Market Wrap
Friday, June 7, 2002
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MAKING SENSE OUT OF FRIDAY'S VOLATILITY
Even if today's reversal turns into several days of rebound, I see no technical reason to become bullish at this point.
I said earlier this week that the Dow's break below its 9775-9800 support was very disappointing. It pushed me into the bear camp. And I see no reason to change my new negative view even if we experience a sharp pop upward next week. My reasons are fairly direct: my weekly charts are suggesting that the Dow is far more likely to see 9250, or much lower, before it sees anything much above 9900.
Today's action was good enough to produce some positive short-term market movement for next week. But that's all it is likely to be. From a trading perspective this means that investors may want to by-pass any of the short-term strength, shorting into any rally as the Dow attempts to return to 9800 (or maybe 9900) and the Nasdaq tries--and I emphasize the word "tries"--to claw its way back to 1550-1600 before facing more sustained weakness. I've presented my technical perspective on some of the indexes below. Before we explore next week's market, though, let me try to tie today's disparate events into some kind of coherent trading session.
Today's Market:
Unless you were listening to NickleBack or Rob Zombie for the last 24 hours--continuously--you knew that Intel's mid-quarter guidance, presented after the market closed on Thursday, would effectively set the tone for Friday's trading. And it did just that, with all the major averages--Nasdaq 100, Dow, S&P500, SOX--gapping down at the open, subsequent to the previous evening's lowered revenue estimates from INTC. Not surprisingly, investor behavior replicated that which we have seen so often in recent trading weeks: positive economic news--a lower unemployment rate this morning, for example--was wholly ignored in favor of anything that contained these three words: "guidance", "revenue" and "lower."
JP Morgan offered its pre-open, and (certainly unexpected) downgrades of INTC, AMD, and NVDA. Micro Devices apparently felt a need to pitch its corpse onto the semiconductor bonfire when it revealed, also before the open, that it too would be revenue-light and EPS-challenged. The S&P futures, as well as those for the Dow and Nasdaq 100, looked ready to collapse well before the NYSE cranked open its big doors for trading.
Like I said, though, this morning's economic news was reasonably encouraging. After April's 6% unemployment rate, today's 5.8% rate for May only validated the notion that the US economy is struggling back to life and that workers are finding jobs. The May rate was significantly better than the consensus estimate of 6.1% unemployment; one has to wonder how the markets might have responded to this news had they not had the INTC matter with which to contend.
While jobs growth may be improving, it is doubtful that there are many new jobs at Tyco (TYC). The company seems to be disintegrating right before the eyes of investors. Generally we don't highlight soap operas in our nightly Market Wrap, but the story line for TYC--and the implosion of its stock price--is quickly becoming the thing around which legends form--horrible legends, that is. In addition to reports earlier this week that the former CEO was under investigation by the NY prosecutor for a host of potential offenses, today revealed that the company itself was being scrutinized for possible income tax evasion and improper use of corporate funds. Yikes! TYC is in the process of attempting to sell its CIT subsidiary--they need cash, after all--so such legal excursions are hardly desirable for TYC's stock price. But that was just the start for today. Late this afternoon Moody's cut Tyco's long and short term debt ratings. With such an array of events surrounding the company, it was not surprising that TYC plunged about 30% on the day. Incredible.
One of our short plays this week was Williams Company (WMB), a major energy corporation that has been wrapped in an Enron-esque shroud. We're a bit embarrassed that we closed out this trade, even with a very healthy gain. Why? Just before the close today Moody's downgraded that company's debt. We suspect that Monday will produce more grief for WMB shareholders.
Getting Ready For Monday, June 10th.
Earnings are finally out of the way. So we'll be concentrating on
next week's indications of economic activity as well as, uh....you know, mid-quarter "guidance." As of this evening we are not aware of any major analyst conferences scheduled for next week, but I'm sure we'll hear about them if they begin to materialize.
Although the Federal Reserve releases its "Beige Book" report on
Wednesday, more influential reports will not show up until the end of the week, with the PPI & Retail Sales on Thursday. Friday essentially shoulders the bulk of potentially market-moving data, when we have Industrial Production, Capacity Utilization, Business Inventories and Consumer Sentiment.
The matter on everyone's mind this weekend will be whether or not we can expect the market averages to build on today's late afternoon rebound. As I said above, I think we will see some carry-through unless, that is, an unexpected bombshell--either literal or figurative--hits the markets. India/Pakistan, a terrorist attack, a big tech stock that lowers guidance---these will obviously be the kinds of detonations capable of derailing any continuation of today's late afternoon rebound.
Here's what I see for the major averages into next week.
The Dow Jones Industrial Average (INDU) Closed at 9590: A few nights ago I discussed the technical patterns that had formed on the Dow, and discussed implications of these. Although the Dow enjoyed a rather impressive rebound today after hitting a low of 9472, today's action did little to improve its overall technical picture. Short-term, yes, a rebound is likely since the Dow came down to its 161.8% Fibonacci retracement (of its April 29th - May 17th advance). There is a high probability the Dow can continue to rebound off this region next week, probably returning to the 9800 resistance region. There is an outside chance that 9900 could be approached. But the bottom line, at this point, is this: technically, the Dow began a serious breakdown out of a longer term triangular consolidation this week and any rebound to 9800 - 9900 is likely to be short-lived. The Dow MUST return--immediately--to a level within the boundaries of the triangular consolidation (that is, decisively above 9900) if it is to offer any hope of repairing this week's technical deterioration.
Let me mention just one other point. Although today's low (9472) SEEMS to be have been a good short term rebound point, a decisive move below it next week will have the Dow looking at 9200--at best--and the clear prospect of 8800 in subsequent weeks.
S&P 500 (SPX) Closed at 1026: Like the Dow, the SPX declined to its 161.8% retracement today, indicating that today's about-face may give rise to further upward action next week. My forecast is for a rebound to 1050 before more weakness sets in; a move to 1070 would be unlikely but not impossible. If the SPX begins to decisively crack today's low of 1012, then things could turn fairly unpleasant, much as discussed above for the Dow.
Nasdaq Composite (COMPX) Closed at 1535: I said earlier this week that if the Nasdaq broke below its 1563 support region, it would likely continue on to much lower levels, the first of which is 1247. We closed well under 1563 today; while I am not ready to say that the COMPX is headed straight to 1247, that possibility now remains quite high as far as I am concerned. Over the next few days we should expect the COMPX to attempt to build on today's reversal, rebounding to either the 1550 or 1600 resistance levels before more weakness hits the index.
The Russell 2000 Index (RUT) Closed at 470: The RUT actually faired very well today, closing UP on a day when the Dow, SPX and COMPX all closed down. We'll be looking for the potential of further upside next week, perhaps to the 480-487 level. I must admit that this index has me a bit stumped, because I can see elements to it--both positive and negative--that are not in the Dow, SPX and COMPX. My best estimate tonight is that the RUT will stall in the 480-487 region sometime over the next week or two, and then begin a more extended decline to 433.
Next week has the potential to obviously be an interesting, and exciting, week. Be sure to wear your trading seat belts.
Siegfried Brian Barger,
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