PRUDENT BEAR: Market Summary August 17, 2001
by Lance Lewis
DELL Takes A Dive
Asia was a little lower last night with the Nikkei dropping back to its lows for the year. Europe was off 2 percent this morning with the German Dax falling 3 percent and hitting another new low for the year. The US futures were significantly lower this morning. We gapped down, tried to rally and then had a cave-in and were quickly down 2 percent. From there, we flopped and chopped with a downward bias until the last hour where we tried to go cliff diving, but the dive was aborted in the last 30 minutes by a sharp, short covering rally. The NASDAQ was not so lucky as its rally into the close collapsed, sending the NASDAQ futures out on their lows. Volume was abysmal, especially for an expiration, as there continues to be a lack of bids (1 bil on the NYSE and 1.3 bil on the NASDAQ.) Breadth was 2 to 1 negative on the NASDAQ and just shy of that on the NYSE.
DELL reported their sequential decline in sales last night and guided revenue down 5 to 10 percent for the coming quarter, so it appears DELL is officially throwing in the towel on the back-to-school PC boom. DELL did try and talk about a bottom and a bounce back in the spring, but at over 40x earnings nobody seemed to be willing to buy into that fable as DELL was spanked for 9 percent. HWP echoed DELL’s comments, saying that it didn’t see a rebound till 2002 at the earliest. Analog chipmaker MXIM reported last night and revealed that (surprise, surprise) bookings had declined sequentially again by 15 percent and that we would be seeing a sequential fall in revenue next quarter again as well. Janus has been beefing up its positions in MXIM and LLTC (which is in roughly the same business) recently and explains some of the strength in their stock prices. When Janus is forced to sell these two overpriced turkeys, it’s going to get ugly. MXIM ended down 6 percent on the day.
Chipmaker ADI also reported last night and said that they didn’t see much of a chance for a rebound for the rest of the year. ADI did offer that their backlog was stabilizing since “there's not much left there to cancel.'' As we’ve discussed before, just because a company’s business goes to zero and that may be a “bottom doesn’t mean its stock can’t fall further, especially when it’s as overpriced as many of these chip companies are. ADI slipped a percent. All that news was initially yawned at last night, but by the morning it seemed to matter. Why, you ask? Because the path of least resistance for the market is now down as the liquidation process starts to pick up. Consequently, we’re likely to see more and more selling off of no news going forward into the fall. INTC was hammered for 7 percent after I suppose people put two and two together after what DELL said to figure out that INTC might have some problems going forward, as if that shouldn’t have already been figured out last year. Or more likely, one of these big mutual funds that owns a load of INTC had some redemptions and was forced to dump shares into a weak market. I don’t seriously think that anyone has suddenly put on their thinking cap and decided that INTC’s business might have more problems going forward or that it is overpriced. For that matter, they probably didn’t buy it because they thought it didn’t have problems either. They just bought it because it’s “INTC,” and now they are selling it because they either don’t like the price action, need to meet a redemption, or are trying to “save their year.” The SOX fell 5 percent on the day to a new low for the move off the Aug peak that resulted from the “train is leaving the station” silliness that some touts were out pushing a few weeks ago. It’s worth noting that bellwether MSFT fell 4 percent to a new low for the move and closed for the week below its key 65 level. Internet stocks under performed once again with the DOT falling another 4 percent and closing for the week below its April low to a new for the move from the peak back in 2000. To sum up, Tech was heavy. I’m not going to bother going through all the damage. The important event to note today was the fact that the larger cap tech shares like DELL, MSFT, and INTC that have been the “safe havens,” where everybody has tried to “hide,” finally came under heavy selling pressure. These are extremely crowded trades. Now that prices have started breaking to the downside, the rush to the doors could be fairly violent.
Financials continued to weaken as well. The BKX fell a percent, and the XBD fell 3 percent. MER fell 4 percent and broke the key 50-level, although it managed to climb back just barely above it for the close. Consequently, that indicator is not telling us to put on our helmets just yet, but you might want to pull them out of the closet so you know where they are. GE fell another 2 percent to another new low for the move. The next stop is GE’s March low. Retailers were lower as the RLX fell 2 percent to a new low for the move from the recent peak. These retailing stocks are another candidate for a real debacle since I suspect a lot of hot money has crammed into them on the premise that this silly $300 tax rebate is going to matter. The run for the exits in these stocks should be a sight to see.
Oil fell 72 cents. The XOI fell 2 percent, and the OSX fell a percent. Gold $4.10 to $282, and the HUI rose 2 percent. The COT report released this afternoon revealed that commercial traders, the typically “smart money,” had moved from virtually flat gold last week to significantly net short, and with the rally since Tuesday they are probably even more short. Consequently, the picture for gold is turning a little bearish in the very short term. While there is most definitely a relationship between gold and the dollar, the relationship is not always one to one. For example, gold bottomed in Sep of 1999, but the dollar didn’t top till last month against most currencies. So, don’t be shocked if gold and its shares get dumped in a corrective move along with equities and the dollar should an “illiquid event” take place over the coming weeks. The US dollar index tried to rally early this morning but turned lower by the close to end down a touch and at the low for the week. The euro rallied back up to just shy of 92 cents to its high for the week.
Treasuries were higher with the long end breaking out above its recent congestion area and the yield on the 10yr falling to 4.84%. The next big level to watch will be the low in yield of 4.69% put in back in March. I doubt we’ll see this taken out during any sort of panic in equities much more than marginally (if at all) due to the weakness in the dollar that is likely to accompany any equity weakness since foreign selling should meet or even overwhelm any domestic buying, but we’ll see. The June trade deficit widened this morning to $29.4 bil, and likely signals that Q2 GDP will be revised down in a few weeks to a negative number. That means that by the last week in October, when we get the initial Q3 GDP number, we’ll likely have two consecutive quarters of negative GDP to meet the classical definition of a recession, and we can stop this silliness of calling the current funk “an economic slowdown.”
So, for the week we now have the S&Ps and the NASDAQ closing below their July lows. The only index still holding above those lows is the Dow. If we get see all three indexes below those “get a helmet” levels, I think we’ll likely see some real acceleration in the selling. Now, we have the FOMC next week, and a lot of people will likely be looking to the Fed to save the day, but the Fed has done about all it can do, and it’s obviously not helping. I don’t think it really matters what the Fed does next week. The Fed can cut rates to zero, and it won’t change anything. Still, there still seems to be some hopers out there that think more rate cuts might eventually make things better, so some sort of bounce on Monday would certainly be no surprise. But, the way things are going, next week could see the beginning of an epic break in stocks if we see all three of the major indexes take out their July lows and make a run on their March/April lows. From there, anything can happen. I hope readers have gotten their financial houses in order ahead of the coming storm because it’s fast approaching. |
