Dow Flirts with a Correction, Which Would Be a Welcome
Retrenchment
09-24-99 | 01:38 PM | Harry Milling The Dow hit correction territory, but that
isn't a bad thing.
The Dow Jones Industrial Average's session low of 10,191.00 gave
the benchmark of benchmarks a 10% loss since its record closing of
11,326.04 hit August 25. However, the index has to close under the
10% level and establish a trading pattern beneath it for a corrective
phase to be experienced.
More importantly, a correction is constructive for an index,
particularly when the index has posted very sharp gains in a short
period of time like the Dow has. Even with the steep losses, the Dow
is up 12% year to date.
There is some unfounded concern that we have entered a bear
market, particularly because technology stocks could extend their
declines due to the earnings impact of the Taiwan earthquake. But it
takes double the loss of a correction for an index to enter a bear
market, and we are far from that in any of the major stock averages.
Even with the slew of third-quarter earnings warnings that have hit the
market during the "preannouncement" period, October is still expected
to witness 20% earnings growth or more in the S&P 500 companies.
Most likely the technology sector will still be able to deliver some
upside surprises.
Microsoft MSFT, which rocked the Nasdaq Composite Index
yesterday with growth concerns by calling its stock overvalued, easily
could be one of the leaders to blow away Wall Street earnings
forecasts.
Microsoft's earnings guidance is based on a forecast of PC sales
volume growth at around 15% in the third quarter. But tech research
firm International Data Corp. has said it expects PC sales volume
growth to be 24.8% in the quarter year over year. Moreover,
Microsoft expected Japan sales to remain sluggish while IDC said its
PC sales forecast was driven by a recovery in Asia.
In recognition that the future profit picture is not all that bad, the stock
averages have recovered from their lows. In afternoon trading, the
Dow Jones Industrial Average is off 23.43 points, or 0.23%, at
10,295.16 after falling as much as 127.59 points. The Dow has lost
612.63 points in the past week and is trading at five-month lows. That
sounds ominous, but it keep in mind it has rose about that much in less
than a week during August. With the Dow above 10,000, 100 points
swings are more commonplace.
The S&P 500 index was off 8.78 points, or 0.69%, at 1,271.99 after
falling to 1,263.82, its lowest in six months. The Nasdaq Composite
Index was off 37.84 points, or 1.38%, at 2,711.99. In morning
trading, it hit a three-week low of 2,684.70.
U.S. Treasuries have assumed their historical role as a safe haven
when the stock market is shaken. The price of the 30-year benchmark
Treasury rose 3/32 to 101 31/32, driving its yield down one basis
point to a four-week low of 5.98%.
Market's Monthly Uptrend Threatened as Tech Profits May Have Hit
Snag
09-24-99 | 11:51 AM | Harry Milling Stocks remain under attack, but rate
hikes are not the issue.
The Dow Jones Industrial Average hit fresh five-month lows at the
open, but the yield benchmark 30-year Treasury was trading at
6.00%, near its lowest in four weeks. That's 11 basis points beneath
its yield in mid-September. Fears were high then that the Federal
Reserve would hike the federal funds rate for the third time this year at
its October 5 meeting. Yet the federal funds contract on the Chicago
Mercantile Exchange, which anticipates rate hikes, has fallen to a
four-week low of 5.265% when the federal funds rate stands at
5.25%.
Nevertheless, after sharp declines in all the major stock averages this
week, stocks are still weak. Expect the equity market to remain on the
defensive until the close due to earnings concerns about the
technology sector, the main fuel of the bull market.
Technology seemed to be only sector that was, on the whole, immune
to earnings concerns. The reason that technology stocks have fueled
the bull market is because investors could count on the sector to
always deliver positive earnings surprises. Now the dazzling growth of
the tech sector has hit a temporary snag, and this calls into question
the ability for the major stock averages to maintain their monthly
uptrend.
There is concern that the impact of Taiwan's earthquake on
semiconductor production may be worse than some thought, resulting
in fourth-quarter earnings growth by some leading technology
companies not being as robust as initially forecast. While the major
stock averages could post a net decline in September, the monthly
uptrend could resume in October as investors focus on profits in the
following quarters.
Industry analysts are saying that chip production may not come back
for a month or more, so there could be a shortage of motherboards,
which hold these microprocessors for the personal computers.
That could severely cut sales during the fourth quarter for personal
computer companies such as Dell Computer DELL, IBM IBM, and
Apple Computer AAPL. These stocks have already been sold off on
the news.
Tech stocks that some investors thought were shielded from the
earthquake's impact are now taking a hit. For example, Intel INTC,
which does not manufacture chips in Taiwan, still needs the
motherboards for its chips. Intel said it needs to wait until announcing
its third-quarter earnings in October before it can assess the fallout.
Investors are not waiting around, and Intel was down 3 15/17 at 73
9/16.
With earnings concerns plaguing the technology sector, investors have
no leading sector to turn to as a safe haven. Possible interest-rate
hikes are not in the forefront, but they are still in the back of investors'
minds, and technology was the only major sector that promised high
earnings growth in a higher-rate environment.
The Nasdaq Composite Index was off 27.56 points, or 1%, at
2,722.27, a two-week low. The Dow was down 13.61 or 0.13%, at
10,304.98, while the S&P 500 index was down 7.34 points, or
0.57%, at 1,273.43, its lowest since August 10.
The Dow has fallen 501.82 points, or 4.6%, this week alone amid
earnings concerns and fears of foreign capital flight because of the fall
of the U.S. dollar against the yen.
The dollar has only temporarily stabilized against the yen. It is still not
far from 3 ½-week lows made last week as there is little chance G7
ministers will decide to intervene against the yen's strength at their
meeting tomorrow in Washington.
Meanwhile, third-quarter earnings disappointments continue to buffet
the market with Allstate ALL and Dow component Union Carbide
UK the latest to issue warnings. Allstate was down 5 at 26 ¾, and
Union Carbide fell 15/16 to 54 1/16. The impact on Union Carbide's
stock is somewhat muted by its agreement to be acquired by Dow
Chemical DOW, which took the larger hit, down 1 ¾ at 109 1/16. |
