Something Wicked This Way Comes
by Lance Lewis
Asia was sharply higher last night after a big fall on Monday. So in essence, they really went nowhere. Europe was up 2 percent this morning, and our futures were a little lower after trading sharply higher overnight. We opened flat and traded slightly lower while we waited for the August NAPM number. The number hit the wires and it was 47.9, up from 43.6 in July, but still below 50, which indicates continued contraction. The fact that we had a bounce in industrial activity apparently excited somebody because that number caused a Harrier jet move that sent us straight up about a percent in the Dow and S&Ps, while the NASDAQ turned green but never really could get going. After the initial explosion, we had a little pullback and then lurched vertical for another couple hours. At that point we had a flameout and reversed hard. The remainder of the day was spent sliding down the other side of the mountain led by the NASDAQ, which hit a new low for the move down from the May peak. The close saw us go right out on the low with the Dow closing back just under the psychologically important 10,000 level. It was one of the uglier reversals I have seen in a while. Normally, that sort of dramatic reversal is reserved for reversing declines and turning them into rallies. Volume was OK (1.1 bil on the NYSE and 1.5 bil on the NASDAQ.) Breadth was slightly positive on the NYSE and slightly negative on the NASDAQ.
After a long holiday weekend, HWP and CPQ got together and decided that they might need each other as a flotation device during the coming deluge. That had the futures rocking last night for some unknown reason. It’s not as if there’s really anything to get excited about here. It’s a stock deal (HWP buying CPQ), or as a friend of mine calls it: a “wampum” deal. Interestingly enough, even as the rest of the market was trying to grind higher off the NAPM bounce, HWP and CPQ were both tanking. By the end of the day, HWP was down almost 20 percent and CPQ 10 percent. That may have spooked a few people and contributed to the selling in tech that we saw accelerate late in the day. The semis were heavy all day. The SOX fell 3 percent led by the equipment shares. ASML, a big European semi equipment maker, broke down badly on the charts right from the open, falling 7 percent, and solidly to a new 52-week low below a price support shelf that has held since last October, which not a very healthy sign for the equipment industry from a technical standpoint, charts being the only thing most can hang their hat on in this industry at the moment because the fundamentals stink to high heaven.
Things are so great in telecom that British equipment maker Marconi warned this morning and announced it was laying off another 2000 workers (half of which are in the US.) Marconi also announced that the Chairman and CEO were both resigning. ERICY was out this morning saying that things appeared to be getting worse also, especially in Latin America. ERICY said it continues to see modest to flat growth in 2002, with more emphasis on “flat.” ERICY fell 20 percent to just shy of a new low. As we have discussed before, who cares whether this is the bottom or not? Asking, “What’s the bounce off the bottom going to look like?” is the more appropriate question and ERICY is saying it’s not much to look at in their business, not to mention that fact that the “bottom” is likely a ways off still and “flat” may be a bit too optimistic assumption from here as well. Growth is what you are paying for with an earnings multiple. If growth isn’t there, then multiples that investors are willing to pay for those earnings fall dramatically. That’s why all this talk of bottoms really doesn’t matter. Life on the other side of the bubble is going to be dramatically different from the nonstop growth that we have been spoiled with during the mania. That is the world we are currently discounting.
The Internets continued their leadership role today with the DOT falling another 5 percent to another new low for the move. The 1998 lows aren’t too far away now. From dust the Internet stocks sprung, and to dust they now return. Today was a day where the “boys” tried to get a rally started but the ongoing liquidation in tech simply overwhelmed what little buying there was. And you can’t have a real rally without tech.
Financials had similar reversals. The BKX traded higher early on but faded to end up only a touch, and the XBD actually ended down. MER fell a percent, once again approaching the 50-level. GE slipped a touch. Sub-prime lender PVN lowered guidance this morning and was smoked for 22 percent. This credit card area is a tinderbox just waiting to catch flame in the current environment. FNM and FRE both bounced a percent. The retailers bounced along with everything else, but like tech gave up most of their gains by the close. The RLX ended up a percent.
Oil fell 27 cents. The XOI rose a percent, and the OSX rose 2 percent (we also had a big offshore drilling merger happen here.) Gold fell $2.80, and the HUI fell 2 percent. The US dollar index launched almost 2 percent to just shy of the 116-level. The euro was spanked for 2 pennies and fell back to just above the 88-cent level. The dollar was due for a bounce when it failed to break badly last week. The next big question is how long does the bounce last before the next leg down? Continuing pressure on equities is certainly not bullish for the buck. Treasuries were spanked in the long end with the yield rising on the 10yr to 4.97%. Interestingly, the bonds failed to rally and went out on the lows of the day even as equities began reversing their rally that began in the afternoon.
Are things about to get nasty? It sure looks that way. A reversal like today indicates that sellers are now so anxious to get out that they will sell into even a sharp rally like we saw today. That could be an indication that we may start seeing some acceleration downward that we have so far been able to avoid. I’ve received several emails suggesting that we won’t have any sort of mammoth decline, and that we’re in for more of a slow grind down like we have see so far in the NASDAQ and SPX. That’s a possibility, but I don’t think that can continue and here’s why. Besides the fact that bubbles tend to end, as John Kenneth Galbraith said, “with a bang and not a whimper,” the public has been wiped out and has finally begun to stop buying the dip as they begin to worry about their jobs and the economy. How do we know this? Besides the continual mutual fund outflows that we see in the flows data. The market is also telling us this by the way stocks like MER trade. While the public was actively buying the dip and the grind lower was slow and controlled and the headline Dow average was well above 10,000, as we saw in late 2000 and early 2001, MER continued to move higher because trading volume from the retail area was still fairly high even though the public was losing money because they were still “playing the game” (MER's all-time high was in January – a year after the NASDAQ, SPX and Dow topped out.) Move forward to today where the retail business is suffering and MER is leading the indexes lower (MER took out its April low two weeks ago.) Who is left to buy the dip? What happens when we get motivated sellers that are selling for tax reasons or to pay off debt? The market is saying that the public has had enough, and there must be dip buyers in order for the move down to be in a controlled and slow manner, especially if sellers suddenly become motivated sellers. There’s only one group that is still buying the dip and aggressively so, and that’s the shorts when they cover. And that’s a very dangerous situation indeed. |
