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FYI. Making sense of yesterday.
It is always darkest before the dawn...
Or at least that is how the old saying goes. Today was another
record setting trading session as the Nasdaq beat last week's
one day dive of 83 points to set a new 3rd biggest point drop
today with a loss of 94 points. That is the equivalent of a
drop of 470 Dow points. No wonder the tech heavy Nasdaq is
blamed for dragging the whole market down. But, the American
markets may not be the only ones to blame. World indexes were
mostly negative as the Brazil Bovespa fell dropped 1.7% in
profit taking after a 4.6% rally Monday. Plus, the European
markets were suffering a widespread downturn as earnings season
opened and investors worried over potential earnings surprises.
So how bad was the damage over here? The Dow closed down 1.7%
to 9133 after fighting all day to hold above 9180. The last
hour plummet put the Dow negative for 1999 by 0.5%. The Nasdaq
did not fair much better. While it remains positive for the year
by almost 5.4%, it still fell to a discouraging 2310 after twice
bouncing off the 2345 level. Other U.S. indexes followed their
lead and the S&P 500 is down 1.1% for the year while the real
loser is the Russell 2000. The RUT is down 4.5% for the year!
What happened to the January effect?
I'm sure most quote screens today were painted a bright red.
Winners were few and far between. The chip sector did an
about face from yesterday and posted a sector wide loss. The
software sector was equally weak while the telecoms, the
biotechs, and the financials all followed suit. Only 3 of the
Dow 30 components posted any type of gain while 6 of the Nasdaq
100 managed to close the day with a gain.
Leading the losers today were the Internet stocks. Almost all
of the big name companies posted a loss. ATHM down 7.94,
AOL lost 11 points, AMZN dropped 9.13, CMGI fell 14.75,
XCIT slipped 8 points, giant YHOO lost 17.88, and NSOL dove
26.13 under news that regulators are looking into creating
some competition. The big loser today was LCOS who fell
33 points to 94.25. Evidently, traders were unhappy with
the deal between LCOS and USA Networks/Ticketmaster. In a
deal worth about $22 bln, the merger will create quite the
cyberspace powerhouse. The combined marketing muscle and
e-commerce presence between LCOS/Ticketmaster and its
citysearch website in addition to USA Networks cable
operations (which include the successful Home Shopping network)
will be formidable indeed. This merger leaves YHOO as the
last remaining (big name) independent Internet portal.
What we can say about this sector wide losing streak is that
it might be over soon. Many of these Internet stocks have
corrected close to 50% from their highs. Once they find a
bottom the leaders should start trending positive again.
INKT may have already started.
However, if this is to happen, if the Internets are to
recover, the market needs to find some form of acceptable
valuation. This seems to be the transition many see the
market moving to. No longer are investors buying into
the momentum stocks but rather they are looking at "value"
stocks. Of course if the market continues to dip at this
rate many of the stocks previously referred to as momentum
will be considered "value" plays as PE(s) start to drop with
their stock price.
So when is a sell off not a sell off? When it is not produced
on strong volume. Probably the only saving grace here is the
fact that volume was light on both exchanges today. The NYSE
traded on volume of 713 mln while normal is between 850 and
900 mln and the Nasdaq traded on 910 mln which is below its
normal 1.2 bln shares (as of late). What we are seeing is
not a rush of sellers but really a lack of buyers. All of
the money is sitting on the sidelines waiting for the
correction to be over. Guaranteed, when the market finds a
bottom they will be rushing in to grab all of the leaders.
So were is this money going in the mean time? Mutual funds
are sticking it into money market accounts. Last year at
this time managers were sticking 20% of their money into
money markets while this year it's over half (about $37 bln)
is moving into money market accounts. As soon as they feel
this correction is done they will be pulling it out just as
fast to play stocks again.
So what can we expect for tomorrow? Probably more selling.
As one pundit put it, institutional investors are demonstrating
a more disciplined approach and letting the market fall to
their predetermined price levels before they buy in. Many
of the major indexes are approaching their 50 dma(s). Investors
are expecting a bounce, if not, we'd all better practice our
put buying. Currently the Dow is at 9133 which is actually
below its 50 dma of 9189. The Nasdaq is at 2310 while its
50 dma is 2225. However, support for the Nasdaq is going to
be close at 2300 or we could freefall to 2200 (2225) and
mental support for the Dow is at 9100.
The good news is Ralph Acompora. Yup, read that again.
While we can credit him with any number of negative market
occurrences, his predictions for a 5% to 10% correction
puts the market bottom between 9100 and 8700. We are
awfully close to 9100 now which could put us at the end
of this nastiness.
If the market is going to turn itself around we will have
to see a redemption of the advance/decline line. Traders
continue to worry over its growing erosion. Between the
NYSE and the Nasdaq, decliners beat advances by a greater
than 2:1 margin (4827 to 2206) and the new lows beat
new highs by better than 3:1 (160 to 51). To truly see
the market turn around, we are going to need a broad market
reversal.
However, things don't always look as bad as they seem.
One prudential analyst said he sees this as merely a
speed bump in a bull market rally. We definitely like
his attitude. Current events that might pull the market
up this week is the possible end of President Clinton's
trial. The senate met behind closed doors today to
deliberate the president's fate. The outcome is expected
to be pro-Clinton which would keep him in office and
the markets would see this as a positive to keeping the
status quo. Another event occurring this week in New York
is the Goldman Sachs technology conference. It was kicked
off today and continues through to Friday. Over 160 companies
will be presenting themselves and it is quite possible that
all of the positive press likely to come out of the conference
will pick up the beleaguered Nasdaq.
We do expect the correction to end, but whether it occurs
tomorrow or next week is unsure. The end of the president's
trial, the tech conference, WCOM's earnings Thursday,
Dell's earnings next Tuesday, and a host of splits near the
end of the month are all positives (assuming the earnings
are strong). But momentum is negative and the advance/
decline line shows no signs of improving (soon). We suggest
sitting on the sidelines like the fund managers and let the
market come to you. As Jim likes to say, avoid emotional
trading, make your decisions when the market is closed so
you are not clouded by the intraday swings, and if you
must trade practice the art of stop losses. Your most
important trading resource is at stake. Your capital!
Don't fool around with it, there will always be another
day.
Good luck and be patient,
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