An initially hard-to-interpret September payroll report tried to give bulls some hope during trading on Friday. However, it was not long before the pattern of lower equity and higher Treasury prices took over once again.
The Nikkei had closed above 9000 (9027), futures were mixed due to anticipated warnings from EMC and SGP, and November Federal Funds were showing a 100% chance of an ease by the Fed by the FOMC meeting on November 6th. Then the much-anticipated payroll report was released. .
The Labor Department reported a decrease in payrolls by 43,000 during the month of September, much worse than the 6,000 expected by economists. However, August's reading was revised much higher to 107k from the previous 39k increase. Also encouraging for bulls was a decrease in the unemployment, falling to 5.6% from 5.8, month prior. Economists were expecting a 5.9% unemployment rate, and it was only April when unemployment reached six percent.
Since the jobs report household survey during 2002 has been extremely volatile, traders' initial nervousness following the release was understandable. Therefore, did it make sense to simply follow the bond markets' lead (higher yields) and send equities higher? Some equity traders apparently thought so. The December 30-year Bond (USZ2), at 9:30 a.m., was trading at 112-14 and lower by 1 full point (32/32). Furthermore, it seemed as though fixed-income traders were also rushing out of five-year notes, freeing up cash for more productive assets, possibly including equities.
With the initial bid in stocks was unable to reach 7800 level (intra-day high of 7784) during the first few minutes of trading, traders evidently began to become nervous. This nervousness spread to the bond pits, as short covering quickly began to materialize. First 7000 in the Dow was taken out, then 7683, 7600, and then 7553. Selling pressure took place in the Nasdaq as well, with the index hitting new multi-year lows and solidly falling under the psychologically-important 1200 level.
By sessions end, the Dow had lost 188.79 points to close at 7528 on volume of 1.8 billion. This was the lowest close in the blue chips since mid-November 1997. Down volume beat up volume by a 6:1 margin, while decliners easily outpaced advancers by a ratio of nearly 3:1. Also noteworthy was that 364 stocks hit new lows as only 35 managed to set a new high. Turning to the tech-laden Nasdaq, the Index shaved 25.67 points to close at 1139 on impressive volume of 1.6 billion. Down volume handily beat up volume by a 4:1 margin, and only 16 stocks set new highs while 365 companies recorded a new low. The S&P 500 Index closed lower by 18-points, or 2.2 percent, but did manage to remain above the psychologically important 800 level (closed at 800.58).
With the Dow losing 2.5 percent during trading on Friday, sectors that underperformed the blue chips included Healthcare (-4.50%), Biotech (4.30), Utility (4.00), Airline (3.25), Semiconductor (2.90), and Banking (2.67) issues. Sectors showing strength included the Gold and Silver Index (+0.56%) and Treasury Bonds (0.16).
As far as specific companies are concerned, EMC was halted after the close on Thursday and initially took the storage sector down with it (QLGC, BRCD, and NTAP). On Friday, shares closed down 23.55% at 3.83 on volume of almost 70 million. Other companies that entered the spotlight on Friday included SAP, FDC, AMAT, CI, UPS, and MO.
Beginning with SAP AG, Lehman believes that the company should lower their annual guidance as overcapacity remains an issue while pricing in Europe continues to decline. Shares of this IT service provider fell 4.19% to 10.28. It was in mid-March when shares were near 40. First Data (FDC) made headlines when shares were downgraded to "underweight" from Morgan Stanley. Reasons included a material slowdown from Western Union within the next 12 months. Shares of FDC rallied on Friday from a low of 23.75 to close at 26.40 and higher on the session by 0.45 percent.
Morgan Stanley was also responsible for getting AMAT into the spotlight, since the investment house cut estimates for semi equipment stocks due to weak seasonality readings, lower utilization rates, and reductions to capital expenditure plans. AMAT, after having estimates cut for 2002-2004, fell 1.47% on Friday to close at 11.33.
Shares of Cigna (CI) lost over 10% to 62.18 after being downgraded by Salomon Smith Barney to "underperform". Company's 2003 estimates were cut to 8.10 from 8.90, while the price target on CI fell to 81 from 89. Salomon also cut 2003 estimates for United Parcel Service (UPS), worried about a weak retail sector and delayed profitability within their logistics unit. Shares of UPS fell 3.75% to 61.60.
With a few hours left in Friday's trading session, news hit the wire that a jury in the Los Angeles Superior Court ordered Philip Morris to pay 28 billion dollars as punishment for causing lung cancer of a California woman. At the announcement, shares were trading near 40. By the close, shares of MO had fallen 7.36% to 36.59 on massive late-day sell orders.
One other noteworthy event occurred late in trading as well, centering on the West Port strike apparently costing the US at least 1 billion dollars a day. The news was actually a rumor that dockworkers were nearing a settlement. Before the rumor, the Dow was near 7500; however, word of a possible settlement sent equities higher and blue chips to 7636 within 25 minutes. It would have been interesting to see the Dow's reaction to the rumor if stocks were significantly higher at the time.
Speaking of the Dow, a look at a monthly chart shows prices actually outside a regression line beginning in January 2000. This should signal to bears that oversold conditions exist; however, it certainly does not mean that a "third standard deviation" lower cannot materialize. The nice thing for traders is that there is a proverbial line in the sand: 7442 (give or take a few points, since stops could be just underneath).
Chart of Dow Jones Industrials, Monthly
It would be nice to have an RSI Bullish Divergence (RSI remaining high as prices set a relative low); nonetheless, the current 30.71 reading should have bears analyzing risk/reward going forward. If 7442 is taken out, there is a good chance this area will become strong resistance and market pundits, including myself, will expect an explosive move to 7000. Note: To get back inside the Regression line, the Dow would have to rise above 7689 (a downward sloping trend line, so this level will continue to fall). Once back inside this channel, shorts should be forced to cover en masse.
Turning to the tech-laden Nasdaq, new multi-year lows place the index solidly under 1200 and forcing technicians to use regression analysis for downside objectives (yes, the H&S formation on a daily chart can be used as well). Least resistance clearly remains lower for this tech index; however, the new relative low was accompanied by a relatively high RSI reading. This bullish divergence only means that shorts could potentially cover at any time. What level could be the catalyst for such a rally? I would look first at 1153 and then 1192. If such a rally fails to materialize and shorts remain aggressive, the downside objective according to the regression line comes in at 1000. Note: This 1000 level will decrease daily, since the regression line is downward sloping.
Chart of the Nasdaq Composite, Weekly
With earnings light next week and no real economic events due out until Friday, the catalyst during the second week of October may come from the Gold Index (XAU). Currently at a pivotal juncture, Gold is close to testing it 50% retracement from 54.67 to 77.34 (66) and currently under an intermediate support/resistance (read: pivotal) level of 67.48. On Friday, the XAU index rose 0.56% to 67.05. If 67.48 can be closed above during trading next week, enthusiasm in the commodity might pick up and a test of 72 (blue line) would become the near term objective. With the 22, 50, and 200 DMA's all converging near 70, there is a good chance an explosive move will take place (could theoretically be higher or lower). Therefore, before entering a trade, take a look at this commodity (which trades inversely to the dollar) in order to gauge risk.
Chart of Gold and Silver Index (XAU), Daily
Speaking of earnings and a light economic docket, notable earnings next week includes PEP before the open on Tuesday, while RMBS, RBAK, and most-importantly YHOO is set to release earnings after the close on Wednesday. On Friday, GE is scheduled to report before the market opens. Estimates for GE's 3Q Net Income is at 0.40 versus 0.33, year ago. Turning to the economic releases, the August Consumer Credit report is due out at 3:00 p.m. on Monday, and then there are no more releases until Thursday morning (only Initial Claims seems noteworthy). Friday's economic releases should take center stage, as Retail Sales, PPI, and Preliminary Michigan Sentiment numbers will be released at 8:30 and 8:45 a.m., respectively.
With the term "new multi-year low" becoming commonplace within financial publications, traders can continue to play the trend of lower equity prices; however, risk is certainly becoming high and tight stops have to be used effectively. Easier said than done, especially with the volatility index at 46.28 and bonds trading in a two-point range on Friday alone; nevertheless, as a trader, support/resistance lines have to be respected and used regardless of nervousness between market participants. Moreover, now could be the time to begin paying close attention to Intermarket relationships, especially bonds and gold issues. It only takes a second to pull up a chart of the December Bond (USZ2) or Gold Index (XAU) before pulling the trigger. This extra step could be the difference between capturing a sizable move or being caught in a vicious bear trap. Good luck.