Key Reversal Day?
Traders woke to a full basket of news to be digested before planning their trades. Much of that news at first appeared to be positive. Television networks trumpeted the announcement that Iraq had invited the U.S. to inspect weapons sites. They did, but they accompanied that invitation with a taunt. Futures at first reacted positively, but a close reading of news articles left little reason to believe that weapons inspectors would soon be packing their bags.
After Bush's Monday speech, the White House released satellite photographs of two former weapons sites, showing evidence that Iraq was rebuilding them. The Defense Intelligence Agency later released information about two more. The so-called invitation to visit those sites came accompanied by a challenge from Iraq's Minister of Military Industrialization, Abdel Tawab Mullah Huweish. Claiming that he's in charge of weapons programs, he denied developing weapons of mass destruction, but threatened, "If the Americans commit a new stupidity, we will teach them a lesson that they will not forget." The White House announced that Iraq didn't make those decisions. The U.N. did. Suddenly, the headline news didn't sound quite so positive, a conclusion reinforced by later news that U.S. and U.K. planes had fired on Iraqi planes in the no-flight zone, a common occurrence these days. To add to negative sentiment, newscasts later referred to an FBI alert that terrorists may have planned other U.S. attacks. Also, the French tanker that exploded in Yemen contained fragments of another ship, seeming to confirm one eyewitness report that a fishing vessel had drawn up to the tanker before the explosion. This lends credence to the theory that the explosion was a deliberate act of terrorism. Later in the day, the House passed a resolution authorizing an attack on Iraq, if needed. The Senate will begin deliberations this evening.
More positive were YHOO's earnings and Aetna's pre-announcement. Futures steadied. Initial jobless claims were released. Those claims fell 40,000, to 384,000 versus the expected 405,000, and continuing claims fell, too. These numbers buoyed the markets, even though that surprise jobless claims number perhaps wasn't so great a surprise. Before the announcement, a Bloomberg television commentator mentioned that the first week of a quarter often surprised to the positive side.
Bloomberg also mentioned that Q3 earnings growth expectations for U.S. companies had been lowered significantly to 5.5%, and that this lowered expectation would dampen enthusiasm for stocks. Also tempering the enthusiasm were the Merrill Lynch downgrade of GE, the news that the ECB and Bank of England had maintained their benchmark rates, and the news that the Nikkei had closed below 8500 for the first time since June 1983. Although the Nikkei closed down 99.72 points, at 8439.62, it had briefly moved below 8200 and bounced from that area. Little did traders know that our markets would stage a similar rebound.
Early on, it looked as if the big C-day (capitulation) had finally arrived. Sellers drove the SPX below July lows of 775.68, to 768.63. The DJ Industrials dipped below 7200, and the COMPX came dangerously close to 1100, at 1108.49. The long- dreaded break of those S&P 500 July lows instead triggered a wave of buying that kept adv/dec lines positive all day. Perhaps coincident with a Fed announcement of a net infusion of $4.5 billion; a strong dip in gold; an announcement of share buy-backs by several companies, and a sell-the-rumor, buy-the-fact reaction to weak retail earnings, markets bounced. Hard. The DJ Industrials climbed more than 100 points in twenty minutes, and zoomed up 250 points within an hour. At its highest level, the Industrials were 363.50 points higher than the lowest, although the Industrials closed a bit off that high.
Was this buying yet-another bear market rally or the start of a new trend? Recently beaten-down sectors proved to be some of the biggest gainers. Usually that hints at short covering, and the markets were certainly long overdue for a short-covering rally. Those previously beaten-down sectors included the banks, brokerages, semis, utilities, and telecom equipment companies. Even retailers gained, despite rather dismal outlooks for most. Gaming stocks, which had been doing well, were among the biggest losers.
By the end of the day, some traders were talking about a key reversal day. What is that? A key reversal day comes at the end of a long trend, such as our current down trend. Markets move quickly to new lows (or highs, if it's a reversal of a move up), but then reverse from there. Technicians say big price ranges characterize key reversal days. Prices may move as much during the first two to four hours as they do during several days' worth of trading. Today's action met that test, although big price swings aren't so uncommon lately, and not uncommon at all in a bear market rally. An explosion of volume also usually accompanies a key reversal day. Volume was higher today than in recent days, with NYSE volume at 2.05 billion shares and the Nasdaq 1.83 billion shares. Although this was moderately heavy volume, I'm not sure I'd qualify it as an explosion of volume, so today's action might not have met that part of the test of a key reversal day.
Let's see if the charts can clarify today's market action. Tonight, I'm going to use the OEX candlestick chart as a proxy for all the major indices, since their charts look similar. One reason for using the OEX chart rather than the SPX chart is that the OEX has not yet tested its July lows, unlike the other indices. On the chart, I've indicated another big-range day on October 1. That October 1 candle seemed to be forming the third candle in a morning-star pattern, another reversal pattern, yet the next day saw the sell-off continue. Like the October 1 candle, today's candle kept the OEX firmly within the descending channel that has been forming since mid-August. As bullish as today's action seemed, it hasn't yet proven that the overall trend has changed. While the RSI and stochastics appear to be showing bullish divergence (lower prices on the OEX while RSI and stochastics reach equal or higher lows), the RSI also appeared to be showing bullish divergence at the time of the October 1 bullish candle. In my opinion, the jury is still out on a trend reversal. I'll watch for a rollover or a (sustained) breakout when OEX hits that upper trend line again before I change my mind about the overall trend.
OEX Daily Chart with RSI and Stochastics:
Tomorrow may tell the tale. Potentially market-moving events include GE earnings, expected before the bell. In late September, GE affirmed that it expected to meet third-quarter earnings projections of $.40 per share. However, the company soon revealed that the proceeds of the sale of Global eXchange Service unit helped the company to meet those projections. Within days, several brokers cut their outlooks for GE. Merrill Lynch cited concerns over the finance and short-cycle plastics units, and they projected their outlook concerns into 2004, when turbine sales are expected to fall. On Wednesday, Scott Davis at Morgan Stanley joined the band and lowered 2003 earnings projections to $1.70 a share from $1.79. Like the Merrill Lynch broker, he mentioned short-cycle businesses, and noted problems in power and aerospace businesses and losses in GE Capital's portfolio. His use of the term "perfect storm" with relationship to this bellwether stock didn't bode well for the future outlook. Today, Merrill Lynch's analysis led them to downgrade GE to neutral from buy. Even with today's slight bounce, this stock has lost 5.40 points since late September alone.
Tomorrow morning also sees the release of important economic numbers: PPI and retail sales (September numbers, released at 8:30 ET) and preliminary Michigan sentiment (October number, released at 9:45 ET). Forecasts are for PPI of 0.1% (previous 0.0%), core PPI of 0.1% (previous -0.1%), retail sales of -1.0% (previous 0.8%), retail sales ex-auto of 0.4% (previous 0.4%), and preliminary Michigan sentiment of 85.5 (previous 86.1). Since the PMA lockout of the dockworkers occurred on Sunday, September 29, those September retail sales figures will not reflect the majority of the damage inflicted by the lockout, but that doesn't mean the numbers will be rosy.
Evidence of weakness mounted this week. In Monday's Market Wrap, Steven Price reminded us that that retailing giants repeatedly missed same-store sales numbers throughout the summer. Also on Monday, the August Consumer Credit report showed $4.2 billion in credit, rather than the expected $11 billion, perhaps another indication of a slowdown in consumer spending. Tuesday, Redbook reported that its chain store sales index fell 0.7% in September. Wednesday, retailer American Eagle warned for Q3 and Q4. Although AEOS mentioned the problems caused by the West Coast lockout, they also blamed the weak retail environment. This morning, CIBC downgraded the company. Also this morning, Talbots reduced its outlook for Q3 and Q4, citing a customer research study that indicated "a significant increase in customer concern regarding the turbulent economy and volatile stock market." Federated Stores lowered their outlook. BJ's Wholesale and Men's Wearhouse both guided below consensus. Wal-Mart met same-store sales figures, but those figures had been previously lowered. Costco topped earnings, but revenues were shy. Dillard's September same-store sales were down 5%, and Ann Taylor reported weak September sales. Gap's and Brown's Shoe Stores same-store sales were down. Kohl's same-store sales fell and they warned that earnings would be lower than expectation. Eddie Bauer same- store sales were down significantly. J.C. Penney's reported a 3.1% decrease in comparable-store sales. I list these numerous results to emphasize how troubled this sector remains. I could list more.
The question remains whether this grim outlook has already been priced into the market. The daily RTH (Retail HOLding Company Depository Receipts) chart shows the damage done by the lockout, but it also points out the difficulties the retailers were experiencing even before the end of September. The double top predicted a minimum downside target of 70 in this index, a target that has now been exceeded. However, the chart also indicates a gap that occurred in the middle of the movement down from the second of the double tops. Such gaps are often called measuring gaps, because the movement that occurs after these gaps is often roughly equal to the movement before the gap. If that's true in the case of the RTH, this holder may have reached the target indicated by that measuring gap.
RTH Daily Chart with RSI and (5)(3)(3) Stochastics:
Continued warnings of lower same-store sales from retailers offer a gloomy prospect, but this week's earnings have already presented most of the gloomy picture. I wouldn't be surprised to see some rebound with upward resistance tested, but the retailers are going to have a hard time breaking through that overhead resistance. As Jim commented last week, the temporary resolution of the PMA lockout of the dockworkers doesn't undo the damage. First, the judge hasn't yet approved the use of Taft-Hartley. Second, even Taft-Hartley is a temporary resolution. Also, the backlog of containers still needs to be unloaded, and perishables may already be spoiled. The CEO of Mega-Toys was on television today, and commented that he didn't see a single container on the road when he drove into work this morning. The lockout occurred because of a slowdown, and nothing ensures that dockworkers won't stage another slowdown.
Beyond these concerns lies another. We haven't yet had an all- out capitulation day. Why do our markets need a capitulation day? Because Art Cashin says so. Well, it's not just Art Cashin. On Bloomberg television this morning, one fund manager confirmed that he wasn't buying equities until the VIX moved strongly over 50. While I tend to trust my own studies and instincts, I've learned to pay attention to people who've survived several market turns. There's a more prosaic reason, too: until seasoned participants believe that all weak hands have been flushed out of the system, they will continue selling into rallies. While we may see a rally for a day or two, and I recognize that one of these rallies will be THE rally that changes the trend, I'm still waiting for the markets to convince me that they've begun a new trend.