Markets Get Snowed
A flurry of negative news and comments over the weekend snapped traders back to attention as two weeks of market gains dissolved by day's end. Leading the international headlines has been a string of new suicide bombings in Israel as Palestinian resistance groups seek to undermine the new "road map" for peace before either country has a chance to exit the on ramp. Much closer to home investors had to deal with negative news in the drug business. The U.S. Supreme court has temporarily dealt prescription drug makers a blow by allowing the state of Maine to revive its discounted drugs for the uninsured law to take effect. Yet the leading story today was not the Leading Indicators report out this morning but more comments from U.S. Treasury Secretary John Snow and his opinion that the declines in the U.S. dollar against the Euro and the Yen have been "fairly modest".
We had been waiting for a catalyst to reawaken the bears, or at least someone willing to hit the sell button, and after weeks of ignoring bad news the markets finally decided to take some profits off the table. The DJIA dropped 185 points to lose 2.1% and close below the 8500 level, which should have been support for the index. The NASDAQ Composite fell a steeper 2.97% or almost 46 points to close at 1492. This index closed very close to its low for the day and below the 1500 level, which many had expected to be at least some form of support. The S&P 500 index dropped 2.5% but managed a close just above the 920 level, which has been so critical in the past. Contributing to the U.S. market weakness were losing sessions across both oceans. The Japanese NIKKEI lost 78 points to close at 8039, down nearly 1%. The Chinese Hang Seng fared better with a 5.8-point loss to 9087. The English FTSE 100 dropped 107 points to 3941, down 2.66%. Outpacing them all were the German and French markets. France's CAC 40 crashed 4.26% or 127 points to 2867 while the German DAX fell 4.63% or 138 points to 2850.
Market internals broadcast just how wide the pull back was volume numbers and the advance-decline ratios swung deeply into bear territory. The NYSE closed with advancing stocks numbering only 7 for every 21 decliners. The NASDAQ managed almost 9 winners for every 21 losers. Down volume was 8.6 times greater than up volume on the NYSE and almost six times greater on the NASDAQ.
Chart of the Dow Jones Industrials:
Chart of the NASDAQ Composite:
So what happened this weekend that suddenly brought traders back to the office thinking "maybe the economy isn't growing as fast as we thought...this market looks overbought... better take some money off the table." It's not like the Leading Indicators report this morning showed us anything new. We've known for weeks that the economy is stalling. In reality the report was positive as the Leading Indicators index rose 0.1 percent in April, which was an improvement over March's 0.2 percent decline. Maybe it is the fact that any post-war economic bounce remains elusive. The Leading Indicators index is supposed to forecast performance three to six months down the road. Here's an excerpt from the Conference Board report:
Despite rebounding financial indicators and consumer expectations, there is still weakness in the labor market and manufacturing indicators. Weakness in these components reflects the recent declines in manufacturing capacity utilization.... The coincident index, a measure of current economic conditions, decreased in April after holding steady in March. The slight decline in the coincident indicators in April is consistent with the weakness in the leading indicators in the first quarter of 2003.
Gold, Dollars & Snow
This weekend held a finance minister summit in France and when asked about the declines in the U.S. dollar, Treasury Secretary John Snow said that the 8% decline (YTD) in the greenback versus the euro has been "fairly modest". Snow has reversed an eight- year "strong-dollar" policy and his comments this weekend drove the dollar to new lows. Of course the "official" story is that U.S. policy on the dollar has not changed but we haven't seen much defense of the dollar during its more than 20% decline against the euro in the last two years. Snow rightly believes that the weak dollar will help U.S. exports. He's hoping that as the dollar continues to fall, exports will rise (and they are) and help stimulate the U.S. economy again (and thus help re-elect his boss, George Bush). Currency traders are reacting strongly to Snow's comments and the apparent lack of concern over the dollar's weakness. The dollar fell to $1.1702 against the euro this afternoon and some speculate it will hit $1.20 by the end of the year.
The combination of a weak dollar, no expectation for the U.S. to stop the dollar's slide, and weak equity prices sent the price of gold soaring. Gold futures rocketed $9.50 by the end of the day closing at $364.40 an ounce. The June contracts appear to be aiming for February highs near $380. Meanwhile the XAU gold & silver index added 3.13%, closing near 74 today.
The drug sector index, DRG.X, fell more than 4% today after the U.S. supreme court offered the state of Maine a favorable ruling on its discounted drugs for the insured law. The state of Maine is now free to pursue a local state law forcing drug companies to offer steep discounts for the uninsured. While the state of Maine alone will not derail the drug industry there are already 20 or so states who are crafting or considering similar statutes. If Maine's law is allowed to become permanent it is safe to assume that the entire nation may follow suit. The decision today was a temporary one as the legal battle continues. Shares of Merck & Co (MRK) were the leading decliners in the Dow, down 4.7% today.
By the looks of it Wall Street is quickly growing concerned that the U.S. consumer, the pillar of the economy, is getting tired. The RLX S&P retail index dropped another 3.77% and closed under what should have been support at the 300 level. Fueling the decline today was earnings news from Limited Brands (LTD), home improvement retailer Lowe's (LOW) and Toys "R" Us (TOY). Shares of LTD slipped lower as its sales numbers failed to meet expectations. LOW was hammered today, gapping lower and closing down 9% at the $40 level just above its 200-dma. Traders can look for potentially more weakness from Dow component Home Depot (HD). Home Depot fell 3.8% in sympathy with LOW's declines and in fear that they'll follow suit tomorrow morning with their own earnings report before the bell.
After recording their largest losses since March 24th the major indices look ready to do it again. The closing numbers under support for several major and minor indices don't bode well and bulls who have been riding this rally up from the March lows are going to be quick to protect their gains. The correction we've been waiting for is here. The next question is where will the markets find support?