The Dow made it two in a row with a +59 point gain after struggling back from a -50 point deficit caused by the jobs report. While the Nasdaq closed fractionally lower it was due mostly to profit taking from Thursday's Microsoft induced romp. Even after two days of strong gains the Dow still lost -221 for the week but is closing in again on resistance at 9400. After finally escaping the October hex the markets are looking forward to a week without negative economic reports.
The jobs report did come in much worse than expected with the biggest drop in jobs in 21 years. 415,000 jobs were lost in the wake of the 9-11 attack and the unemployment soared to a five year high of 5.4%. Just a couple months ago this news would have sent the markets reeling into a death spiral but after the constant barrage of bad news investors shook off the initial impact and bought the dip again. The bad news is already in the markets and short of another terrorist attack the Fed meeting next week and Cisco's earnings are the only major potholes in our road to recovery.
The Microsoft settlement got much of the press on Friday but the stock was flat after a major gain on Thursday. The opponents, or should I say competitors, were very vocal and very irate. The comments were focused on the inability of the government to force a substantial change in policies even after Microsoft was judged to be a monopoly. The settlement was viewed by almost everyone as barely even a slap on the wrist and a license to eliminate the competition. About the only major win for the Justice Dept was the insertion of a three member oversight committee with full access to books, records and even software code. The term of the deal is for five years with another two years if Microsoft is deemed to have violated the law during the first five years. Three detectives to cover all of Microsoft! What an insurmountable task. The prospect of a revitalized and aggressive Microsoft has sent chills through the software community. Probably the only reason the stock did not rally again was that most people were in shock and disbelief that the penalty was so light. They kept expecting something else to appear. If Microsoft does get this deal done we can be assured that the stock price will reflect it very quickly. Remember that MSFT straddle in the Editors plays several weeks ago? Get ready to rock and roll!
If the Microsoft news was good for the markets, news from Qwest was the anchor that held it back. With more impact than the Jobs report the surprising news shut down the network sector. Qwest CEO Joe Nacchio told all contractors to stop network construction immediately. Alarms went off among all network gear suppliers. Just this Wednesday the CEO painted a worst case scenario that envisioned NO network spending by Qwest in 2002 other than routine maintenance. The directive on Friday that told contractors to cease all work immediately was a shock to projects currently underway. Qwest said they would continue to evaluate their needs as they moved forward and would reinstate the current projects when/if they were needed. Fourth quarter spending is projected to drop to less than $700 million from $3 billion initially expected. The most likely to suffer from the cutback are CIEN and JNPR and both stocks fell substantially on Friday. Qwest had initially budgeted $8.5 billion for capital spending in 2002 but said on Friday it could fall to under $2 billion. This is a serious blow to the telecom supplier sector because of the size of the drop as well as possible contagion to other carriers like WCOM and SBC.
On the brighter side of the economic picture semiconductor billings improved for the third month in a row. Some of the increase was based on seasonal production but the majority of the gains were due to inventory levels coming inline with current production requirements. The Asia Pacific region posted a significant improvement which is a leading indicator since most components are assembled in this region. There will be some deterioration in these numbers due to the Qwest news today but the beginning signs of a recovery are slowly coming to light.
Last Sunday I mentioned three sectors that could be trouble in the past week. Semiconductor, Biotech and Retail. Each were right at resistance and could possibly roll over and take the Nasdaq with them. The SOX.X dropped almost -60 points on Monday/Tuesday but rallied back to exactly the same spot we were in last Sunday.
The Retail Index RLX.X was at a dead stop around the 820 level of resistance and also fell substantially during the week only to recover most of the losses by the close on Friday. The negative economic news depressed the outlook for retail in advance of the holiday season.
The biotech index also fell substantially but did not recover as strongly as the other Nasdaq leaders. Many drug and biotech stocks saw selling in the last 15 min on Friday as it appeared the profit taking might not be over.
Each sector had been a leader out of the Sept-21st lows but more importantly had gained strongly the prior week. The resulting sell off of each was exactly what we feared.
The coming week should be interesting since the biggest earnings announcement for the week, CSCO, is on Monday and is in a sector that has already suffered greatly. The networking sector had been hit harder than most with the drop in telecom spending but had rebounded on every little bit of hope since Oct-5th.
Not only will all eyes be on Cisco to decide the fate of networkers they will look to Cisco for some clue as to when a future tech revival in general will appear. The guidance they give will be crucial to any further progress in the current rally. Much of the weakness in tech on Friday was related to worry about their numbers. Qualcomm is the next most visible announcement on Tuesday but they will likely be overshadowed by the Fed meeting results.
The Fed meeting on Tuesday is the major economic event for the week. The dismal economic numbers this past week including the biggest job loss in over two decades has increased the chance of a larger rate cut than previously expected. Most analysts had expected a 25 point cut but the fed funds futures are showing about a 65% chance of a 50 point cut. This would be the 10th cut this year and by far the most aggressive series in recent memory. The Fed needs to assert its control by being aggressive once again and not play it safe with only a quarter point. The economy is struggling to pull itself off the bottom after the attack and another 50 point cut would show the Fed to still be onboard.
For a market that has shaken off every piece of bad news for weeks it would be a shame to be scuttled by the Fed. I say scuttled because almost every analyst and trader are counting on the 50 point cut to the extent that, just like the bad news, it is already priced into the market. Does it matter really whether it is 25 or 50? Not to me but it is a sentiment thing. Traders are so used to receiving 50 point presents that not getting one is like getting an empty box under the Christmas tree. We are easily spoiled and the talking heads convince us that we need it whether we do or not. In reality it will not make any real difference to the current economy in the near term. Just like the previous nine have gone undetected the tenth one will also. These things are like antibiotics. You start feeling better after the first three or four but you still take the whole bottle to finish off the bugs. This rate cut is likely the last for the year even though there is another meeting on December 11th. The minutes from the October 2nd meeting will be released on Thursday which will allow analysts to see how concerned the Fed was last month and compare it to the statement from Tuesday's meeting for changes.
The markets are facing a crucial test next week. The Dow has been trading in a range between 9000-9400 for four weeks. There was jubilation that the 9000 level held again on Thursday but there was no volume to support the conviction. The market internals are marginal despite the upward bias. The sentiment is there but the buyers are still waiting on the sidelines for the most part. The Dow faces stiff resistance at 9400 and I am sure most investors are waiting for a break through of that level before committing themselves. If the Dow fails again it will be the fifth time at that level and could setup another retest of the lows to convince traders that the bottom is past.
The Nasdaq is poised to test resistance at 1750 for the third time since the attack. To say everything rests on Cisco would be too broad a claim but almost everything does. If they can just say that they think the bottom has passed and orders are improving slightly, that would be the key to the next leg up. If the Nasdaq fails at 1750 again after the CSCO earnings then there would be nothing left to power the next attempt and things could get ugly.
Buyers stepped in at 9000/1650 last week just like I suggested would happen. Those buyers are now out there on faith and hoping that the Fed and their fellow traders do not desert them. The longer they wait for reinforcements the more nervous they will become. The most positive sector on Friday was semiconductors again and they are poised to breakout of resistance and make a run based on the tidbits of good news I wrote about above. AMAT, KLAC, NVLS, ALTR and others all look alike on the charts. They are at or near new highs since Oct 1st but they cannot hold the Nasdaq up by themselves. They SOX is commonly referred to as the head of the snake (Nasdaq) and where it goes the snake will follow. For our benefit let's hope the SOX can power through the 500 resistance level on Monday and lead the Nasdaq to something better than the fractional loss from Friday. That will set the stage for some positive Cisco comments and maybe convince some more cash to come off the sidelines.
If you are in the market from the dip to 9000 last week then set your stops on Monday morning and wait for the CSCO/FED story to unfold. If you are not in the market wait for a move over 9425 before opening any new long positions. It is not that far away but moving over that level should cause shorts to cover again and power the next wave. If the news is bad shorts will try to sell at 9400 and push the Dow back down again. This is our line in the sand for this week. Keep your stops tight on open positions and don't buy more until we are above 9425. Investing should not be difficult but somehow we seem to make it that way.
Enter passively, exit aggressively!