Volume is Back!
Unfortunately it was all down! For all U.S. markets the total down volume at 2.7 billion swamped up volume of only 548 million. Traders came back to news of an apparent Iraq capitulation and were faced with covering shorts in an exploding market. Once the Iraq news was called into question those same traders piled on the shorts again to recover their lost profits.
It was an ugly day after about 9:40. All the good news for the bulls was sold with abandon by institutions looking for an opportunity to raise cash and get out of stocks. The bad news started with the Industrial Production numbers which came in much lower than expected at -0.3% instead of estimates for a gain of +0.1%. This was the first decline in production in seven months and shows that the economy is rapidly coming to a halt. Construction was the only sector to post an improvement. Business equipment has now declined two months in a row. The risks to the economy are definitely to the downside as the Fed would say. There was slightly more than a 10% chance of a rate cut by October yesterday. After this report and the JPM warning tonight those chances should get much better tomorrow.
We had earnings warnings from almost every sector today and those warnings helped add speed to the bursting Iraq bubble. McDonalds lead the parade with a McWarning, the 6th in the last two years. Store traffic is down, sales are down, competitors are kicking Mcbutt with the 99 cent menus. MCD fell to 18.91 and a seven year low. Who says there is no recession? (grin)
Kroger (nyse:KR) missed analyst's estimates for the quarter and lowered estimates for the year. The slumping economy was the major reason along with increased competition. ToysRus (nyse:TOY) was cut after analysts were told that buyers were cutting nonessential inventory for the 4Q and reducing the number of toy lines carried. It appears that inventory levels are too high for the current and expected holiday sales levels and TOY is going to cut the expected losses early. BBY hit lowered estimates this morning but said profits would be flat the rest of the year. They said sales of big screen TVs and DVD players are slowing due to worries over unemployment and the market. Schwab (Nyse:SCH) warned that retail trading volume was dropping significantly as traders closed accounts and bailed out of the market for safer investments. They were cutting another -1800 employees and earnings were going to suffer.
I could go on but you get the picture. Chips, healthcare, food, restaurants, brokers, banks, software, toys, retail and insurance all saw earnings warnings today. After the bell the carnage continued. Oracle (nasdaq:ORCL) announced earnings after the bell and while they hit the proforma seven cent number analysts were expecting they missed the revenue numbers. Oracle said it is still difficult to forecast future revenue and with license revenue down the outlook is not positive. New license revenues were down -24%. Larry Ellison said businesses around the globe were still reluctant to spend for IT until economies recovered.
Even more detrimental to trading tomorrow was a high profile warning from JP Morgan (nyse:JPM). They warned that 3Q earnings would be significantly below 2Q levels. They blamed higher corporate credit losses, weaker trading losses and higher reserves for non-performing assets. They only made $100 million in trading profits for this quarter after $1.2 billion in the prior quarter. (You thought swing trading was hard?) They said they had $1.4 billion in credit losses for the quarter and were going to lose another $1 billion in questionable credit assets. Analysts had expected $.54 cents per share and now the guesses are anywhere between zero and $.25 cents. This knocked the bottom out of the futures which were down -8.00 in after hours.
Iraq news after the bell is starting to show cracks all ready. After the inspectors said they could be in Iraq by tomorrow the Iraq authorities said no! We will meet with you in Vienna in about ten days to discuss the terms of the inspection. Terms to an unconditional offer? It appears Iraq wants limited teams, closely watched, inspecting military sites only and lasting only a "matter of days". Unconditional? The only unconditional thing about this offer is that it will not fly. Iraq saw the pressure building and is trying to buy time. If they can delay the process several months then it could delay the war up to a year before the weather would be right again.
Traders came back to work with a vengeance today and the result was a 5:1 down volume day. The negative news tonight will apply added pressure at the open tomorrow. Support appears to be in the OEX 436, SPX 870, Dow 8050 level. This is not that far below where we closed today. The TRIN closed at 2.81, VIX at 41.98, VXN 60.39 and the put/call ratio at 1.20. These are all levels that indicate strong fear in the market and a possible bounce ahead. Unfortunately these were closing levels and with the ORCL/JPM news they could become even more oversold at the open. I have made the mistake many times of seeing the market close deeply negative, have more negative news after the bell and just when I turned severely bearish in my outlook have it rally at the open. I don't think that will happen tonight but with support just below us there is a good chance the bulls will buy the dip again. I think that any bounce is just another opportunity to get short again but my main point is that I would not be surprised to see us not go straight down. Bottom line, if you are short, stay short. If you are not short look for a failed bounce and get short. The next two weeks will be heavy with earnings warnings and there will not be many opportunities for good news. The best we could hope for is a rate cut from the Fed next week and that is only a slim chance tonight. The bears are on a feeding frenzy prior to hibernation and they are far from full.
Enter Very Passively, Exit Very Aggressively!