Fear Returns to the Market
The VIX is returning to 40 and the Put/Call ratio closed the day at 1.35. The President held a press conference and said time had run out for Iraq. Pressure is building for action in Iraq and that same pressure is threatening current support levels in the markets.
Dow Chart - Daily
Nasdaq Chart - Daily
The morning started with bad news from Jobless Claims again. The headline number was 391,000 and again very close to the critical 400,000 level. The bad news was a revision of last weeks number to 402,000, up from 397,000. Anything above 350,000 represents a declining job market. Considering the +42% increase in announced layoffs in January the Jobless Claims numbers should continue to grow.
With jobless claims hovering near 400,000 the Jobs Report on Friday could have a negative surprise again. Last month the expectations were for a gain of +37,000 jobs and the actual number came in with a loss of -101,000. A serious deficit. This month analysts are expecting a gain of +60,000. This sets up a real potential for another negative event.
Also surprising traders was a drop in Productivity, the hallmark of the recovery according to Greenspan, by -0.2% and well under expectations. Unit labor costs also soared +4.8%. This was the final number for the fourth quarter and shows that the economic weakness in the closing days of 2004 was weaker than originally thought. This shows the weaker production load from slowing orders. Capacity is there but demand is absent. Companies are continuing to cut excess workers but minimums are required to keep production lines open. Tough times still exist in the manufacturing sector.
Chain Store sales for the full month of January rose slightly by +1.8% but department stores dropped -3.9%. Drug stores rose the most with +5.8% gains. Unfortunately there are a lot more items and economic dollar volume in department stores and they have a greater impact on the economy. Despite the weak sales WMT, JCP and GPS raised earnings guidance with Sears lowering guidance due to credit card defaults.
Echoing the Cisco comments earlier in the week Dell's COO used the Iraq ate our orders excuse and said technology spending would be weak this year due to Iraq and the economy. He said the economy more than anything else was weighing on spending and the war just made more people skittish. He said 2003 would be a difficult year. That did not depress the Nasdaq futures for more than a few minutes but then what did he say that everyone did not already know?
EDS warned after the close that revenue and earnings would suffer for 2003 and reported a -11% drop in revenue for the 4Q. The CFO said they were taking a very guarded view for 2003. He said that even without extended military action against Iraq, overall market conditions are not expected to recover through the first half. They cut Q1 expectations to 30-35 cents and well below analyst's estimates of 43 cents.
Returning to center stage was North Korea with warnings that the US is not the only country that could make preemptive attacks. They warned that any threats against North Korea would be taken as acts of war and could prompt a devastating preemptive attack by North Korea. Even though NK is a "pauper" tiger it is a tiger with claws and it is holding South Korea hostage. Their method of negotiating is to talk a big bluff and attempt to attract a bribe to back off the threats. The US is not worried specifically about any material threat from NK against the US but they also cannot let the threat stand. The US sent the carrier battle group Carl Vincent to station 200 miles offshore from NK. The carrier group is carrying a large contingent of attack and reconnaissance aircraft. Some fear this escalation of force in the eyes of NK could ratchet up their threats as well. What a wonderful world!
The US government also issued another terrorist alert and warned that an increased level of communication intercepts were pointing to the possibility of multiple terrorist attacks over the next three weeks. The said the attacks could be timed to the end of the Muslim holy days after Feb-12th and the possible start of an Iraq war. They think attacks are necessary to show they are bringing the war to us instead of just waiting for us to bomb Iraq. Owning a house in the country is looking more attractive every day.
Last month was the first January since the 1990 that had a net redemption from stock funds. This is normally a heavy inflow month as holiday bonuses and retirement contributions pour into retirement accounts. Investors are worried that there is still trouble in our future and they are moving dollars to bond funds and money markets despite the very low yields. Overseas investors are pulling money out due to the falling dollar and anti-American war sentiment. This pushed the Put/Call ratio to a high close at 1.35, which shows growing fear in the marketplace.
The Dow hit another milestone today with its break below 7900. The first dip was quickly met with bargain hunting buyers but they were unable to get close to the 8000 level again. After the initial bounce there was a series of repeated attempts to recover but each met resistance at a lower level and eventually traders gave up. The index dropped below 7900 again just before the close but managed to recover slightly on short covering.
The Nasdaq was probably the only reason we are not at 7700 tonight. It stubbornly refused to give up the 1300 level and finished with a fractionally positive close. The 1295 level is proving to be strong support but the Dell and EDS comments after the bell today could spell an end to this stronghold.
It is amazing to me that with the North Korea threat, the terrorist alert and the tech profit warnings that the S&P and NDX futures are positive at 7:30PM. Add to that the very real possibility that the Jobs Report will be negative again and I think a lot of traders must be on drugs and I am not talking about Viagra. I can only guess at the monster spike we would see if Saddam decided to retire to Libya. If that happens I am backing up the truck. Until then I am still concerned that there is more risk to the downside ahead of us. The Dow tested a very critical level today of 7907 which is the 61.8% retracement level from the October low to the December high. A failure of this level should be followed by a retest of the 78% retrace at 7592 and likely very soon. That 1300 level on the Nasdaq is also critical. Should that level fail there is only two real speed bumps at 1266 and 1196 before retesting the October lows near 1100.
This market, despite the recent support at the current levels, is very fragile. If we had a single terrorist event on US soil or shots fired in North Korea we could be in free fall in a heartbeat. Everyone is primed to buy but they are waiting on the sidelines for the signal once the war starts. Until then the negative event risk is huge. Short of retirement by Saddam we should be headed lower.
Enter Very Passively, Exit Very Aggressively!