Stocks Fall for Fourth Day
The last week of February began with a decline as the NASDAQ erased its 2004 gains and stocks fell for their fourth straight session. The tech-heavy NASDAQ traded to 1999.59 in the last hour of trading before bouncing back above the 2000 level. Today's close marks a 6.7% correction from the NASDAQ's 2004 highs at 2153 and from the lack of bounce at the 2000 level we may see more declines in the near future. The selling in the tech sector was lead by a 2.74% decline in the semiconductor sector, which produced a new intraday low for 2004.
The Dow Jones Industrials also struggled through most of the session as two components, United Technologies (UTX) and Boeing (BA), traded lower over news that the Pentagon might be canceling the Comanche helicopter program. The Dow Transports index also slipped lower, continuing last week's decline. Normally one might expect defensive stocks like the drug sector to rally higher as investors shift money into "safe haven" plays but the DRG drug index fell again for the sixth loss in seven days.
Overseas stock exchanges were mixed as the dollar slipped from three-week highs against the euro and three-month highs against the Japanese yen. The Japanese NIKKEI index added 148 points to close at 10,868 while the Chinese Hang Seng lost 103 to close at 13,765. English stocks ended with modest gains as the FTSE 100 closed up 9 points to 4524. German stocks edged lower with a 4.6-point decline on the DAX to 4068. In commodities crude oil ticked higher 9 cents to $34.35 while gold bounced $1.30 to close at $399.30 an ounce, its second session in a row under the $400 mark.
Here at home market internals were very negative. Declining stocks surged past advancers 9 to 5 on the NYSE and 22 to 8 on the NASDAQ. Down volume overwhelmed up volume by more than 2 to 1 on the NYSE and nearly 5 to 1 on the NASDAQ. Overall volume settled at 1.73 billion on the NYSE and 1.92 billion on the NASDAQ.
Technical oscillators are all negative on the Dow Industrials but the venerable index managed to close above the 10,600 level again with only minor losses. If the selling continues tomorrow the Industrials should find support at 10,500 with its rising 50-dma to support it.
Daily chart of the Dow Jones Industrials:
Intraday Chart of the Dow Jones Industrials:
The NASDAQ Composite is in worse shape. Market analysts have been calling for a 5% to 10% correction in the major averages for months now and many expect the NASDAQ to suffer the worst of the selling because it out performed so well last year. As I mentioned earlier the NASDAQ is down 6.7% from its 2004 highs and today's decline firmly broke technical support at the simple 50- dma. Art Cashin, a floor trader at the NYSE and a popular guest commentator for CNBC, mentioned that the breakdown under the 50- dma may be seen by many investors as a sign that the rally is over and it's time to take some money off the table before any more of their profits evaporate. The temptation to sell now and book all of 2003's profits will be a strong one. However, there are plenty of investors who have been waiting for a pull back to re-enter the markets and the psychological 2000 level might look like an entry point.
The greater concern to me is the lack of bounce from the test of 2000. If there are a lot of traders waiting to buy the dip here where are they? A 7-point rebound in the last hour is not what I would call enthusiastic. Looking at the daily chart below you'll see two supporting trendlines. One is broken with today's decline and the other is not. Also noteworthy is the broken simple 50-dma (pink line) on the NASDAQ's chart. The same technical breakdown through the 50-dma showed up in the GHA hardware index, the GSO software index, the NWX networking index and the INX Internet index.
Daily chart of the NASDAQ:
Weighing heavily on the NASDAQ was strong selling in the semiconductor sector (SOX). Earlier in February the SOX broke through the bottom of its long-term rising channel but found support at its 100-dma and bounced. Today the SOX has broken support at the 500 level and its 100-dma, which could be very bad news for tech traders since many believe that the semiconductors tend to lead the NASDAQ higher or lower.
Driving today's declines in the SOX was Intel, also a Dow component. Intel fell 3.33% and broke major support at $29.50 after reporting that an IRS audit of their 1999 and 2000 returns might find it liable to the government for another $600 million, plus interest, in back taxes. The tax adjustments are focused on Intel's export sales and the IRS has not issued any formal rulings yet but if Intel is found liable they plan to appeal. Investors might be worried that the IRS may find more back taxes are owed as they currently conduct an audit of Intel's 2001 and 2002 returns. Compounding concerns in the semiconductor group was a downgrade for Intel rival AMD. UBS lowered their price target on AMD to $17 and cut its earnings estimates over concerns from stiffer competition. Plus, a Goldman Sachs analyst issued some negative comments for Applied Micro Circuits Corp (AMCC) stating their belief that AMCC won't be profitable again until June 2005.
Daily chart of the Semiconductor Index (SOX):
Some of today's larger headlines were made by QUALCOMM (QCOM) and Lowe's (LOW). QCOM raised its Q2 earnings guidance this morning and shares gapped higher above resistance at $60.00. QCOM is the second largest producer of chips for mobile phones and it raised its Q2 EPS guidance from 38-41 cents to 48-50 cents. Including the estimated 1-cent loss for its investment division QCOM expects to report 47-49 cents a share on revenues of $1.19-1.21 billion. Compared to the 13 cents it earned for last year's Q2 that's a pretty big improvement. QCOM's CEO Dr. Jacobs was quoted as saying, "in fiscal year 2002 we shipped 65 million MSM phone chips. Comparatively, in the first two fiscal quarters of 2004 we expect to ship approximately 63-64 million MSM chips." Jacobs said QCOM was seeing, "Record demand for our chipsets and strong growth in virtually all CDMA markets..." QCOM ended the session with a 5.1% gain at $62.43.
Investor reaction wasn't so cheery for LOW's. The second largest home improvement chain in the country issued Q4 earnings that were a penny better than analysts estimates on sales that rose 20% for the quarter to $7.25 billion. Lowes even raised their Q2 estimates but their stock fell 2.9% by the close to $56.67. Troubling investors was a sales shortfall compared to analyst estimates of $7.28 billion for the quarter and a drop in same- store sales. Last quarter Lowes had same-store sales of +12%. This quarter they dropped to a +7.3% gain, which is not bad but under estimates of +7.5% and below "whisper" numbers in the high single digits to low double digits. Tomorrow before the opening bell we'll hear from larger rival Home Depot (HD), a Dow component. Current estimates are for HD to turn in 39 cents a share. If HD can hit analyst estimates and issue higher guidance it may be a positive influence on the Dow tomorrow.
More Dow components to watch tomorrow are UTX and BA. As mentioned earlier they traded lower today on the expectation that the Pentagon would cancel the $38 billion Comanche helicopter program. After Monday's closing bell the Pentagon confirmed that news and said the remaining $14.6 billion for the Comanche project would be shifted to other aircraft projects. Some of that money is said to be headed toward UTX's Black Hawk helicopter program. Now there is still a chance that lawmakers, especially those with constituents likely to be affected by this move, will fight this cancellation. However, the real question for us is how will investors react tomorrow now that the news has been verified.
Tomorrow will also bring another consumer confidence report, this one for February. Economists are expecting a rise to 102.0 after last month's reading at 92.0. Last but not least is another scheduled appearance for Alan Greenspan before the Senate banking committee in Washington. While not expected to issue any comments on monetary policy his appearance alone could cause the markets to drift sideways on the off chance that he may say something negative.