with decliners beating advancers 3:2. New lows blew away new highs 506 to 17. This shows the generals were leading but the troops were still getting slaughtered.
The Nasdaq had several factors in its favor today. Micron said that they were seeing a rise in corporate orders and were now building chips to fill orders again instead of just producing inventory. DRAM prices were climbing and components were seeing increased demand. The semiconductor sector rallied on the news with the SOX gaining +68 points. Big gainers were INTC +3.13, PMCS +6, RMBS +5.66, AMCC +4.44 and BRCM +6.38. Helping the Nasdaq also was the pause in the biotech sell off. After dropping almost -20% in the last several days the biotech index BTK.X stopped at 382 and rallied into the close. It is too early to call it a biotech rally but at least a pause in the drop.
The Dow saw several major components set new 52-week or longer lows. GE set a new 52-week low at $36.42 before closing at 37.61. MCD set a three year low at 24.88 and only gained a quarter into the close. AXP set a two year low at 34.25 after a two month slide. Only eight Dow stocks were positive with MSFT +3.94 and INTC +3.13 leading the list with MRK and HWP the only others to gain more than a dollar. The Dow broke into bear territory about ten minutes after the open and provided an imitation of the MIR space station which will plunge in flames into the ocean this week. The Dow appeared to be attempting a true capitulation event. High volume, increasing every day this week, with severe advance/decline disparity. Traders were almost joyful as the watched the crash and burn event. "Finally, we are getting some fear." Yes, there was some fear. The VIX hit 41.99 for the highest point this year. The 42 level has only been hit three other times in the last four years. You will remember the previous events as Oct-1997, Oct-1998 and Apr-00. The put call ratio however drifted back down to only .74 and less of a buy signal than yesterday. The Dow finished only about 14 points above bear territory which was only a small victory.
The Nasdaq performed better on the strength of the semi stocks and some software stocks. MSFT which was downgraded today rose +3.94 instead of falling. INTC rallied on the Micron news and stocks like AMAT, VTSS and NVLS followed suit. As I said yesterday I was encouraged that the Nasdaq held its ground with the Dow in the tank by triple digits. Today the Nasdaq did not just hold its ground but rallied in the face of a monster Dow drop. Could this be the end of the tech selling? Looking at the money rotation for a clue, investors were selling cyclicals like AA, GE, BA, HD and WMT. Raising cash to put into the bloody techs? Could be...
TrimTabs.com said that Monday investors took -$4.4 billion out of stock funds but ironically Tuesday showed an inflow of $7.4 billion. The full month of March is estimated to see outflows of -$10.6 billion but compared to the +53.7 billion that came into the markets in March of 2000 the numbers do not appear to be as important according to trimtabs.com. Speak for your own money! The $10 billion outflow may be all that is left of the $53 billion invested last March!
Analysts are mixed as to market direction with several noted predictors calling for Dow 8000 soon and others looking for a rebound to 10000 next week. Personally I think the huge rebound today guarantees a bounce at the open on Friday. The key driver of course is the shorts who did not cover today. They are looking at the market action and the positive futures tonight and thinking about what another +300 point bounce will do to their profits and they will be trying to cover at the open. The closer we get to lunch time we will see if there is any real buying interest. With the global weakness growing traders will probably not want to hold over the weekend. Traders have been selling into the close on Friday for some time and tomorrow may not be any different.
The game plan for Friday should be extreme caution. Traders will want to jump on any morning bounce as the long awaited bounce off the bottom. That may be premature. I suggest waiting for next week to see if this is yet another classic bear trap rally. In this market shorts AND longs have much to fear. A market that can move 400 points in both direction on any day is very dangerous for traders that are not quick on the trigger. If it is the bottom then we have a long way to go and can afford to wait. If it is not a bottom then we do not want to be long. Cash is king today and patience is a highly desirable virtue!
Enter passively, exit aggressively!