All Pumped Up With no Place to Go
The gains seen on major indexes last week could not be sustained in the first fully staffed trading day of the New Year. That's not to say that last week didn't count in the bulls' favor as the markets moved up three days in a row. Just that the bullish sentiment could not be fully trusted as long as the faithful at the trading desks were still on holiday vacation. After all, good technical ground was gained in the process, which kept many a bull optimistic about the future even as the market sputtered following the opening green arrows today. More on the technicals in a minute.
The happenings today fall more under the heading of market noise rather than market news. There were a few spotlight hogs including the new i-Mac introduction, the introduction of new speed-demon chips from Intel (INC) and AMD (AMD) and a settlement fine of $1.5 to be paid by Knight Securities (NITE) to the NASDAQ as settlement for trading violations that put the firms interest ahead of investors during the late '90's. (Gomer says, "Sur- prize! Sur-prize! Sur-prize!").
But the attention grabber was that Patricia Russo after only eight months as President and COO of Eastman Kodak (EK) was hired back by Lucent (LU) as President and CEO, where she had been following the spin off from AT&T in 1996 and prior to join EK. Despite the hoopla in the press, the markets were unimpressed and the stocks went nowhere. LU was down $0.15 to close at $6.95 and EK was down $0.95 to $27.94.
My personal take on it is that EK has got to be a world of hurt. First of all, their dividend yield at over 6% is in real danger of being cut because their sales are falling from loss of market share to Fuji and Agfa. Second, that the top dog would leave after only eight months to be top dog at her previous company, itself a laggard among corporate giants - a company where she was part of their demise - are warning signals that EK could end up in the scrap heap of corporate America along with its de-fanged former nemesis, Polaroid (PRD), which is no longer traded. This is on my personal list of LEAP put candidates based on fundamentals even though the charts don't support it (yet).
What else? Long ago, there was a saying that as goes GM, so goes the country. Today it could be said that as goes GE, so goes the market. Unfortunately for GE, we learned earlier this morning that Florida Power and Light (FPL) is canceling 6 projects and 22 GE gas turbines on order for 2002. While CS First Boston removed GE from its focus list (but didn't change its rating or earnings estimate), it cited that many other power companies may come to the same conclusion to cancel orders in the next six months.
While that would be significant for GE, the roots of this can be traced back to Enron's (ENE) failure. ENE began operation of 42 power plants last year - a good number probably with GE turbines, as GE is the only "big iron" supplier in the business. If you operate a utility, are you going to buy a new turbine from GE or pick up a power plant (with multiple turbines cheap in the ENE bankruptcy sale? More cancelled orders are not out of the question, which could lop billions of dollars from the top line. GE is on my suspect list too now that the price is under $40 - a pivotal point.
One last thing before we get to the charts. This item has to do with the Fed. Now I'm not big on quoting the Fed chapter and verse since their record of economic prediction has been no better than Madam Abbey's house of crystal balls, which frequently shatter. Evidence? Ever notice how Greenspan always uses the caveat "in the foreseeable future" in all his comments? If the "foreseeable future" was so clear, how come the Fed lowered interest rates on 10 plus/minus occasions by nearly 500 basis points? The "foreseeable future" for the Fed clearly isn't.
But that didn't stop the Atlanta Fed President from offering his two cents. I'm paraphrasing here courtesy of briefing.com, "Atlanta Fed president Guynn sees negative GDP growth for another quarter or two with second half growth picking up to 3%. Despite this optimism further out, he indicated that there is room for the Fed to ease further and that he is not going to call the economy 'stable.'" No matter, bulls will be bulls and the potentially bearish tones went largely unacknowledged as the market pulled back in lackluster fashion. No one on the floor appeared to regard today's mild slide with any concern. So what do the charts say?
Dow Industrial chart (INDU):
Floor traders are right not to worry at this moment. While today's NYSE volume was a respectable 1.3 bln shares, the Dow was off only 62 points to 10,197. Advancers lost out slightly to decliners 15:17. Even so, the Dow managed to remain above the psychological 10,000 mark by a long shot, above its 200-dma of 10,092, and above its 68% retracement level off the low in September from its May 2001 high. Weekly and daily stochastics are muddled at or near overbought and could turn down over a longer period of time. However, the 60/30 chart stochastics are at or near oversold and look fresh for a bounce soon from a higher low.
NASDAQ chart (COMPX):
The NASDAQ is looking a bit tired thanks to biotech and semis undergoing a bit of a selloff following last week's gains. Like the Dow, it too has a muddled weekly/daily stochastic, though trending to overbought. The only possible warning sign here (and it isn't even a confirmed warning yet) is the possible bearish divergence on the daily chart as the index reaches a new high unmatched by its corresponding stochastic. Meanwhile the 60/30 charts are entering oversold at a higher candlestick low - slightly bullish. The NASDAQ gave up 22 points to close at 2037 on 2.1 bln shares traders with decliners trumping advancers 5:4.
S&P 500 chart (SPX):
A more ominous technical picture looms for the bulls (to bears possible delight) on the index of the pros. The SPX failed to hold above its 200-dma of 1166. And while the 5-priod stochastic appears muddled near overbought, the 10-period stochastic is beginning to roll over. That would not come as a surprise to those watching the commercial commitment of traders as they lightened up on long positions as of last Tuesday by some 10,000 contracts bring their net short positions to the highest level in a few months at over 68,000 contracts. Therein lies a danger for the investor. However, the trader need only look to the oversold or nearly oversold stochastic on the 60/30 min charts to see that a reversal is due at yet a higher candlestick low.
What of our friend the VIX? At 22.09, this bull run since late September may be coming to a close. As Austin Passamonte rightfully pointed out over the weekend, bears stand to make a bunch of $$$ if the VIX falls under 20. Heck, even at 24 VIX following a 21 VIX might be enough to tip the scales in favor of the bears. The fact is there is nearly too much complacency on part of the bulls right now and it is statistically about time for them to get nervous again.
As for tomorrow, not much can be read into today's action, except to say that the short term (60/30 min) charts suggest a mild trader's rally may ensue, which could win a few points for the swing and day traders. Not much economically until Thursday that would substantially move the markets though - only factory orders and consumer credit tomorrow, which will likely show a decline and an increase, respectively. It will be hard for a rational person to look at those numbers tomorrow and conclude that the economy has reached a bottom. However, bulls will give it their best shot and likely continue to suggest that the rising market is telling us that fatter profits loom in the latter half of 2002, further justifying their bullish action.
Earnings are the horizon too and a few tech companies have come out with what they consider to be positive news - yes, a reiteration of past guidance is positive and "proof" that the economy is recovering. (Never mind the substantial downward revisions of September and October. Look at any bounce as tradable but not "investable". Trade them. Don't keep them.
See you at the bell!