The buyers took a snow day today, staying home and leaving the markets in the red from the opening bell. With the Paul O'Neill resignation out of the way, and a nomination for a more stimulus- friendly Treasury Secretary in place, the bulls had little left to combat the United Airlines Bankruptcy, IBM downgrade and news that the holiday shopping season is looking weak just a week after setting a new one-day record. We re-tested Friday's lows in the Dow, OEX, SPX and Nasdaq, with all bleeding red down to a new relative lows. Today's drop may simply be the continuation of the response to last Friday's jobs data, which showed a higher than expected unemployment rate of 6%. That drop rebounded on the news of O'Neill's resignation, but appears to have caught up to us today, compounding today's news.
United (UAL) made it official, filing for bankruptcy protection on Sunday. The filing was necessitated by the almost $1 billion in debt that comes due starting this week. Chairman Glenn Tilton said the company and its employees are prepared to make the company profitable once again, but so far the unions and management have not had much luck in finding settlements that work for both sides. The company's attorney said it was losing $22 million each day, more than three times its average daily loss in the third quarter. The stock sold off early in trading, but rebounded following UAL's announcement that it was implementing pay cuts for officers and salaried and management employees. It finished the day unchanged at $0.93.
President Bush announced his nomination of rail executive John Snow to head the Treasury. Snow is chairman and chief executive of freight carrier CSX Corporation, as well as the former head of the Business Roundtable, the lobbying group that represents corporate leaders in Washington. He also sits on the boards of Johnson & Johnson, Verizon, Circuit City, USX and Sapient. He certainly has plenty of business experience, but his personal experience is probably less important than the fact that the President put someone in place that will support his tax-cut plans. Rather than trying to figure him out, we can assume that if we were not in Bush's corner, he would not have the job. Bush said this morning, " I'll be proposing specific steps to increase the momentum of our economic recovery, and the Treasury Secretary will be at the center of this effort." He also mentioned that, "Many Americans have very little money leftover after taxes." Sounds like the economic stimulus plan just took a few steps forward and investors can expect a tax break sometime in the next year. Still, the appointment of a Bush-friendly Treasury Secretary was not enough to keep Friday's rally going. Friday morning saw a sell-off all the way down to 8501, before a furious rally saw the average up on the day. Today we tested that level once again, bouncing at the same point, and then rolling over below that support.
Bush also tapped Stephen Friedman, former CEO of Goldman Sachs, to replace Larry Lindsey as head of the National Economic Council. By choosing Friedman, the President has now filled vacancies with someone from industry, as well as someone from Wall Street, satisfying both factions.
After today's sell-off in both the techs and industrials, the chances of a breakout over the August highs in the Dow and SPX is looking less likely before the end of the year. We took a run at that level following Thanksgiving and have seen a decisive pullback ever since. We've seen the most consecutive down days in the Dow since the August to October sell-off, and although we can expect a bounce at some point, the near-term picture does not look promising for a continued rally. As we approach Dow 8300, we may be looking at the possibility of a bearish head and shoulders formation. I talked about that possibility back in October, when the Dow began to form what looked like a left shoulder at 8550, with a head at 8800 on November 6. I don't want to sound like the analyst that cried wolf, so I'll simply suggest that the 8800 level "may" have been the left shoulder, with the latest run at the August high as the head. The run ended at 9043 on December 2. I'm not predicting doom and gloom just yet, but another rebound from 8300 should be a red flag to traders as we approach 8800 once again (if we get there). The eventual downside objective of an H&S pattern with the head at 9043 and the neckline at 8300 would be around 7600. However, there is still plenty of trading ahead of us before the formation fills out and at least one big rally to play long. For the time being, however, we continue to bleed red toward that support at 8300. If we are going to bounce, however, there are a number of factors pointing to it happening soon. That support at 8300 is awfully strong, and coincides with stochastics that are in oversold territory. The 50-dma sits at 8345 and has provided both support and resistance in the recent past. Add to the mix the seasonal rally at the end of the year and a big bounce, however temporary, could be in the mix.
Chart of the Dow
The Nasdaq Composite dropped all the way to its November 19 low of 1367, which coincides with lows of Dow 8400 (still in place) and SPX 893 (broken today). The IBM downgrade from Banc of America got the tech ball rolling downhill, with help from a Salomon Smith Barney downgrade to Qualcomm. The COMP finished down -55.35, accompanied by a -2.73 drop in IBM ($79.59) and - 2.29 drop in Qualcomm ($39.19). The next level of support for the COMP is in the 1315-1319 area, which has served as both support and resistance. However, if we are going to get a bounce, this level (1367) could give us that bounce, after acting as previous support. The sell-off came in spite of a report from Taiwan Semiconductor that net year over year sales in November rose 32% and that the drop from October's numbers was less than expected. The Semiconductor Index (SOX.X) still dropped -23.73 through two recent levels of support. It appears we are seeing "Alice in Semiconductor-land," as recent good news about an upturn in demand has led to an 86-point sell-off in the last week. That sell-off followed poor earnings reports and poor visibility of an increase in IT spending, which fueled a 183-point rally from October through November. Confused? Forget the news trade what you see.
Chart of the Nasdaq Composite (COMPX)
Chart of the SOX
We got some disappointing news from the retail sector, as Wal- Mart (WMT) said weekly sales came in at the low end of the company's 3-5% growth plan. This came out just a week after the company reported record one-day revenues the day after Thanksgiving. The big numbers that day are most likely the result of a late Thanksgiving and shoppers having one less week to get their shopping done. While shoppers may not purchase fewer items because of the late start to the "holiday" shopping season, they will purchase a higher amount of gifts during the last two weeks before Christmas, when aggressive discounting takes place to clear shelves. This could cut further into retailers' bottom lines, which are already being affected by a slow economy. Federated (which owns Macy's and Bloomingdale's) saw November same store sales down 7.4% and said if December sales are flat, that November-December figures should come in at the low end of the company's forecast of flat to down 2.5%. The company echoed sentiments from Wal-Mart that extreme winter weather in the east was partially to blame for the disappointing week. While that may account for some of the disappointment, we got the same excuses over the summer, when warm weather supposedly kept shoppers from buying sweaters and winter coats. Guess what? A slowdown in sales meant shoppers were actually buying less! Weather has been a convenient excuse for months, but with a rising unemployment rate, it appears that the summer/fall's trend of disappointing retail sales is simply continuing into the most important time of the year for retail sales. Teen-oriented retailer Sketchers (SKX) also issued a warning today, saying it will lose $0.25-0.35 in the fourth quarter, instead of the $0.05 profit analysts were expecting. At this rate, don't be surprised to see a big guy in a red suit, with 8 large dogs tied up outside, standing in the unemployment line. Retail sales are a good measure of consumer spending, which bleeds into all sectors of the economy. I wrote a couple weeks ago about the possibility of poor retail sales acting as a time bomb to a soaring market, and it appears to be having the stated affect. The Retail Index (RLX.X) lost 2.5% and fell through its 50-dma to close at 276.56.
With the broader indices all approaching significant support levels, I expect the drop of the last week to slow down, or get at least a marginal bounce somewhere along the way. The end of the year usually brings a rally and that rally would coincide with a bounce off support. Keep an eye on the levels outlined above, because if they fail, it could be a steep drop until we find the next floor. If they hold, then we're due for a bounce and long plays could be back in season - at least temporarily.