Is October Synonymous with Bottom?
The Dow set a multi-year low on Thursday, only to rally 700 points from Thursday's low to Friday's high and post its first weekly gain since mid-August. Additionally, volume on the NYSE on Friday was an impressive 1.8 billion shares. More impressive was the fact that advancing issues represented almost 90 percent of volume.
Gains in the Nasdaq was equally impressive, as the tech-laden index rose 10% from its low on Thursday and, like the Dow, closed above its 22 DMA (1199). Volume on the Nasdaq was 1.7 billion, while up volume swamped down volume by a ratio of over 4:1. Unlike the Dow, the Nasdaq engulfed the "real body" (candlestick term meaning range from open to close) of the prior two weeks.
The headline catalysts on Friday included in line earnings from GE and an upgrade of IBM from Lehman Brothers. GE's 3Q earnings reportedly rose 25% as NBC television and the sale of their Internet commerce unit managed to offset weak demand in aerospace and power markets. Shares of GE rose $1.61 to $24.21, but failed to test its 22 DMA (25.32).
Shareholders of IBM were rewarded following a Lehman Brothers upgrade to "overweight" from "equal weight". The investment house noted that third-quarter earnings for IBM should be in line with estimates, adding that information technology spending by corporations should improve in 2003. Shares of IBM on Friday rose $6.34 to $63.92 and above its 22 DMA (62.52).
Another company making headlines was Intel (INTC), ordered to play at least $150 million in damages after a Texas-based Judge ruled the company infringed on patents held by Intergraph (INGR). Intel can appeal the ruling, and has already asked the Judge to reconsider his ruling. Shares of INTC rose 1.04, or 7.33%, to 15.22 and broke above its 22 DMA (14.72) for the first time since late-August.
These developments seemed to be the catalyst for the Dow rising almost 170-points during the first 10 minutes of trading. Other developments include weakness in the bond market and a strong rally seen in Semiconductor, Airline, and Retail Stocks. Just before 2 p.m. (EST), the Dow was at 7900 and fueling speculation that this rally was more than just traders covering shorts.
Speaking of the bond market, a rumor on Wednesday began to circulate regarding George Soros buying a significant amount of U.S. Treasuries. Reasons for sizable purchases included the fact that the European Central Bank (ECB) would lower interest rates during their meeting on October 10th. When the ECB kept rates unchanged, Treasury Bonds began selling off from a high of 114-18 on Thursday to 112-03 during trading on Friday. The December 30- year settled on Friday down 1-14 to 112-10. The question is: If Soros was selling Treasuries (and most likely buying stocks) on Friday, are there more bond contracts to be sold during trading next week?
As the bond market came under selling pressure, some securities fell into the red as well. One of those was Lucent Technologies (LU), losing 17% to 0.58 following news that the company will report a wider-than-expected loss in the fourth quarter, cut 10,000 more jobs, and take billions in charges for severance and a decline in its pension assets. The company also said it canceled a $1.5 billion credit line to avoid a likely technical default.
Largely ignored on Friday were economic reports covering inflation on the wholesale level, retail sales, and a preliminary October Michigan sentiment report. U.S. wholesale prices rose 0.1 percent last month after an unchanged reading in August, according to the Labor Department. The "core" PPI, which strips out volatile food and energy costs, also rose 0.1 percent in September following a 0.1 percent drop. This reading seems to fall into the category of "not deflationary or inflationary"; so traders apparently looked elsewhere.
Overall retail sales, according to The Commerce Department, reportedly fell 1.2 percent in September, mainly hindered by poor automobile sales. Excluding autos, September sales actually rose 0.1 percent. Then, at 9:45 a.m., the University of Michigan preliminary sentiment reportedly fell to 80.4 in October and a new 9-year low. September's reading came in at 86.1. The equity markets momentarily sold off following the Michigan report (10- minutes and 53 points); however, bulls were relentless and kept the buying enthusiasm in tact.
Speaking of reports, next week will feature a significant number of bellwether companies reporting earnings. Below is a list of only a few of the notable names. On Monday FNM reports before the open, while MYG is scheduled to release earnings after the close. Tuesday features companies such as BAC, ONE, BBOX, C, FITB, FRX, FCX, GM, JNJ, LLL, and WFC; all before the open. After-the-close on Tuesday includes AMCC, DCLK, HDI, INTC, ISSX, MOT, NVLS, RFMD, and TER, all after the close.
Earnings on Wednesday will highlight companies including BK, BA, CAT, KO, FBF, F, GD, GENZ, HON, HI, JPM, MER, PFE, RETK, USM, WHR, and WB, all before the open; while AMD, AKAM, AAPL, CDWC, CLS, IBM, IWOV, MACR, QLGC, RSAS, SEBL, SYMC, and VIGN are set to report after the close on Wednesday. Thursday is busy as well, with BOL, BAX, CEN, CAL, CY, EMC, FO, GP, KEY, MAT, NYT, NOK, MO, PNC, PPG, S, LUV, and UNH all before the open. After-the-close involves ATML, ELY, CPWR, EBAY, GTW, HAND, MERQ, MSFT, NT, PBI, PMCS, DGX, RATL, SFA, FON, SUNW, SY, and XLNX. On Friday, BGEN, ERICY, MRK, and TLAB are scheduled to report earnings before the open. Busy, to say the least.
Economic reports scheduled next week includes September housing starts on Thursday, with economists' forecasting a 1.636 million number versus 1.609 million in August. Also on Thursday the Federal Reserve releases industrial production and capacity utilization figures for September. Forecasts are for industrial production to rise by 0.1 percent, after dropping 0.3 percent in August. The capacity utilization is expected to come in at a relatively low 76 percent.
The Philadelphia Fed report, scheduled for Thursday, should be a solid leading indicator since it covers the month of October. Economists expect it came in at 2 against last month's 2.3. Zero is the break-even mark for growth at the region's manufacturers.
On Friday, the trade balance for August is scheduled. Economists predict a larger trade deficit to 35.2 billion from 34.6 billion the month before. Also on Friday the consumer price index (CPI) will be released. Economists think it grew by 0.2 percent, lower than August's rise of 0.3 percent.
Note: The US fixed income market is closed on Monday, while Canadian and Japanese markets will be closed as well.
Time for some illustrations. We begin with the Dow, which closed higher on Friday by 316 points, or 4.20%, to 7850. Following the rally seen on Thursday and Friday, is it time to talk about a bottom? As the chart shows, the Dow appears to be overextended by being above both its 22 DMA and daily regression channel; however, shorts might be patient and wait for prices to fall back below the 22 DMA and into the channel before becoming aggressive again.
The objective to the upside is three-fold. As the chart explains, the Dow managed to get back inside a monthly regression level (profiled last Sunday) and technicians will now have a long-range projection of near 8900. For shorter-term traders, psychological resistance is at 8000. For those following moving averages, traders will most likely look for a test of the 50 DMA (8187). When do all of these bullish projections get nullified? Most likely when the Dow trades back underneath 7532.
Chart of the Dow Jones Industrial Average, Daily
With yields rising on Friday more than any other day of the year, traders will once again watch the bond market for confirmation of a move in equities. A chart of the cash bond shows yields now above both its 22 DMA and top of regression channel. I believe the key will be (1) earning developments, and (2) possibility Soros is not done selling Treasuries and rolling cash into stocks (note: unconfirmed rumor). Nevertheless, clearly there appears to be a shock to the bond market that cannot be ignored. The objective should be for yields to test the 50 DMA, while a move back under the 22 DMA will most likely bring back all investors who exited during the last few days.
Chart of the 30-year Treasury Bond, Daily
How are technology stocks looking from a technical perspective? After Friday's rally of 47-points, or 2%, to 1210, this tech- laden index now sits above its 22 DMA (1199) and two prior relative lows set a couple months back. Note: Since March, every time the Nasdaq rose above its 22 DMA, a test of its 50 DMA occurred soon thereafter. The one exception was on September 11th. MACD has crossed higher, indicting a change in momentum; however, resistance above is numerous. A descending trend line, the top of its regression channel, and its 50 DMA; all located within the next 50 points higher (1260). If the Nasdaq falls back below 1200, shorts will most likely become more aggressive.
Chart of the Nasdaq, Daily
How about the highly-watched volatility index? Following Friday's 6% loss to 43.55, it would first appear optimism is gaining in strength. However, a further look only places the VIX at the bottom of a well-defined upward channel. Therefore, I would wait until the index trades underneath 41 before expecting a significant decrease in the amount of market pessimism.
Chart of the Market Volatility Index, Daily
One other highly-watched index that also appears to be at the bottom of its upward channel is the US Dollar. With the Greenback underneath its 22 and 50 DMA's, the possibility of a breakdown under 106 continues to enter traders' minds. If this index can manage to rise above 108, shorts should start covering and the likelihood of solid dollar-denominated buying will begin to take root. Note: Higher dollar should mean higher equity prices.
The last chart is "food for thought," since the month of October is far from over and the monthly "hammer" (significant reversal indicator) formation cannot be considered successfully achieved. Nevertheless, if October ended today, technicians would clearly look at this pattern as an attempt by bears to "gauge possible depth" of the bottom before covering shorts and allowing bullish sentiment to take over. Note: The last time a "hammer" formation was seen in the Nasdaq, the market went on to rally thousands of points higher. Ok, I don't expect the same magnitude this time; nevertheless, this "hammer" formation should increase a trader's odds when placing a trade to the long side.
Chart of the Nasdaq, Monthly