The Big Picture
Monday, July 9, 2001
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Nasdaq Sheds 3.7% As Bad News Mounts
Investor's Business Daily
Investors would rather fight the Fed than stand up to weak profits and dour jobs data.
They dumped stocks Friday after a few more companies confessed to profit problems and the economy lost nearly three times as many jobs as expected.
BMC Software (BMC) and Harrah’s Entertainment (HET) joined Advanced Micro Devices (AMD) and EMC Corp. (EMC) in the profit-warning parade. That should wind down this week as companies start reporting actual results. Of course, if the outlooks that come with the actual numbers remain bleak, the market will continue to struggle.
The jobs report, even though it’s a lagging indicator, didn’t help matters Friday morning. The economy shed 114,000 jobs as the unemployment rate ticked up to 4.5% from 4.4%. Manufacturing remained weak. The big surprise? How the slowdown spread into the service sector. Private service jobs dropped by 19,000, only the second decline in 5 1/2 years.
The market responded with a broad sell-off. As usual, the Nasdaq took the biggest hit, dropping 3.7%. The S&P 500 followed with a 2.4% loss while the Dow industrials fell 2.2%.
Volume climbed from Thursday’s light levels, but remained below average. Still, it was the Nasdaq’s first unequivocal day of distribution, or professional selling, since the prior week’s rally. The tech-dominated index held above its recent low, something the Dow and S&P failed to do. That pair also notched a second distribution day in a week.
Friday’s declines also knocked the major averages back to their mid-April levels. They rallied when the Fed cut rates by a half-point April 18. Despite two more cuts totaling 75 basis points, the market has made a round trip in the past 11 weeks.
In fact, the market is lower than it was in January, when the Fed kicked off its dramatic monetary easing. Those cuts eventually will jump-start the economy. But for now, investors remain focused on current profits and economic data.
Most of the profit woes have plagued broken-down stocks and lagging industry groups. The Leisure-Gaming group, which ranked No. 7 on Thursday, broke the trend Friday. In a market with few leaders, it was a disappointing development.
Harrah’s earnings warning slammed gaming stocks. The casino company said second-quarter profit will come in between 46 cents and 50 cents a share vs. the 55 cents Wall Street expected. It blamed the economic downturn for lagging returns at its Rio resort. The news sent the stock plunging 17%. Traders folded and unloaded a full deck of other gaming stocks, including Mandalay Resort Group (MBG), MGM Mirage (MGG), Argosy Gaming (AGY), International Game Technology (IGT) and Penn National Gaming (PENN).
The broad sell-off scared some investors, which ultimately is good for the market. The put/call volume ratio jumped above 0.90 for the first time since early April, when readings above 1.0 coincided with the market’s bottom.
By some measures, investors had turned rather complacent. Bullish investment advisers climbed back to 50% last week as bears dwindled to 25.5%. |
