DOW HOLDS 10K, TYCO LOSES
All the Market Indices sold off to new lows for this move, but rebounded substantially and the Dow was defended at 10,000. Both the Dow Jones Industrials (INDU) and the Nasdaq Composite (COMP) ended fractional higher from yesterday. Institutional money mangers and other big trading interests "defended" the 200-day moving average in the Dow at 9935. When the initial sell off to under this level lacked heavy offers, bids came back in some of the big cap stocks.
Buying seemed to come from hedge fund short-covering, fund managers adding to their blue chip holdings and the buying effects of some index arbitrage between futures and stocks.
The biggest disappointment today was on Tyco's (TYC) disappointing earnings and that it would not split into 4 parts. The company's stock got driven to a new 52-week low, closing at 20.75, off $5.15 or 20%. A whopping 66 million shares were traded. Instead of the $3.14 estimated for their full-year, the conglomerate said it expected its Q4 earnings to be in the area of 2.60-2.70 a share.
Talk about a shock - Tyco's surprise comes in a market where companies off by a penny or two, get beaten to a pulp. To add insult to injury, Tyco also said that its breakup strategy was a "mistake". Instead, the company has a new vision and plans to spin off 100% of its commercial and consumer finance CIT unit in an IPO. The new company has $50 billion in managed assets, hopefully with none of that money invested in TYC stock.
There is a theme a day in the market - yesterday, Amazon, today Tyco. Tomorrow, who knows? Having the SEC opening a formal inquiry into the practices of Wall Street Analysts is not contributing to the warm and fuzzy feelings of Main Street for Wall Street. It also has sent Merrill Lynch (MER) into another downside slide this week.
TRADING STRATEGY -
If in those sectors, count yourself lucky. New purchases on pullbacks in key stocks in these groups (or buying the deferred out-of-the money calls) that are continuing to climb on positive earnings momentum is a question however. These sectors may not have the same risk to reward equation as earlier this year, but still have some further upside potential it appears.
Looking at some of these sectors in strong uptrends, I've estimated, on a technical basis, some potential further upside price targets: The Healthcare Payors Index ($HMO.X) closing at 610.79 today, in a very strong move, projects to as high as 734 on a big picture basis; Health Provider Index ($RXH.X), at 366.3 today, has potential resistance coming in around 386; if it breaks out above this level, it could carry to as high as 430; The Gold and Silver Index ($XAU.X)- at 73.94 may have potential resistance at 88-90, but a possible objective is the 100 area; Oil Services Index ($OSX.X) -- at 106.78 has some nearby resistance at 112, but a possible upside target to 116 with major resistance beginning at 135.
While there is greater risk the higher these groups climb, there appears to be further upside potential too. Use suitable stop points under prior downswing lows to exit, if these favorites reverse.
I have revised my expected trading ranges, as it seems more likely that the low side of my expected and broadest trading range must now include the February bottoms in the S&P and the Dow as the potential low end. If 1080 in the S&P 500 gives way, especially on a weekly closing basis, the idea that the market is in a basing pattern is called into question. The 9600 area in the Dow is the level of its February low, but the Dow is trading well above this area as it has outperformed the S&P since then. The equivalent area in the Dow to SPX 1080 is the 9900 area in the Dow Industrials. (10 points in the Dow have been equal to a 1 point move in the S&P.)
If SPX 1080 and DJX 99 areas are reached and not breached, we can begin to look at some Index call purchases and unwind some put strategies. If S&P 1080 is breached, we may be looking at the 1000 area as the next major stop on the bear express however. The next couple of weeks seem key.
ANTICIPATED BROAD TRADING RANGES:
S&P 500: 1080-1170. Short-term: 1080-1120
CHARTS TO WATCH -
S&P 500(SPX) Weekly -
The key area here is clear. SPX holds the 1080 area at its February low or, there is just "air" underneath as far as possible major buying interest -- until we get down to the 970- 1000 area, where the market bottomed back in September.
Dow Industrials (INDU) Weekly -
You often hear various media talking heads on CNBC say that such and such chart is a "good looking chart". The weekly Dow chart is NOT a good-looking chart, IF its broad downtrend channel continues to define the broad trading range. You can make a bear case for an eventual move to well under near support in the 9900 to 9600 area -- such, as down to the 9000 region. Time will tell. Right now I am not THAT bearish when looking at each of the 30 individual stocks in the Dow.
OIL POLITICS - THE WILD CARD IN THE MARKET
"Normal" fundamental concerns at this juncture in the Market, center on fear and loathing type selling related to the earnings disappointers and concerns. However, there is also a political and economic wild card.
The chart breakouts and accelerating upside momentum in the oil services and in gold stocks in the past couple of days, plus a firm oil index -- recent pullbacks in the Oil Sector Index ($OIX.X) stocks nevertheless see the index holding its 50-day moving average -- speak to a bigger, backdrop fear: that of the Arab countries unleashing their oil weapon.
A oil sales boycott would of course raise havoc with our SUV rich culture. If used, the oil card could send our emerging recovery into a tailspin and the improving earnings trend with it. What would happen to the market then - are we then looking at Dow 8,000 again, or what?
Not to be an alarmist, but just to note that this worry is starting to creep into the forefront of the brains of already stressed market participants, rather than remain a hidden fear. Exposure was given to the Mid East bogeyman in a widely quoted New York Times article today titled "Saudi to Warn Bush of Rupture Over Israel Policy". The NY Times has a influence way beyond the confines of the Isle of Manhattan.
The article indicated that Crown Prince Abdullah of Saudi Arabia was anticipated to tell President Bush at their meeting today, that the strategic relationship between their two countries will be threatened if Mr. Bush does not moderate his support for Israel's military policies. "In a bleak assessment, he said there was talk within the Saudi royal family and in Arab capitals of using the 'oil weapon' against the United States, and demanding that the United States leave strategic military bases in the region."
This is not to say that this will happen, but these are the MOST responsible and influential Arab leaders putting out word that they cannot resist the more radical politics of their Arab "street" forever. Arab TV shows images day after day of destroyed Palestinian areas. Unless you have lived in this part of the world, and I speak from 3-years experience of living in Iran (and speaking Farsi), this is an emotional hotbox issue in a part of the world where emotions can dominate, more than the "rational" West.
The article goes on to quote sources close to Abdullah that Saudi Arabia's recent assurances that it would use its surplus oil- producing capacity to blunt the effects of Saddam Hussein's 30- day suspension of Iraqi oil exports could quickly change. Having been a student of politics all my life, I know that when national interests diverge radically, such as is implied by this article, all bets are off. We know we are vulnerable. Who knows, we may end up being totally dependant on our newfound friends, the Russians.
ALL THAT GLITTERS -
"We're in the second stage of a raging market for gold, and eventually silver and palladium will follow," according to James Dines, who has been one of the best known advisory services that covers the gold mining companies. Jim is a well-known gold bug -- like my friend Bernie Savaiko, PaineWebber's metals analyst. Once a gold bug, always a gold bug, speaking from experience with this unusual breed.
Thom speculates in his article, that the greenback has been the preferred safe haven by international worryworts for years, but this may be changing as our stock market sinks and Asian investors, who traditional held gold as a storehouse of value, get back on this glittering bandwagon.
I hear from friends now who think investing in a gold fund may be the way to go to beat the sinking stock market. I tend to think that where there is smoke there must be fire. I trade technically, but think that technicals are driven by fundamentals - its just not always immediately apparent what all the fundamental influences are. So, my bearish view on gold is subject to the market telling me otherwise.