Option Investor
Market Wrap

Buyers Have Left the Building

HAVING TROUBLE PRINTING?
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03-29-2005


High

Low

Volume

Adv/Dcl

DJIA

10405.70

- 80.00

10520.84

10396.24

2.16 bln

935/2184

NASDAQ

1973.88

- 18.60

2002.65

1968.58

1.80 bln

804/2256

S&P 100

555.90

-   3.75

562.12

555.05

Totals

1739/4440

S&P 500

1165.36

-   8.92

1179.39

1163.69

 

 

SOX

410.66

-   5.30

418.10

408.66

 

 

RUS 2000

604.63

- 10.49

618.82

603.75

 

 

DJ TRANS

3673.57

- 67.20

3755.06

3665.21

 

 

VIX

14.55

  0.80

14.68

13.38

 

 

VXO (VIX-O)

13.93

  0.78

14.06

12.88

 

 

VXN

18.03

  0.29

18.21

17.46

 

 
Total Volume

4,265M

 

 

 

 

 

Total UpVol

970M

 

 

 

 

 

Total DnVol

3,360M

 

 

 

 

 

Total Adv

1978

 

 

 

 

 

Total Dcl

5019

 

 

 

 

 

52wk Highs

81

 

 

 

 

 

52wk Lows

271

 

 

 

 

 

TRIN

1.45

 

 

 

 

 

NAZTRIN

1.17

 

 

 

 

 

PUT/CALL

0.66

 

 

 

 

 

Buyers Have Left the Building

The indexes gave up ground once again as the quarter end approaches. Monday's window dressing attempt failed at resistance and those buyers brave enough to attempt a rebound entry ran for the exits. This typically bullish period on the calendar has turned ugly and this does not bode well for the weeks ahead.

Dow Chart - Daily


Nasdaq Chart - Daily


The morning started off rocky with the second consecutive monthly drop in Consumer Confidence. The final March reading came in at 102.4, -2 points below February. The expectations component pushed the headline number lower with a drop from 96.1 to 93.7. Those planning on buying a home fell from 4.1% to 3.7% and those planning on buying a car fell from 7.2% to 5.7%. There was a significant jump in those feeling jobs were harder to get. With oil/gas prices holding near their highs it is not surprising that confidence is slipping. As long as gasoline remains over $2, well over in some areas, consumers are going to grimace in pain with every fill up. This will translate into further drops in sentiment if prices do not ease before the summer driving season.



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Today was the last day of relative calm for economic reports. The pace begins to pickup starting tomorrow with the GDP. The next three days are packed full of reports that should give us a clue for the coming quarter. The NAPM, PMI, ISM and Jobs report are the headliners for the next three days but there are plenty of others. Oil inventories will be out again on Wednesday and expectations are for another increase as the cold weather moderates into spring.

The news outlets were glued to the Qwest, MCI, Verizon story all day and I will not repeat it here. More important to the health of the market was a sharp drop in cyclical stocks like CAT and materials stocks like PD and NUE. After months and months of vertical rises the cyclical/materials stocks may have finally fallen victim to the profit taking they deserve. CAT fell -4.42 after Morgan Stanley issued a report saying the sector was at or near its peak. The machinery stocks have risen 100% over the last 18 months and Morgan felt the economic cycle might be peaking. Morgan suggested investors take profits and there was a rush for the exits. With profit growth in the sector over the last four quarters at 100%, 100%, 80% and this quarter expectations at 50%, Morgan Stanley could be right about the end of the boom. Profits are clearly slowing but that does not mean 50% growth is bad.

The same comments sent shares of the materials stocks lower with Phelps Dodge falling -5.79 and Nucor -3.70 to lead the drop. PD also said business was not as strong as expected and this helped accelerate the plunge. Steel stocks took a hit on news that Seabreeze Partners were negative on future expectations. There was also news from overseas that four plants were being closed due to excess global steel inventory. This close to the end of the quarter I am sure this is giving fund managers indigestion. With no material window dressing attempt for equities in general and oil holding over $54 it appears funds were hoping to exit the quarter with tidy profits in energy/materials stocks. If the selling continues fund managers may have to abandon that plan.

Pfizer may have taken a serious hit today after the Austrian Patent Office invalidated its patent on the main ingredient in Lipitor. PFE vowed to appeal and its patent will be in force for the expected year long process. Ranbaxy Laboratories has additional suits in other countries including the U.S. to void Lipitor patents. Several readers have asked me if PFE was a buy at this level given their strong pipeline and low price. I cautioned that it appears to be open season on drug companies and with hostile fire coming from all directions. I would want to see a positive trend develop before risking money in that sector.

The only bright spot in the indexes was the SOX, which did give up its gains but held at support at 410 while all other indexes were breaking down. This may be helping to hold up tech stocks but you could not tell it from the Nasdaq, which hit new five month lows. Tomorrow Microsoft has its quarterly analyst meeting and we could hear about its business outlook but investors sold into the news. MSFT closed at $23.92 and a new 10-month low. MSFT set a cycle high just over $27.50 back in November but it has been downhill ever since. Big cap techs can't find a bid and no amount of strength in the SOX is going to revive the Nasdaq without big cap buyers. The SOX may be acting as a brake on the current decline but I fear it is starting to slip.

The Nasdaq tried for three days to use 2000 as support then for four days to regain that support once broken. Today's drop to 1972 appears to be tech investors throwing in the towel after failing to hold that 2000 level. The close at 1972 was almost exactly on the up trend support from October 2002 and it represents a level that MUST hold or the next stop could be 1750 and the August 2004 lows. The 200-day average at 1992 held for four days but it is now history and the break constitutes a strong sell signal for techs. The Nasdaq setup looks like a potential repeat of the March 2000 top but at a lower level. We saw the index chop around at its highs for several months only to post a climax peak and drop into oblivion.

The Dow dropped -79 points and came within 20 points of its 200-day average at 10376. While this is a clear line in the sand it is not as critical as the Nasdaq 200. The Dow tends to notice the 200 but not react to it while tech investors historically use the Nasdaq 200 as their buy/sell signal. The Dow has support at 10400 dating back to September and a break here could easily see a drop to 10000 or lower.

The S&P dipped very close to my 1160 target I mentioned last week as a critical level. 1160 would be the level I would bet on for a rebound but like I suggested last week it would only be a trading bounce. If 1160 breaks it could be a sharp drop to 1100 with 1065 a very likely target.

S&P Chart - Daily


SPX Chart - Weekly


Nasdaq Chart - Weekly


What the heck happened to our markets? You can sum it up in four words that matter most. "Don't fight the Fed." Historically 66% of Fed tightening scenarios result in a recession within two years. With the Fed ratcheting up their Fedspeak towards more aggressive moves ahead the storm clouds are growing. Investors were having trouble getting excited about slowing growth as we moved into 2005. Now with high-energy prices, slowing economic news, rising inflation and a hostile Fed it is just not a positive environment for equities. The Fed pumped massive amounts of cash into the system post 9/11 and dropped rates to multi-decade lows. Now that the economy has recovered from the 9/11 shock they have to remove that IV tube of cash and force the economy back onto its own two feet. Unfortunately inflation is rising faster than they would like while other global economies are slowing. France, Germany and the EU in general are struggling and there were several comments in the news today that growth in China was also slowing. (Stick around, next week somebody will claim China is exploding again.) This global economic weakness is not supplying the necessary buyers to pull the U.S. out of its current phase. With the bull market in its third year and aging rapidly investors doubt there is much excitement ahead. This economic malaise is transferring into the equity markets and investors everywhere are deciding cash is a position.

The failure of Monday's window dressing attempt convinced investors that it was time to exit and today's internals were terrible. Down volume was more than 3:1 over up volume and decliners beat advancers more than 2:1. Since March 4th we have seen a steady decline in individual new 52-week highs and a steady rise in new 52-week lows. This is a very strong indicator of market sentiment and it is not painting a pretty picture. The indexes hit their recent highs on Friday March-4th and Monday March-7th and it has been downhill ever since. The new 52-week lows on the Nasdaq were 154 on Tuesday and a level not seen since Oct-25th 2004. The following image shows the numbers for the overall market since March 4th when new highs hit 650. That was the highest level since Dec-2nd.



With two more days left in this quarter and serious economics ahead I am sure we will see additional volatility. Funds hoping to escape the quarter with their gains intact are going to be holding their breath as the clock ticks away. Those seeing the writing on the wall for a post end of quarter dip will probably try to take some profits early and move to cash. There could still be an attempt at window dressing but in this environment it may take the form of preventing further drops rather than pushing the markets higher. The outlook for the rest of the week is very cloudy but my outlook for Q2 is very negative. The big report will be the Jobs report on Friday and as the first day of the new quarter funds will probably act on the news. I believe investors will decide the easy money has been made and memories of the March 2000 top will hasten exits on fears of a repeat. This could be an ugly summer for equities in general. Oil prices are holding just over $54 but another inventory build announcement on Wednesday could set the stage for a post end of quarter drop. I would be a buyer of oil stocks around their 100-day average or any dip of oil to $50 or below. Check out the Leaps Trader section from Sunday for individual symbols and entry points. Definitely, enter passively and exit aggressively.
 

 
 



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