The terrorist attack in Spain that killed 192 and injured over 1400 bombed our markets as well. The indexes opened down but well off the overnight reaction lows. After an attempt to rally that lasted until after 2:00 bad news sent them down again.
Dow Chart - daily
Nasdaq Chart - Daily
The second news blow came when Spain reported that a van with explosives had been linked to the bombings and there were Arabic tapes in the van with verses from the Koran. Shortly after that sound bite Reuters broke a news story from England saying Al Queda had claimed responsibility for the bombing in a letter to a newspaper. The letter reportedly claimed a similar attack was imminent in the United States. Traders hit the sell button and the bottom dropped out of the market at 2:30. American officials were quick to point out that Al Qaeda does not normally claim responsibility for attacks and suggested the letter was bogus and designed to shift blame from the real suspects. The markets did not care and fear became the motivator into the close.
The morning economics did not help market sentiment with Retail Sales coming in flat for February once autos were removed. Department stores held their own but drug stores, grocery, sporting goods and furniture stores all declined. Rising energy prices were blamed for robbing consumers of cash available for discretionary purchases.
Import prices rose +0.4% and export prices rose +0.6%. Analysts said the falling dollar, higher commodity prices and higher energy prices were blamed. Consumer goods remained unchanged with autos and parts up +1.0%. This was not a factor in today's market.
Jobless claims continued to fall at 341,000 and continuing claims fell to a post-recession low of 3.032 million. This is good news but it was overshadowed by the global events. The very slow drop in claims continues to show there is no pickup in hiring but as we all know jobs are a lagging indicator in a recovery. At least that is what they keep telling us as an excuse for no jobs. Greenspan said today that jobs will pickup soon because he is continuing to see increasing signs of a pickup in the economy. Somebody get him a new speech.
It was not economics that tanked the markets today but the terrorist attack. The markets actually rebounded off their overnight lows when news of the bombing first hit. The blame was first placed on the Basque separatist group, ETA, and the markets shook off the news thinking it was an internal matter for Spain. The Dow rallied back from the morning low of 10228 by nearly +100 points to 10321 before the van was found. That announcement knocked -55 points off the index but it again rebounded when authorities said there was nothing conclusive in the evidence. The news that caused the implosion was the Al Qaeda letter claiming another attack was imminent. "We bring the good news to Muslims of the world that the expected 'Winds of Black Death' strike against America is now in its final stage...90 percent (ready) and God willing near," the letter said. The al-Quds al-Arabi newspaper received similar letters from the same brigade claiming responsibility on behalf of al Qaeda for a November bombing of two synagogues in Turkey and the August bombing of the U.N. headquarters in Baghdad. This was the kiss of death for the struggling rebound. France also announced they were raising the terrorist threat level on all public transportation.
The damage to US markets was severe. The Dow had held above the 100dma at 10218 all morning but after the Al Qaeda news blew right through that level and barely blinked as it passed 10200. Were it not for time expiring on the clock we might have broken 10100 as well with the close at 10128. This is a major blow to any bullish sentiment still remaining. In four days the Dow has dropped over -500 points with -168 of those being lost today. Since the market high of 10753 on Feb-19th the Dow has lost -5.8%. It has been 19 months since we have had a 5% correction and we normally have 2-3 per year.
The Nasdaq dropped nearly -40 points from the afternoon high and closed at 1944 after the Al Qaeda news. This is below all the averages except for the 200dma which is still quite a ways off at 1873. However, since the Nasdaq high on Jan-26th the Nasdaq has lost -209 points or -9.7% and is very close to the benchmark -10% range. This is a huge change in investor sentiment despite continued upgrades to earnings estimates. The next major support is at 1900.
Now that we are out of our Jan/Feb trading range and have broken all short term support where are we going? We have officially lost the required five percent to be recognized as a real dip and the Nasdaq is very close to -10%. In theory we are due for a rebound. In practice we could easily hit Dow 10000 and Nasdaq 1900 with any additional negative news. Fears of another attack on U.S. soil sent the VXO back to near 22 from its low of 14.09 last Friday. This is a major fear reversal. It rose nearly three points today alone.
Before I tackle the forecast there was some good news today. Declining volume beat advancing volume better than 4:1. Decliners were 3:1 over advancers. Volume spiked to over 5.0 billion shares and the biggest day since Jan-29th. The majority of this volume came in the last hour and it could be seen as a news washout. A potential capitulation day when considering it came at the end of an already oversold condition.
There was also some positive stock news, which was ignored due to terrorist concerns. GE affirmed estimates today and said they were continuing to see an increase in global growth. GE fell -0.68 on the day but it failed to break its 200dma. This is huge support on GE and it should be very difficult to break without any major external event. The addition of the $3.8 billion in new shares has been weighing on GE but the 42 million shares traded today may have put an end to that pressure.
Intel has already broken its 200dma from last weeks lowered guidance but it closed right at strong support today at $27 that dates back to September. Intel traded 98 million shares but only fell -.23 cents. This could be a bottom for Intel. Also at critical support levels is Microsoft which closed at $25 and very strong support. MSFT traded 90 million shares and only fell -.28 cents. Dell actually gained +.74 cents today and this was the third day of an uptrend by Dell. It is back over $32 support. The SOX turned in an amazing display of strength with a loss of only -2.45 and a solid grip on the support at 475. Just another indication that maybe we are too oversold.
SOX Chart - Daily
National Semi announced a $400 million stock buyback and made positive comments about orders and margins for the current quarter. Altera announced their mid quarter update after the bell and said it expected revenue growth at the high end of its previous estimates. Oracle reported earnings after the bell and said software license growth was up +13%. Yellow Roadway said first quarter business was booming and the stock jumped +10% and helped keep the transportation index in positive territory despite the broad market crash. First call said earnings estimates for the first quarter had climbed to +14.9% growth from +13.4% just a couple weeks ago. Earnings are growing despite the worry over the economy. Fannie Mae said rates have fallen so low that they expected a fourth consecutive year of record home sales and increased their estimates by +100,000 homes for the year. They said demand was so strong and inventory so low that housing prices should rise +7.4% in 2004 after a similar +7.5% gain in 2003. 30-year rates dropped to 5.41% and the lowest since July-2003.
Good news was breaking out all over and many of the major players are holding at strong resistance. The challenge for the day was clearly terrorist related and it may have been a market blessing in disguise. It forced us to lower levels and flushed another billion shares of volume that we probably would not have seen. Tomorrow is light on economic reports with Business Inventories and Consumer Sentiment. Inventories could be a challenge but it is not expected to be a market mover. A positive surprise could be a good sentiment boost. Unfortunately Consumer Sentiment is likely to come in lower once again. The election mud slinging on the economic outlook could again drop the numbers. Fortunately this week's terror event, the market drop, Intel guidance and the Jobs report all occurred after the majority of polling took place. The next report is the one to worry about.
Now back to the forecast. The potential is very good for a strong move on Friday as opposed to a sideways consolidation day. The more the press plays the official doubt about the Al Qaeda letter the more it will be seen as somebody trying to shift blame and a non event. The markets are VERY oversold. -507 points for the Dow in three days is completely out of character for the current economic conditions.
The two options I see for Friday look like this. Depending on the terror news coming out overnight we could see another day of losses as weekend event risk looms large on investors minds. One more strong decline could take the Dow closer to 10000 and the Nasdaq to 1900. Both of these levels are very strong support. While this is a possibility I think it would take some strong news from overseas to push us over the edge.
The other option would be a rebound based on the lack of any new negative news and the very oversold conditions. While I would like to think this was the direction we will go I have to be realistic. I thought today would be a rebound day but the terror news killed that process after lunch. Investors have to be thinking bargain hunting after the drop on no real change in economics. It was just time to rest. Once this weeks drop begin to accelerate it took on a life of its own as they sometimes do and rapidly overshot the expected targets. Just as the bulls headed back into the market the terror news hit them in the face. If you are thinking bargain hunting tonight then you are also thinking about the weekend. Is there risk or not? I vote no because people are more concentrated on work days and make better terror targets. However my vote does not count. This fear of weekend event risk could keep traders from bargain shopping until Monday. This suggests any rebound on Friday could be muted.
To get more specific I would expect a potential dip at the open on any overseas news. I would expect the dip to be bought depending on the severity of the news. Midday could be flat as traders weigh their weekend risk. The close could be interesting. Traders wanting to finish dumping stocks to avoid the weekend and start with a clean slate on Monday could be countered by strong short covering from those wanting to lock in profits from the big drop. Never a dull moment and never a clear answer. Personally I would spend Friday looking for bargains and wait for signs of strength on Monday to go buy them. Cash is a position.
A week ago I was lamenting the fact we were trapped in a trading range with no material movement. The first chart below was one I showed last Thursday. Wish we were still home on the range.
Dow Chart - 45 min
Dow Chart - 45 min
Enter Passively, Exit Aggressively.