Option Investor
Market Wrap

Halloween Coming Early?

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      10-19-2004           High     Low     Volume   Adv/Dcl
DJIA     9897.62 - 58.70 10020.55  9894.89 2.16 bln 1124/2079
NASDAQ   1922.90 - 13.60  1952.85  1922.60 1.72 bln 1236/1887
S&P 100   530.99 -  4.19   538.10   530.93   Totals 2360/3966
S&P 500  1103.23 - 10.79  1118.03  1103.15 
SOX       388.00 +  3.94   395.63   384.35
RUS 2000  566.67 -  5.36   576.63   566.49
DJ TRANS 3345.34 - 37.34  3392.76  3345.25
VIX        15.13 +  0.42    16.32    14.32
VXO (VIX-O)15.63 +  0.94    15.64    14.46
VXN        20.84 +  0.12    20.89    20.10 
Total Volume 4,229M
Total UpVol  1,410M
Total DnVol  2,750M
Total Adv  2723
Total Dcl  4484
52wk Highs  241
52wk Lows   170
TRIN       1.45
NAZTRIN    1.20
PUT/CALL   0.95

The markets may be warning us that Halloween is coming early this year. The markets gave back an early bounce to sink back to critical support and there were no bulls in sight at the close. Dow support at 9900, Wilshire 5000 support at 10800 and SPX support at 1100 all appear to be in danger of failing. Could this be predicting an ugly October surprise?

Dow Chart

Nasdaq Chart

SPX Chart

Wilshire-5000 Chart

Today was not a good day for economics. The weekly Chain Store Sales fell -0.2% after two weeks of gains. This is not a big drop but shows retail simply can't maintain a positive trend. Debt burdens are nearing record levels and gas prices over $2.00 are cutting into budgets. Not anything we did not already know.

Worse news came in the form of the Consumer Price Index which rose +0.2%. If you don't use food or energy the core rate rose +0.3%. These levels would have been much worse but there was actually a -0.4% decline in energy prices during the survey period. This held the headline numbers down but as we all know the small drop in energy prices did not last. The core inflation rate is now at +2.0% for the year and at levels not seen since Oct-2002. Once the rebound in energy prices filter back through the market this will be even higher. This could force the Fed to continue the rate hikes despite a cooling of the economy.

New Residential Construction fell to 1.898 million from 2.02 million in August. Starts fell -6% and it was the largest decline since January and they are well below their 12-month average. Multifamily units continue to buck the trend but single family homes are suffering. There could be some benefit underway in the South for hurricane recovery but it is still too early to tell. With long-term rates stabilizing we could see a level housing market for the near future. Permits suggest we have reached a support level where demand could be stable as long as jobs continue to hold. The ten-year yield closed today at 4.04% and bonds could continue to find buyers in a weak equity market.

The challenge remains the job market and the Challenger Survey announced on Monday showed 54,701 high tech jobs were lost in Q3. This was up +60% from Q2 and +14% from the same period last year. Challenger said tech companies have no pricing power and they are having to sell for lower margins just to keep market share. After three years of cost cutting the only avenue left to reduce costs is to reduce jobs. Challenger said IBM and BearingPoint are hiring in the U.S. but are becoming increasingly picky about who they hire. Service and consulting businesses like IBM are seeing their backlog increase but tech manufacturing accounted for 56% of the Q3 job losses.

IBM roared out of the gate this morning with a +3.50 gain to trade over $89 and contrary to the market did manage to hold those gains. IBM reported profits on Monday night that beat the street and were surprisingly good. Emerging markets such as Brazil, China, India and Russia grew by more than +30% with American revenue up only +8%. IBM said it had more than $110 billion in back orders. Profits for the quarter were $2 billion. Not bad for a blue chip tech that was known for earnings warning fears just a few quarters ago.

Texas Instruments also beat the street and jumped +1.50 on the news. The TXN gains were not so spectacular and came in part due to late quarter sales that boosted the prior two months of weak results. This and several other chip stocks helped push the SOX to resistance highs at 395 that were tested last Wednesday after the Intel earnings. Those highs did not hold then and they did not hold again today. The SOX did close in positive territory but well off its highs.

It was not techs or software or even Internet stocks that captured the spotlight today. It was the warlock of Wall Street in the person of Elliott Spitzer making headlines once again. The regulatory gargoyle jumped from sector to sector as not only insurance companies like MMC, CB and AOC took the heat but subpoenas spread out to AET, CI, WLP and ATH with monster losses the rule for the day. ATH -7.30, AET -11.57, CI -6.85 and WLP -11.30. The size of the losses and the widening scope of the witch hunt put fear into investors and every sector even remotely related saw selling. Financial stocks suffered because they were not only grouped into the same indexes being dumped but due to fears the carnage would impact current loans and relationships with the banking community. Somebody needs to put a leash on this wild man or maybe use a wooden stake to prevent Count Spitzer from sucking the lifeblood from any new victims.

The markets sank from the open and never found a bid. Support levels were not broken sharply they just eroded away with slow steady selling pressure. Although volume on the NYSE was higher than recent levels at 2.16B shares there was not a serious imbalance. Decliners beat the advancers by slightly more than 2:1 and given the hit to three letter insurance stocks listed above this was not unreasonable. There were just very few buyers.

The Dow retreated to 9900 at the close and while that is/was strong support the action at the close suggested it may not hold tomorrow. This is the third retest in the last four days and the odds are good this one will not hold. The August low was 9783 and this could be the next target. One analyst is suggesting we could go all the way to 9500 and the bottom of the downtrend channel.

The Nasdaq is refusing to crack and holding above 1925 most of the day. The Nasdaq tried to hold the high ground at 1950 but failed and pulled back to the middle of its recent congestion range running from 1900-1950. This divergence from the blue chips has more to do with the insurance implosion than a tech rally. The IBM/TXN earnings helped techs but swimming upstream in a down market is a tough task.

Tonight's earnings were a mixed bag with companies beating estimates disappointing on guidance and those that did not disappoint on guidance found some other reason to trade lower. MOT, PLT, STK, STX, CYMI, MNST and SIMG were some of the stocks beating estimates after the close. MOT, CYMI, MNST, SIMG all traded down along with ERTS which missed estimates.

Very late after the market closed Teradyne, a maker of semiconductor testing equipment, posted a serious warning. TER posted earnings of +0.21 cents but warned that Q4 earnings would drop to only +0.04 cents due to customers significantly slashing orders compared to Q3. They said there was a significant reduction in capital spending as chip makers tried to deal with snowballing inventory levels. Revenue for Q3 was $457.8 million and current Q4 orders are only $284 million. At the same time FSL, Freescale Semi, a recent spin off from Motorola said they were laying off -1000 workers and expected orders to decline through Q4.

The negative earnings and guidance from multiple companies after the close sent the futures plunging to below 1100 on the S&P and buyers were just beginning to nibble at 8:PM. Will they return to positive territory by morning? Will it matter? With today's negative session and the nights earnings events you would expect Wednesday to be less than exciting for the bulls. The key for traders is not likely to be the chip woes but the ailing financial sector.

Eventually the fear will wear off and investors will tip toe back into the water but they may want to cling to the safety of the bank for a few more days. Spitzer needs to be sighted targeting somebody else before they will feel safe entering the sector again. Since banks are grouped with insurance companies in various funds the financial sector may remain weak. Citibank said after the close three top officials are leaving due to the Japan scandal and Fannie Mae reported the SEC inquiry had turned negative with a formal attack now underway. This sent FNM plunging in late trading.

Negative chip earnings, weak financials, an election tie and a calendar month known for volatility. Sure sounds like a recipe for disaster. Helping to lubricate the selling was a firming in oil to near $54 once again and money moving from equities to bonds. While myself and many others were expecting an election rebound to begin this week I believe that potential is quickly eroding. If the Dow trades down to 9800 tomorrow it should be our most likely spot to launch a rebound. Should that level fail the sentiment could turn much uglier and the next stop could be that 9500 I mentioned earlier.

Wednesday will clearly be a battle between the technical traders and market sentiment. Should they end up on the same side the outcome could be dangerous. There are no material economic events in the morning but we will get oil and gas inventories at 10:30. A drop in inventories could breathe new life in the lagging oil prices. Earnings before the bell include AMR, BK, CL, CFC, DCN, DAL, EK, FLIR, GD, GENZ, HET, HON, JPM, NITE, LIN, LU, MGG, NTRS, ODP, PFE, SWFT, UTX, WYE. Three of those are components in the Dow and misses could be painful to the market. The airlines are expected to show large losses and the transports should react to their guidance. Look for a bounce at 9800 should we trade that low but enter carefully. Given the weak market breadth and sentiment I would be careful about rushing back into the water too soon or you may end up swimming with the fishes rather than surfing the waves.

Enter Passively, Exit Aggressively.

Jim Brown


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