The rocky week ended with a whimper and only light short covering provided a bounce into the green at the close. Big name news events led by GE and IBM helped lead the Dow to its fourth consecutive weekly loss and the fifth weekly loss for the Nasdaq. A back to back triple digit gain and triple digit loss on Wed/Thr toyed with investors hopes and fears but the end result was the same. The Dow edged even closer to Dow 10K again and the S&P slowly settled toward the critical 1100 level. How are these earnings runs supposed to work again? I forget.
The GE disaster on Thursday helped erase the +172 point Dow gain from Wednesday with a -205 point loss. You have heard this before so I will be brief but GE only took six questions on its extremely short conference call. Analysts with lists of pointed questions were left with a dial tone and a bad feeling about the "new GE". Downgrades flourished and GE was still dropping at the close on Friday.
IBM led off the week with its earnings warning and lost nearly -$10. After a slow recovery through Wednesday it was hit again with news that the SEC had instituted an inquiry. IBM had a no comment response and the stock got hit for another -$5 drop. Surprise, the SEC announces "after the close" that the inquiry was already closed and IBM traded up +$3 in after hours. Inquiring minds want to know why IBM did not make the announcement since they already knew the outcome when they made the "no comment" statement. Also, why did the SEC wait until after the close to make the announcement? Those same inquiring minds are coming up with a conspiracy theory that assumes "other" problems in the pipeline. IBM opened up near $88 on Friday but sold off all day to close with only a +1.41 gain. Obviously traders are not convinced the company has told the whole truth and nothing but the truth.
On a side note, the CBOE is investigating unusual put option volume on IBM the week before its warning. According to the CBOE put volume increased +59% above normal. Of course we already know why the volume was up since we picked it as a high odds put candidate the week before. I had several readers email about some serious profits gained with one person planning on buying a Porsche. Keep up the good work guys!
With big caps under pressure investors turned to small caps for relief. The Russell-2000 posted nearly a +18 point gain for the week and broke out of a trading range in place since early March. Regional banks and property investment companies were the strongest sub-sectors in the Russell.
The most beaten up sector for the last two weeks was the software sector with nearly 25 earnings warnings complete with lowered guidance. Mercury Interactive (MERQ) broke away from the pack when they announced earnings on Thursday which beat the street and then affirmed full year 2002 earnings. They said sales exceeded all targets and they were continuing to cut expenses. MERQ rose +25% or +7.30 to $36.70 on strong short covering. This powered the software index (GSO.x) to nearly a +5% gain for the day. Even Microsoft gained +1.14 after a bad week.
Economic reports on Friday included the PPI, which was heavily influenced by sharply rising energy prices, gained +1%. The core rate rose slightly but was consistent with the recovery underway. Those numbers should decrease for April after crude prices fell to under $24 on Friday. Venezuela said it was going to quit selling oil to Cuba and place the concerns of the country ahead of concerns of OPEC. This was seen as a prelude to raising output to fund the country. Oil had peaked over $28 last week and the drop back below $24 should ease the pricing pressure on companies that are dependent on energy prices. The Dow transports soared with a nearly a +100 point gain for the week.
Consumer confidence fell slightly in the first April reading from 95.7 to 94.4 and could probably be tracked fairly closely to the higher gasoline prices and falling stock market. These two areas are the first to impact the consumer psyche. Holding up the index was low mortgage rates which are stabilizing on the hoped the Fed will not rush to hike rates and stop the recovery in its tracks. Consumers are slowly being convinced that the recovery will not vertical but could be a rocky path over the next year.
Bubble mania returned on Friday when the two year old JetBlue airline with 24 planes rocketed into being as the fifth largest U.S. airline. The IPO which gained +57% meant JetBlue now has a market capitalization of $1.6 billion surpassing both UAL and US Airways and nearly hitting the $1.8 billion value of Continental Airlines. Not bad for an airline that has 108 flights a day. They are going to use the money to buy 59 new Airbus A320s and triple the size of their fleet by 2007. I applaud their success but does this seem overdone to anyone else? They are already warning that their expenses are rising and they may not be able to open any new cities this year.
Next week the earnings parade in all its glory. The flood of companies reporting begins on Monday with BAC, C, CAL, HAND, MER, NVLS, PFE, TXN to name a few. Check for the link on our website for the full list by day. Everyone expects the earnings to be a disaster but the key factor is still the guidance for the next couple quarters. If that guidance falls flat like the GE forecast then next week could get very bumpy. Investors want to discount any bad news and they will be struggling to find the silver lining in any cloud. It is all in the call and many company officers will be having Maalox moments as they face the analysts questions.
Despite the market drop this week the market internals have been surprisingly strong. The new highs have been substantially beating the new lows by a 4:1 or better margin with a couple days of better than 5:1 this week. On Friday, a wimpy day to say the least, the advance/decline ratios on both the Nasdaq and NYSE were positive by 2:1. Obviously the big caps are not getting investor attention and funds pouring the same amount of money into $10-$30 stocks that they would be putting into $50-$100 stocks means a lot more shares being bought and that produces the upward pressure we have been seeing.
The problem as I see it becomes the age old battle between the bulls and bears. The lines are drawn, the major averages sitting right at support, and the battle next week will decide direction. Because the big caps have been warning it appears that things are worse than expected. Still there have been far fewer warnings this quarter than were expected. They have just been very high profile. It is all going to boil down to the guidance we get next week when several hundred companies across all sectors get their 15 min of fame. I could draw a word picture of the coming crash or the coming rally and be equally convincing on both. The markets are oversold after multiple weeks of drops. Still they are resting right on support. It may take really bad news to push them down any farther. Still, April 15th is Monday and we all know what happens then. The taxman requires payment and stocks will be sold to come up with the cash. How serious a problem this will be we do not know.
Also, remember the period between April-15th and May-15th typically produces the spring crash. Just before that drop is when things typically appear the rosiest. I could easier pick the winning lotto numbers for the $200 million drawing this weekend than pick the market direction next week with any certainty. I am leaning down but indicators are turning bullish. The put/call ratio on Friday closed at .99 which typically indicates a rebound soon but the oscillators on the S&P are indicating more possible weakness.
How do we trade this scenario? Simple! We typically get all tied up trying to pick market direction and then place our bets. Instead I strongly suggest letting the markets tell us which way they are going. On Tuesday I changed my entry points for going long to 10350/1800/1130. The Dow moved to trade over 10350 briefly during the Wednesday phantom rally but quickly failed at that level. The S&P managed to break 1130 by one point also on Wednesday before heading to new lows. The Nasdaq never came close to 1800. I picked these levels because that is where the near term resistance is greatest. A breakout over those levels will require conviction, not speculation.
I know those levels appear to be a long way above our current position and many people feel they will be giving up too many points to wait for a breakout. My feeling is I do not want to be long the market unless it has legs. Breaking those levels is proof that it has legs. If it is going to hit Nasdaq 2200 this month as some predict it will have to break 1800 first. I heard a six week target on the S&P of 1250 on Friday. If that analyst was right then we would benefit from a +120 point gain even if we wait for a move over 1130. So, my upside entry points allow me to watch patiently for conviction and take action only when the time is right. If you are not short this market then I would wait for a break below 10100/1725/1100 to go short. Avoid the noise and let the market trade in its range and we will profit on a breakout to either side.
Enter Very Passively, Exit Aggressively!