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Markets Implode on Anniversary

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     03-10-2004            High     Low     Volume Advance/Decline
DJIA    10296.89 -160.07 10473.86 10284.67 1.99 bln    622/2242
NASDAQ   1964.15 - 31.01  2007.25  1963.13 2.13 bln    690/2362
S&P 100   552.80 -  8.10   561.38   552.01   Totals   1312/4604
S&P 500  1123.89 - 16.69  1141.45  1122.53 
RUS 2000  575.01 - 10.94   589.78   574.56
DJ TRANS 2788.48 - 45.82  2838.08  2786.61
VIX        18.67 +  2.07    18.07    16.11
VXO        18.80 +  2.43    19.23    16.75
VXN        26.05 +  1.35    26.07    24.41
Total Volume 4,626M
Total UpVol    833M
Total DnVol  3,690M
52wk Highs     335
52wk Lows       22
TRIN          2.46
PUT/CALL      0.91

Markets Implode on Anniversary
By James Brown

Ka-BOOM! The major stock indices have stretched this week's declines to three in a row. Both the Dow and the NASDAQ are negative for the year and that noise you heard was all three indices, including the S&P 500, breaking major support today. All of this comes on the March 10th anniversary of the NASDAQ's all-time closing high at 5048 back in 2000. It also happens to be near the one-year anniversary of the market's bottom in March 2003. The S&P closed at 800.73 on March 11th, 2003, dipped to an intraday low of 788.90 the next day but rebounded sharply as the Iraq war began.

This week's decline has been very wide spread affecting every sector with virtually zero pockets of strength. Those industries hit hardest today were gold, oil services, drugs, broker-dealers, semiconductors, internets, airlines and homebuilders. The hardware group did try and buck the trend but eventually succumbed to the sell-off as it picked up speed this afternoon. Strengthening the PC makers was a survey from International Data Corp, which revealed that global PC shipments are expected to climb by more than 10% in 2004 and 2005 and shipment value is expected to rise more than 5% over the next two years.

U.S. markets weren't the only ones in the red. Asian stocks were lower as the Japanese NIKKEI lost almost 99 points to close at 11,433 and the Chinese Hang Seng lost 183 points to close at 13,214. The British FTSE managed to close positive at 4545 with a 3-point gain. Meanwhile the German DAX slid more than 42 points to 4044.

What bulls should find disturbing about today's breakdown are the internals. Both the NYSE and the NASDAQ reported that declining stocks outnumbered advancing issues by nearly 3-to-1. This was the weakest advance/decline reading since October 2002. New 52- week highs have withered to just 178 between the two exchanges. Furthermore the down volume trampled up volume by more than 6-to- 1 on the NYSE and close to 3-to-1 on the NASDAQ. Volume breached more than 2 billion shares on both exchanges and was growing as the sell-off gained speed into the afternoon.

The 160-point drop in the Dow Industrials to 10,296 crashed through what should have been support at 10,400. The next hope for support is the simple 100-dma near the 10,200 level. Coincidentally the 10,200 level also happens to be a 5% correction from the recent top and traders trying to pick a bottom might help support the markets there. Personally, I wouldn't be surprised to see the Industrials retest the 10,000 level before the end of March.

Chart of the Dow Industrials:

The tech-heavy NASDAQ Composite looks a lot worse. The NASDAQ has lost about 90 points (4.3%) in the last four sessions and closed near its low for the day. The breakdown under the 2000 level was bad enough on Tuesday but today's decline really confirms the move and will play havoc on investor sentiment. Optimistic traders can hope that the NASDAQ might find support near 1935, which would be a 10% correction from its 2150 highs but I would agree with Jim's assessment that the next true support level is probably the 1900 level. Any rally back towards 2000 is probably going to be seen as a chance to short the market since broken support tends to become resistance.

Chart of the NASDAQ Composite:

The S&P 500 index lost 1.46% today and closed under its simple 50-dma for the first time since last November. The good news is that the S&P 500 is still green for 2004 but those gains are in danger of vanishing. The sell-off today managed to pause as the SPX approached its late January support near 1120. Whether or not this level will hold is the real question. The bad news is that today's drop in the markets was finally echoed by a surge in the volatility indices. In the recent past the market declines saw spikes in volatility but each time the spike only proved to be a new lower high. This time the VIX and the VXO (old VIX) have produced a new higher high, breaking the descending trendline. There are a lot of traders, both big and small, that follow the VIX/VXO, which has not been much help lately. Today's rally in the VIX shows a sharp increase in investor fear that suggests this pull back is "for real" this time.

Chart of the S&P 500:

Chart of the VIX/VXO:

Wednesday's only major economic report was the January trade deficit numbers. Economists had been expecting the trade gap to shrink in January to $41.9 billion. Unfortunately the Commerce Department announced that the trade gap hit a new record high at $43.1 billion, above last March's $43 billion. One of the main culprits were meat and chicken exports, which shouldn't be a surprise. Exporters are still dealing with the mad cow scare and the recent bouts of bird flu that prompted bans on U.S. poultry. The export numbers showed beef and chicken products dropped 40% to their lowest levels since November 1993.

The trade gap report undermined investor sentiment, which was already weak given the two days of profit taking and the technical breakdown in the NASDAQ yesterday. A sign that traders' attitudes have changed was the reaction to positive news. Rockwell Automation Inc (ROK) issued a positive earnings pre-announcement saying its March quarter would be higher than expected. Analysts consensus estimates were 33 cents a share and ROK now expects earnings in the 35 to 38 cent range as sales in the first two months of the year have beaten forecasts. ROK gapped higher at the open but eventually faded into the afternoon painting a discouraging failed-rally pattern and closing under its simple 200-dma.

Investor reaction was even worse for Danaher Corp (DHR). DHR raised its Q1 earnings guidance to 81-86 cents a share above its prior guidance of 76-81 cents and above consensus estimates at 80 cents. Shares of DHR quickly shot higher at the open and traded above its simple 10-dma briefly before promptly falling on strong volume to a new five-week low at its 100-dma (87.99). There is some support at the $88.00 level but given the trajectory of this afternoon's sell-off traders are probably betting on a test of the $85 level.

It's not hard to imagine that if investors are reacting this poorly to good news how would they react to bad news? Just look to shares of Krispy Kreme Doughnuts (KKD) to answer that one. The stock dropped $3.94 to $34.22 on more than seven times the average volume after reporting earnings that were in line with analysts' estimates at 26 cents a share. Revenues were up more than 35% but margin pressures cratered investor confidence. KKD said operating margins at company-owned stores plummeted from 20.3% to 17.4%. JP Morgan reiterated their "under weight" on the stock and investors decided to exit.

Other notable decliners today were BRL, THC and GLBC. Barr Pharmaceuticals, previously Barr Labs (BRL), dropped more than $5 to $73.90 after management failed to raise their earnings forecast at the company's analyst conference today. Tenet Healthcare (THC) dropped more than 14% to $10.06, a five-year low, as investors fled over concerns that the company is running out of cash. Meanwhile shares of Global Crossing (GLBC) collapsed for an $11 loss or 38% to $17.78 as investors reacted to its first earnings report after returning from Chapter 11 bankruptcy.

Tomorrow should prove interesting. Markets don't usually move in a straight line for very long. Even though the indices looks terrible right now it wouldn't surprise me to see an oversold bounce tomorrow, especially at the 10,200 level for the Dow. I'd like to think that Tech Data Corp's (TECD) positive earnings report tonight after the bell might inspire some sort of rebound in the tech sector but that could be wishful thinking on my part. The next two days are overflowing with economic reports. Tomorrow will bring the weekly initial jobless claims, import/export prices, the February retail sales numbers, and the natural gas inventory report. The big report on Friday will be the preliminary Michigan sentiment number unless of course the government chooses to surprise us by publishing the long-awaited PPI index. On top of it all Greenspan will be speaking at two separate engagements but don't expect him to say anything about monetary policy.

Overall it looks pretty ugly out there. The last three sessions have broken major support in numerous sectors and an untold number of stocks. This could be the beginning of the Q1 correction we were expecting about 7 or 8 weeks ago. Watch those stop losses and think twice about initiating any new bullish positions.


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