The AMAT earnings after the bell yesterday were grim with guidance for another -20% drop in orders in the fourth quarter and a forecast for another 6-9 months of declining chip demand. Dell hit estimates which were raised twice in the quarter and said the fourth quarter was shaping up for another rise in revenue. Both companies are heavily dependent on the current economy but they appear to be living on different planets.
Dow chart - Daily
The AMAT news was grim but the chip sector soared to a huge gain on the bad news. The SOX was up +23.48 with many chip makers breaking out to a new recent high. Obviously if you want logic don't look in the stock market. The consensus appeared to be that the bad news was already priced in after the recent AMAT restructuring news and everybody expected worse. That leads us to the following assumption.
Dell posted what could only be called a remarkable quarter. When everyone else was growing +2% Dell grew +22%. They said they were continuing to steal market share from HWP and GTW and their server and notebook business was soaring. The server side of the business gained +27% for the quarter. Michael Dell said the fourth quarter was shaping for another +10% gain over the third quarter. Dell said business spending had stabilized and was no longer dropping.
This brought back memories of the Dell of yesteryear. Constant growth at the expense of others and continued branching out into other tech areas where its business model would give it the edge over competition. Dell said it was turning over inventory 99 times per quarter and that gave them a price and feature edge over the other box makers. The bottom line to this story is that Dell is firing on all cylinders and kicking box maker butt. This is a strong win for Dell but only Dell. The only positive thing Dell said about the market was that IT spending had quit falling. Dell is gaining share from rivals not from business expansion and increased capital spending. However, the news "should" be positive for Dell stock but it was trading down in after hours. Surprised? You shouldn't be. The strong gains Dell stock posted in the last month were based on Dell raising/affirming guidance twice during the quarter. The good news was already priced into the stock, which was trading at six month highs. In later news the COO said on the conference call that "we are not sure the industry is going to see a particularly strong Q4 and that is the big question mark in our outlook. "IF" we see better industry numbers then we could do better." He must have been listening to the IBM call yesterday.
Now for the assumption. If AMAT trades up after posting a grim quarter AS EXPECTED then should DELL trade down after posting a strong quarter AS EXPECTED? Dell dropped -$1 in after hours and Nasdaq futures were down -4.50 in early trading. This is of course temporary and tomorrow is another story. With the extreme bullishness exhibited today I would be surprised if the "business spending has stabilized" comment did not fuel some more gains.
Bad news equaled good news again. The bad news was that retail sales were flat for October. This was also good news because the bottom did not fall out as many analysts had expected. Autos were the major cause of the flat line as the biggest decrease in sales. Without the auto anchor consumer sales actually grew +0.7% with winter clothing leading the charge. Adding to this "bullish" news was a minor drop in initial jobless claims of -8,000. The markets roared off at the open and you would have thought the total jobless claims were 8,000. The key number was the +89,000 increase in continuing claims, which indicates the number of people out of work is still growing. Also, the weekly number, which got so much positive press, was not even a complete number. The Veteran's Day holiday caused some data to be left out and this number will be revised next week. There was also no allowance for the increase in temporary holiday jobs causing seasonal dips in the jobless claims. The bottom line again was that traders wanted an excuse to buy stocks and this was the best one available.
Remember it was just yesterday that Greenspan said there were "no signs of appreciable vigor" in the economy and warned we were in a "soft spot". That soft spot hit Sprint, which announced another -1,600 job cuts and Lehman Brothers, which announced -500 cuts after the close. They said their chief investment strategist Jeffery Applegate was also fired.
Economics for tomorrow include Business Inventories, PPI, Industrial Production, Capacity Utilization and Michigan Sentiment. The Industrial Production and Sentiment are going to be the most important. The markets ran up to stop just under resistance once again and the internal market indicators are showing very overbought conditions. The Dow has strong resistance at 8550 and closed at 8541. Nasdaq at 1425 and closed at 1410. The SPX/OEX are both within a couple points of critical resistance levels. With option expiration tomorrow there is a good chance we will see some pinning at critical levels like OEX 460, SPX 900, Nasdaq 1400, DOW 8500. The exception to this forecast would be a breakout based on the Dell earnings, which would make no sense other than some positive sentiment since it is a Dell only story. A breakout over those levels mentioned above could generate significant short covering.
Enter Very Passively, Exit Very Aggressively!