It took a painful week but investors are right back where they were this time last weekend. Actually the major averages are lower than they were last week. The Dow lost -66, the Nasdaq -12 and the S&P -18. Cisco who? The supposedly stellar earnings on Tuesday sent shorts running for cover and produced a +300 point gain. Maybe they should have read the earnings first instead of listening to CNBC. Once traders realized orders were still dropping and those earnings came on cost cutting efforts and sales of inventory written off over the last year they went back to business as usual, shorting tech stocks.
The surprising drop in the PPI on Friday provided no relief for the markets as traders were focused instead on news that IBM was going to layoff 8,000-9,000 more workers. All the talk that maybe a recovery was under way was suddenly called into question. If a recovery was just around the corner why would IBM be cutting its workforce so drastically? The answer is clear. The recovery is missing in action and the IBM CEO was not kidding earlier in the week when he told his employees that growth for 2002 and 2003 could be flat to less than 10%. Surprise! This caused traders to reflect on the Cisco earnings again and several tech warnings for the week.
Debt downgrades for a major Nasdaq stock, WCOM, did not help either. Not that WCOM is a bigcap stock any more at $1.59 a share but cutting their debt to junk cast yet another pall over the telecom sector. Chip stocks completed a two day slide and were instrumental in tanking the Nasdaq. Microsoft fell over -$2 to close at $50 again. Microsoft's slide was prompted by news that the EU may exact stiffer penalties from IBM than the US may get. They are still talking about an unbundled browser and removing Media Player from Windows. Microsoft get 25% of its revenue from the EU states. Intel continued to lose ground after CEO Barrett said contrary to wishful thinking sales for the 2Q would be flat due to lack of demand. QCOM lost -1.54 on worries that the economic slowdown would delay acceptance of their new technology. Sounds like the Nasdaq is still bleeding from a thousand cuts, none serious this week, but each extracting a painful toll.
The economic results this week boiled down to more of the same. The 1Q was purely inventory replenishment which carried over to the 2Q in some areas. The 3Q/4Q are still a black hole of unknowns and every day brings us close to earnings disappointments if something does not start happening fast. Retail earnings will be the focus next week and we will see if those better than expected 1Q sales were at the expense of profits and if the guidance is a slowing consumer ahead.
Next week could be another tech wreck. IBM holds it's biannual analyst meeting and already there are rumors they will lower guidance again. Their meeting is on Wednesday. On Thursday TXN will hold it's analyst meeting and update them on the state of the chip sector. Should they guide expectations to slower growth the outcome would be a disaster.
The Wednesday rally turned into the feared one day wonder and a perfect example of rampant short covering. The slide below 10000 on the Dow is a psychological blow for the retail investor and the odds are strong they will withdraw to the sidelines as May drags by. Already indications are of an investor drought as TrimTabs.com reported a net outflow of -$2.4 billion in week ended Wednesday. It was not just the Nasdaq or the Dow having trouble this week. The Russell-2000, the star of the show recently, dropped to a new two month low of 492.73. This is -31 points from the April high and shows that buyers are leaving the market in droves. Declines beat advances 2:1 on moderate volume. Unfortunately most of that volume was down. 1.182 billion shares on the NYSE were down compared to only 196 million up volume. Now that is really ugly. GE, once the Dow leader is struggling to hold over $30. A failure of that level would send a very negative signal to other Dow holders.
The good news at the close was the TRIN at 2.62 showing a strong oversold condition and the VIX at 25 nearing a buy signal. These are straws, I know, but they do show the internal health of the markets. Around the office the view was mixed. Bailey was trying to sell the concept of a stealth Nasdaq rally next week and Leigh is still promoting the consolidation base in preparation for the next leg up. Hey, I hope they are both right but with the tech downtrend firmly in place despite the Cisco news, what will turn it around? Earnings are over and I can't imagine IBM will change its spots on Wednesday. They will try to put a positive spin on a dismal outlook but will the analysts believe it? I doubt it.
The Dow is trapped in a range between 10100 and 9800 and if I had to bet on which side broke first it would be the lower number. It has been tested four times and next week could provide the fifth. The S&P hit a seven month low on Tuesday before posting a +40 points gain which has all but disappeared. That low at 1048 is only 7 points away. The Nasdaq's Tuesday close of 1574 is only 27 points away and that was a six month closing low. My point in this is simple. If a monster short covering rally can't energize investors for more than 6.5 hours then what will stop this skid next week?
Economic reports next week will provide only comic relief as analysts attempt to spin them for maximum impact. Wednesday is the CPI and Industrial Production. Thursday Housing starts and Friday the Consumer Sentiment again. Personally I would be more afraid of IBM on Wednesday than all of those put together. My entry points for buy and hold traders are several days out of range, 10100/1700/1090. What it means is it would take several bullish days of price movement to trigger those levels. Buying any bounce between here and there is asking for trouble. Those levels have failed several times and there is nothing to indicate they would not fail again. Fortunately we don't have just one card to play. We can play the trend to the downside just as easily as we play the uptrends when they come. Remember those?
My suggestion for the week. If you are a trader there will be many opportunities. Check out the market monitor for even more trading ideas than are listed in the newsletter alone. Check out my daily Swing Trade suggestions in the Monitor. If you are not a trader I would be looking to buy a bounce off 9800 for the Dow and 1500 on the Nasdaq. Whatever you do please use stop losses because the odds of negative surprises far outweigh the positive ones. Keep those seatbelts fastened and trade in the direction of the skid.
Enter Very Passively, Exit Aggressively!
Editors Note: We are having a spring-cleaning sale at OIN. We have rounded up the last remaining video sets of the last seminar consisting of 10 four hour VHS cassettes and workbooks. I think we now have four or five left. These are the next best thing to being there. This seminar had over a dozen speakers including Austin, Jeff, Eric, Jim, Tom DeMark, Jon Najarian (Dr J on the CBOE), Tim Taylor, Dick Arms, Lindsay Glass, Buzz Lynn, Jeff Wright, Jim Crimins, Rance Mashek, Harry Browne, Mark Skousen. Over 40 hours of option teaching.
Also we have a couple dozen of the year end special CD/Workbooks available. This is the five special reports with several hundred pages of indepth teaching. Jim, Austin, Jeff, Steve and Eric. We have delivered several thousand of these to rave reviews and only have a couple dozen left. Don't miss out!
Act fast because there are no more. When they are gone they are GONE!