The Big Squeeze
Wow! Who would have thought that today would be the day? The Fed Futures contract did not even have an intermeeting rate cut priced into it. It was an unusually strong day for an unusually strong statement from the Fed. In fact, it was historic as the NASDAQ had the heaviest volume ever (3.08 bln) in comparison to the old method of volume counting, posting a 156 point gain to close at 2078. Thank you! And we don't want to slight the Dow ($INDU) which rallied almost 400 points to finish at 10615. It's like we have been transported back to the good ol' days. Or have we?
It is has been a heck of a week! Cisco (NASDAQ:CSCO) warns on Monday, the market shrugs it off on Tuesday, Intel (NASDAQ:INTC) beats the Street and ignites a rally that put the shorts on red alert. Imagine being a big bear and shorting into the morning strength after the gap open. I mean, imagine massive positions. Then, you see that little "Newsflash" on CNBC or on the newswire. Fed cuts Federal Funds Rate by 50 bp to 5.0%. As my colleague Jeff Bailey would say, "a rally of biblical proportions!" Shorts frantically scrambled to cover in what is one of the biggest short squeezes ever. The Dow literally spiked 300 points in seconds! The Fed gave all the longs in the market an early Christmas present, putting a little, and in some cases, a lot of money back in their pockets after the dismal Q1 and Tax Day.
The Fed certainly surprised everyone. Instead of bailing the market out three weeks ago, they tactfully waited until the market repaired itself and showed signs of hope before giving it the boost it needed; a shrewd move to avoid criticism of bailing out the market. Money flowed back into tech issues and financials which will most certainly benefit from lower interest rates. So why today? The CPI yesterday was in-line and inflation remains in check. INTC painted an inoffensive picture and didn't cut their capital expenditures going forward. Even in the face of this news, the Fed is looking out for the U.S. economy. Their decision today was aimed at reversing declines in business investment and profits. In the Fed statement, they made it clear that they're on our side, "Dampened capital spending threatens to keep the pace of economic activity unacceptably weak." Today, Greenspan and company proved that they will remain aggressive toward recessionary conditions. Concerns over global weakness, specifically in Japan and Europe, also played a role in the rate cut to insulate the U.S. from global deterioration.
The velocity of the moves in both the NASDAQ and the Dow were fantastic. Instant karma. Where you on the right side of the move? I know a few of my colleagues were. These types of moves are characteristic of short covering, however, today's huge volume in the market indicates that there are new longs in the market. When I say this, I'm not speculating on any time horizons for these longs, only that there was clear indications that institutional buyers were out in force. The cash hordes at the mutual funds are spilling over the treasure chests, and today some of that money went to work. It's time for the fund managers to stick it to the shorts a little bit here. We have seen the Fed cut four times this year already, 50 bp each, two of which were intermeeting cuts. That is a fair amount of rate relief to filter through the economy. Can we just fast forward to Q4?
Technically, the Dow blasted through resistance at 10300, which was previous support before the recent breakdown. This a very bullish advance. A sustainable move in this index will be lead by Financials and Tech. Overhead, 10750 will likely be a challenge for the bulls; don't count out the bears just yet. They are highly capitalized and love to buck the trend.
IBM (NYSE:IBM) came out after the bell with in-line earnings of 98 cents and reiterated that they were on track for full year estimates. Big Blue is weathering the storm well even as CSCO and Hewlett-Packard (NYSE:HWP) resorted to warnings and layoffs. The company stated that while IBM is not immune to the economic conditions, they expect to outperform their rivals in the coming year. Sound a little cocky? You bet they are after widespread speculation that IBM would warn before this release. Advanced Micro Devices (NYSE:AMD) beat the Street by 4 cents and reaffirmed net income for the full year as well. Both stocks traded higher in after-hours: IBM closed at $112.81 and AMD at $29.85.
Over on the NASDAQ, the index gapped up on the open over 2000, quickly pulled back to 1995 and climbed higher on the INTC news. The Fed's rate cut lifted the NASDAQ to 2100, where it spent much of the day. However, traders booked profits in the final hour after hitting the day high of 2129. This level should be watched closely as the next resistance. Above that, 2250 is the pivot point from the last decline to recent lows. Shorts will be lurking there to battle. Keep this in mind while maintaining long positions.
Helping send the NASDAQ futures higher tonight is Apple (NASDAQ:AAPL). They returned to profitability tonight by beating the estimates by a whopping 10 cents, posting an 11 cent profit. The management presented an upbeat outlook, unlike many other box makers. Siebel Systems (NASDAQ:SEBL) defied the tech downturn and beat the Street by a penny with 15 cent per share earnings. In the Semiconductor space, KLA-Tencor (NASDAQ:KLAC), the leading testing equipment maker, posted better-than-expected earnings as well, 48 cents versus 44 cents. However, they still have six months of inventory backlog as demand has weakened across the Semi sector.
Microsoft (NASDAQ:MSFT) closed above its 200-dma today for the first time since March 31st, 2000. This is ahead of its earnings report due out tomorrow after the close. A positive report could very well continue the upside strength going into Expiration Friday. We will likely see volatility tomorrow afternoon as positions are rolled forward and defended, especially with today's move which changed the options landscape. The Fed rally today felt really good. It gives investors hope and incentive for mutual fund managers to put cash to work. However, the bears are not dead and while they took a hit today, we must be on guard for when they pick their next level. The long and short money are going to battle and each has plenty of cash reserves. This will be an interesting fight to watch. But keep in mind the key resistance levels on the indices. We will be opening higher tomorrow so protect your profits and play the long side until resistance proves itself. Expiration adds a whole new twist to the magnitude of today's move. Don't leave those trading screens.