Greenspan and Gerstner, Where's the Guidance?
When will the economy recover? And how long before corporate profits rebound? These two questions are at the essence of the battle that IS the market. Unfortunately, the earnings releases Wednesday and Greenspan's testimony provided little in the way of clarification, let alone closure. My friend Mr. Hockey tells me that closure is the key to life and, from where I sit, the market hasn't yet reached closure with its 'issues.'
The three primary drivers of the supply/demand dynamic in the market are: Inflation, Interest Rates and Earnings. It's that simple. Greenspan addressed each of the aforementioned issues, in one way or another, during his testimony Wednesday morning.
"The lack of pricing power reported overwhelmingly by business people underscores the quiescence of inflationary pressures," reported Greenspan. On interest rates, Greespan said that, "Should conditions warrant, [The FOMC] may need to ease further." And on earnings, Greespan offered the following: "Although earnings weakness has been most pronounced for high-tech firms...weakness is evident virtually across the board." In summary, inflation remains benign, the Fed is willing to cut rates again and the economy and corporate profits have yet to turn the corner.
Despite the strong housing report and larger than expected rise in the June consumer price index, the bond market advanced in the wake of Greenspance's hints toward further Fed easings. Yields dropped across the board and broke below key support levels, which does not bode all that well for equities in the short-term. The earnings releases from corporate America are not offsetting the pressure from the bond market.
The data storage sector was knocked out Wednesday by a double dose of bearishness from Veritas Software (NASDAQ:VRTS) and Emc (NYSE:EMC). Emc reported numbers that met previously lowered estimates, but offered nothing in the way of guidance for the next quarter, which underscores the difficulty in the information technology business. Veritas, on the other hand, offered guidance, but it wasn't good. The company reported late Wednesday, and guided revenues lower by about 30%. The combination of Emc's and Vertias' dismal outlooks pressured Nasdaq issues, ranging from QLogic (NASDAQ:QLGC) and Emulex (NASDAQ:EMLX) to Brocade Communications (NASDAQ:BRCD).
Veritas is one of the ten largest components of the Nasdaq- 100 (NDX.X) and the stock's 26 percent loss most certainly weighed on the Nasdaq. But the Composite (COMPX) managed to bounce from the 2000 level yet again Wednesday afternoon. It should breakdown below that level Thursday morning in the wake of a less than inspiring tech earnings report Wednesday evening. But traders should keep a close eye on the 1975 support level.
After the bell, Big Blue (NYSE:IBM) reported earnings that met estimates, but its sales came in a little light. CEO, Lou Gerstner, offered the following guidance: "[IBM] saw ongoing weakness in PCs and hard disk drives and continued to be hurt by the negative effects of currency translations." In addition, Gerstner said, "We expect that these factors will continue to work against us in the second half of the year." IBM is one of the last tech stocks standing, so its report after the bell Wednesday was highly anticipated and should impact trading over the short-term. It wasn't the worst report, and could've been worse. At the same time, however, it wasn't the type of report that the bulls were hoping for. Shares of Big Blue shed $2 in after hours. Watch IBM if it approaches $100 Thursday or Friday. A breakdown below that level for Big Blue might represent a psychological defeat for the bulls.
IBM is one of the largest components of the S&P 500 (SPX.X). If IBM gaps measurably lower Thursday, traders might watch for the S&P to fall below its critical support at 1200, from which it bounced yet again Wednesday. Building momentum to the downside in the S&P should lead the index below its relative lows around the 1170 level and offer traders profits on the short side.
Among the other 'big' earnings releases after the bell, aside from Big Blue, included Siebel Systems (NASDAQ:SEBL). The CRM software king reported earnings that beat estimates, but lowered its next quarter revenue guidance by about 15 percent. Its shares shed about $3 in the after hours session.
Broadcom (NASDAQ:BRCM) reported a loss that was slightly less than expected, but its CEO reaffirmed his opinion that business was showing signs of bottoming and stabilization. Shares of Broadcom added about $2 in the after hours session following its CEO's comments.
Applied Micro Circuits (NASDAQ:AMCC) met lowered estimates of a 5 cent loss, but mentioned the magical word on its conference call. That word, of course, is 'bottom.' Its shares added about $1 in the after hours session. Keep in mind that Applied Micro is a supplier to Cisco (NASDAQ:CSCO), which was slightly higher in the after hours session. There exists the potential for the networking group to rally from its oversold condition on the heels of Broadcom and Applied Micro, so keep that complex in mind when look for trades in the morning.
Another possible trade worth monitoring in the short-term is the potential for the multinational, cyclical stocks to get a pop if the U.S. dollar continues to weaken. The dollar has held incredibly strong during the recent global economic slowdown. And it has wreaked havoc on large exporters, such as IBM, and especially the cyclicals. In fact, the cyclicals saw a nice pop Wednesday so bullish traders might keep an eye on the dollar and its impact on that group. And how about the Oil Service Sector Index (OSX.X)? How low can it go?
As for broad market strategy, I'm still favoring buying/covering near support and selling/shorting near resistance. The strategy has been working in the QQQs (AMEX:QQQ) rather well, and with some regularity. The range between roughly $41.25 and $43.50 has been working for about the past month and a half. There have been outliers in that range, however, so the strategy hasn't been perfect. But, the breakdown in the bond yields (breakout in bond prices) caught my eye Wednesday and has me thinking the downside may be more favorable in equities over the next three to five trading days. That doesn't rule out the possibility of an advance over the short-term, however. I could foresee a gap down Thursday morning, followed by a sharp advance just for the sake of confounding market participants, with the catalyst short covering induced buying from the 'bottom' talk by some of the chip companies Wednesday evening.
This market is one of frustration for momentum type traders. But for those who favor trading with the trend, I think trading breakdowns below support levels over breakouts above resistance is prudent. That's because the fear factor yields greater profits faster, at least in this market.