Was Friday's market weakness caused by the CPI data? Did Tokyo's raised terror alert spook the markets? Did the dollar's strength hit those stocks that had seen gains in an export-friendly, low- dollar environment? And, the biggest question of all--did the markets begin a breakdown on Friday or just rest for a day?
Friday dawned with a mixed performance in overnight markets. Japanese investors reacted to a smaller-than-expected rise in the Japanese services industries index by sending the Nikkei lower by 0.31 percent. Other Asian bourses turned in a mixed performance. Semi-conductors fell in Asia due to a January U.S. semiconductor book-to-bill number that was above the benchmark 1 but still deemed disappointing by Asian investors. A strengthening dollar helped support those export-heavy Asian markets, however. European markets were mixed, too, but U.S. futures were higher and U.S. markets looked primed for a bounce until the release of the CPI data.
That CPI data showed a 0.5 percent increase for January, far above the expected 0.1 percent rise. The surprise number raised fears of inflation and rate hikes. The markets tried to steady at the open, but then news of a heightened terror alert in Japan hit the markets. Indices fell, climbed in bear flag formations and broke down again. By 1:00 EST, most had hit their day's low and then began a laborious climb that caught fire at about 2:00 EST. The Fed had marshaled its forces and Fedspeak included Federal Reserve Governor Ben Bernanke asserting that the CPI figure shouldn't raise alarms. The president of St. Louis's Federal Reserve Bank, William Poole, also reassured investors, saying that inflation should remain low throughout 2004. Greenspan did his part, although he focused on job growth and not inflation. He reiterated his belief that expanding output would soon lead to jobs growth.
The Dow, SPX, NDX, and OEX all managed climbs above their opening levels, but the SOX and Nasdaq never made it that far when another bout of selling hit the markets just before the bond market close. Most indices ended near the middle of their day's ranges, with the Dow down 0.43 percent, the Nasdaq down 0.39 percent, and the SPX down 0.26 percent.
Weak sectors included semiconductor stocks, networking stocks, computer storage and peripherals, the metals, the airliners, and the homebuilders, but even normally defensive sectors such as the pharmaceuticals and those represented by the Morgan Stanley Healthcare Providers Index traded lower. The Oil Service Sector Index was green as were the Morgan Stanley Consumer and Early Cyclical Indices, but the first two of those three were essentially flat. The advdec line was negative all day, and by the close there were 12 advancers to 21 decliners on the NYSE and 12 advancers to 20 decliners on the Nasdaq. Down volume measured 2.7 times up volume on the NYSE and 1.7 times up volume on the Nasdaq.
HPQ and AA led decliners among Dow stocks. HPQ lost 3.06 percent following its earnings report, considered in line with expectations; and AA lost 2.41 percent after it announced that it had sold its automotive fastener business. This was part of an already announced plan to help AA pay down debt. Other story stocks included DIS, now target of Comcast's takeover bid; and KO, subject of a Bear Stearns downgrade to a peer-perform rating after Thursday's announcement that the CEO would retire at the end of the year. DIS lost 1.67 percent, but KO declined only 0.12 percent. Some stocks performing well included G, adding 0.82 percent and reaching a 52-week high after Prudential raised its rating to an overweight rating; and WMT, gaining 1.80 percent after yesterday's earnings report.
Those who came to the markets today expecting the usual opex Friday, including early-morning volatility and then pin-them-to- the-max-pain number, straight-across-the-charts trading, found themselves surprised by the day's action. How much damage was actually done?
Annotated Daily Chart for the Dow:
On the way to its low of the day, the Dow slipped below 10,600, testing its 21- and 30-dma's and finding support from them. However, some troubling facts become apparent from a study of the chart. The Dow may have broken down below a recently established symmetrical right triangle, and the afternoon bounce may have been nothing more than a bounce back up to retest the broken support. Bearish price/MACD divergence occurred as that higher high was hit week before last, and oscillators have continued a pattern of lower highs. The apparent breakdown, even with the bounce, may merely have been reforming the consolidation pattern into a bearish right triangle, with a flat bottom at about 10,575-10,580 and a descending top trendline.
RSI and stochastics have rolled down and both have far to go before hitting levels indicating oversold conditions. Those oscillators support the idea that the Dow is either in the process of breaking down or has already broken down, with plenty of downside to go. Believing in oscillators in a trending market is a treacherous endeavor, but the Dow has begun a consolidation process despite the recent new highs, and we might be able to begin putting more credence in those oscillators. For now, however, I consider the evidence inconclusive, although with a slight bias to the downside. Look for another break above 10,700 as a sign that the Dow may be breaking out to the upside, and a break below Friday's low as confirmation of a downside break. Be careful, though, if that downside break occurs, because the 50- dma speeds up to join forces with the top line of the former ascending trendline. A bounce of some amplitude should be expected at that point. A failure to maintain the 50-dma would be more serious.
Annotated Daily Chart for the TRAN:
While the Dow was rising to its 2/11 new high, the TRAN was bouncing from the bottom of its recent plunge. The 50 percent retracement of the plunge and the 50-dma stopped the TRAN's advance, however. The divergent behavior of the two sister indices, the Dow Industrials and Transports, has been troubling to those familiar with Dow theory, and the longer that divergence persists, the more bearish the outlook for the Dow.
Like the Dow, however, the TRAN's chart leaves questions unanswered. Until and unless the TRAN sustains levels above that 50 percent retracement of the recent plunge, we can't consider any move higher to be a bullish move. Yet Friday's doji at the bottom of a decline left open the possibility that the TRAN could reverse, printing a higher low. Oscillators look bearish, but also look as if they're trying to slow their descent in preparation to turn up again. Next week's movement will tell us more, but watch for a TRAN move above 2952 to verify strength in the Dow, or a fall below 2800 to verify weakness. A TRAN move to 2800 will create a new P&F sell signal.
Annotated Daily Chart for the NDX:
The NDX left traders with as many unanswered questions as did the other indices. Is the NDX breaking down out of this long-term ascending channel? The NDX closed right on its 50-dma after having broken through it during Friday's dip. Oscillators look ready to tip over again, but essentially just squiggle around at neutral levels for each.
As I study this chart, I note that each of the last few times the NDX approached the upper boundary of its rising regression channel, it turned down from a bigger distance away from that boundary, and each time it approached the lower boundary, it violated it to a greater degree. Is this signaling increasing weakness? Perhaps, but it's been dangerous to reach that conclusion during the last year. If the NDX should dip below the 50-dma, it will soon find historical support at 1450, a point at which traders should expect a bounce, if not before. It's only after such a bounce or failure to bounce that we'll know more about continuing strength or weakness. Another lower high would set up the possibility of a bearish right triangle on this chart, too, with a much lower downside target.
Annotated Daily Chart for the SOX:
A look at the NDX wouldn't be complete without a study of the SOX. Over the last few days, I've been watching as the SOX retraced some of its recent descent. The climb appeared to be taking the form of a bearish rising wedge, but these formations have been notoriously unreliable over the last year. I found myself somewhat skeptical. Thursday, the SOX climbed above a 50 percent retracement of the plunge, to levels that shouldn't be sustained if the climb is a bearish distribution formation. However, by the end of that day, the SOX had fallen back below that key level, unable to sustain the retracement. Friday, the SOX appeared to have fallen out of the bearish rising wedge. It certainly fell back below the 50-dma, and, unlike the NDX and COMPX, was unable to close back on that average. The break was minimal, however, and the oscillators inconclusive, leaving open the question of whether the SOX can climb back inside that regression channel and continue its way higher. Without the SOX, however, the NDX and COMPX are unlikely to make much headway.
Friday's action left me with the impression that the markets teeter on the edge of a bigger pullback, but that the action could have resulted from a combination of multiple blows received one after the other and opex activity. The damage did not prove so severe that the markets could not recover, as we've seen them do so many times over the last year when similarly teetering on the edge of a breakdown. When I study the weekly chart of the OEX, a favorite index of mine to watch, I see the possibility that the OEX could trade sideways a number of weeks, expending any overbought pressure, just as it's done through other periods over the last year. The last two sideways consolidations each required 11 to 12 weeks, and we've seen only five or six in this latest consolidation period. The question of what happens next must unfortunately be delayed until next week.
Earnings reports slow down next week, but a number of retailers do report, including GPS, JCP, and KSS, among others. Next week's economic calendar will see a number of releases, with February's consumer confidence number Tuesday morning at 10:00 and January's existing home sales Wednesday at 10:00. That's only the beginning. Thursday will see the release of January's durable orders, help-wanted index, and new home sales, as well as the previous week's initial claims. The releases don't let up on Friday, either, with before-the-bell releases of the Q4 preliminary GDP and chain deflator, the 9:45 release of February's revised Michigan sentiment, and the 10:00 release of the February Chicago PMI. The durable orders, preliminary GDP, Michigan sentiment, and Chicago PMI will probably draw the most attention out of those numbers.