Bullish Sentiment Elected
It is far too soon to know how the political elections turned out but traders elected to be bullish again today. It is unknown what is powering the sentiment other than the overwhelming assumption that the Fed will cut rates on Wednesday. Early comments from the election reporters seemed to indicate that gridlock would remain and that means no immediate danger to the status quo. It appears bulls are celebrating in advance on both counts.
There was good economic news this morning if you call a smaller than expected drop in the ISM service numbers good news. Analysts were expecting a drop to 51.8 for October and the real number came in at 53.1. This was still a drop in the rate or growth but just not as bad as expected. This is just another indicator that the mid-year recovery is continuing to slow but not at the same rapid pace.
The recent rally in the market has brought out a flood of analyst downgrades based on valuation. The common theme appears to be that the unexpected bounce in most stocks has propelled them well over what the lowered earnings expectations would support. They were eager to recommend them four weeks ago but are now aggressively cutting them while they are profitable. Some of the stocks downgraded on valuation today were ADP, IBM, AXP, LXK, ADNE, YHOO, NXTL and TLAB. Many stocks have come too far too fast and we are starting to see an undercurrent to the bullishness that wonders how much farther the market can go without some positive economic news.
Circuit City added to the negative sentiment on the retail sector for the holidays with a strong warning. The Chain Store Sales Snapshot released today also showed a continued slide in sales and projected a weak number when Retail Sales are announced on Thursday.
AMAT was instrumental in knocking the chip sector for a rare loss today with their news of a -1750 job cut and dismal outlook last night. KLIC added to the gloom today by saying they were looking into selling non-core assets to reduce costs and conserve energy until a recovery appears. However, traders bought the dip at 1:45 PM at the low of 307 on the SOX. It appears no amount of bad news can weaken the chip sector before the Fed meeting.
After the close today CSC announced earnings after the bell but warned that it was lowering their earnings outlook due to a continuing slowdown in technology spending. It blamed slack demand in the U.S. and Europe for consulting and systems integration for the shortfall. They lowered full year estimates to $2.60 from $2.73 to $2.88 a share. Since IBM and EDS are their primary competitors it would be safe to assume that those companies are having trouble as well.
Despite the election today the markets rallied to near Monday's highs with the Dow closing at 8675. Regardless of the election outcome the major hurdle in front of us is the Fed meeting on Wednesday and Cisco earnings after the close. The closer we get to the Fed meeting the more cautious the commentators calling for a 50 point cut are becoming. I have heard a greater number of analysts saying a cut will not matter which is a politically correct way of hedging their previous comments projecting a cut. I have beaten this topic to death but the bottom line is that the Fed has not said a word about the chances of a cut. This is very uncharacteristic of them but it could be due to not wanting to become an election target.
The bottom line is what can the Fed do "FOR" the market tomorrow? A 25 point cut is already priced in and would cause a sell the news event as traders captured profits. Since there is already a 65% chance that we will see a 50 point cut by December a 50 point cut tomorrow would mean there was nothing else coming until next year. After an initial pop on the news the markets would likely sell off as traders took profits and moved to the sidelines to see what will happen next. Of course no cut would be the worst option. The bottom line is that the maximum expectation has already been priced in and there is nothing the Fed can do to really juice the market. Of course with investors buying bad news recently it is entirely possible they buy the sell off on any news with an eye that things will get better by the end of 2003.
As a postscript to the Fed meeting the Cisco earnings after the close could actually be a bigger factor than the Fed. They have widely been expected to miss the revenue numbers with one analyst suggesting by -$200 million just this morning. Others think that because they did not warn they will hit estimates and raise guidance. Now that would be a surprise. However, a rumor from a company that buys a lot of Cisco products is that they could not get expedited shipments on products for the last month. This implies that they were out of inventory due to better than expected sales. There are other possible scenarios. They could have let their inventory shrink to avoid massive write downs like they have had to take in the past. Make only what you sell and limit exposure to obsolescence. Since most boxes take only a very small amount of time to manufacture it keeps you flexible. Another possibility could have been parts held up by the dock strike. Maybe the company was ordering the newer top of the line products where there is demand while the rest of the line was slipping. You can see it is very dangerous to speculate on market rumors.
The only speculation I can see making tonight would be that the market is very overbought and the chances for a rate cut have actually diminished over the last two days. In normal markets this would be the prime setup for a drop regardless of what the Fed did. That would be my outlook for tonight. Expect a possible bounce at the open if the CSC news does not tank IBM and then bleed points until the 2:15 Fed decision. Any bounce will run into strong resistance at 8725. I expect any good news from the Fed to be muted due to the Cisco news after the close. Nobody is going to want to go long with big bets with a Cisco time bomb only two hours later. Thursday all bets are off as it will be tech driven and depend on the Cisco guidance. Even if the stars align and the Fed and Cisco don't disappoint the resistance at 9050 is likely to hold until the economy shows signs of a recovery.
Enter Very Passively, Exit Very Aggressively!