Who Could Ask For Anything More?
Even though it's been hard to be upbeat about the recent market action, from a technical standpoint, it deserves a gold star. I say this because after a rigorous rally such as we saw last week, a few days of retracement on lighter volume is always welcome. I know this pill is hard to swallow, especially after hopes were lifted into the upper stratosphere last week, but as long as the reasons behind the recent sell offs remain "typical" and key support levels hold, I think it's safe to say that the emotion- dial could remain at "cautious optimism" into this summer.
We have been here before. We need look back only as far as January, when the Fed last did an intermeeting rate cut, to see how the market popped then subsequently sold off. The big difference this time, however, is the change in the market's reaction to bad news and the fact that companies are starting to get some earnings visibility.
Due largely to the recent shift in investor psychology, traders are now hoping that this time around, the markets will bounce as they are supposed to after a rate cut. That said, if the market is going to bounce, it better do it soon, as we are fast approaching support levels on the NASDAQ, that if violated, may make a comeback bounce less likely.
If these support levels hold, we may be expected to trade sideways for a while, since corporate earnings are still holding the indices back from trading to the upside with conviction. Although, starting next week, the steady stream of earnings will dry up to a mere trickle. This is both good news and bad. It's good news since we won't have to worry about any potential overnight catastrophes in individual stocks but bad news because investors will again be turning to economic news for guidance; news that has been showing an economy with its foot on the brake.
Speaking of economic news, we received the April Consumer Confidence number today, which showed consumers are less optimistic about their current and future prospects. The April figure came in at 109.2, as opposed to the 116.9 level posted in March. The 109.2 also missed economist expectations of 112.1. In addition, when questioned about how they felt about their prospects six months down the line, consumers said they were less optimistic than last month. They were also pessimistic on employment opportunities, which is not surprising given the word "layoffs" has been prevalent in just about every business headline.
After shrugging off early morning bad news out of some key tech companies, traders changed their tune midmorning, causing a slow drift lower that persisted all the way into the close.
The NASDAQ (COMPX) lost 42.71, or 2.07%, to 2016.61. This close puts us back below where the NASDAQ was right before the Fed cut interest rates last Wednesday (that was quick). The good news was that volume continues to come in light, with today's session seeing 1.9 billion shares trade hands. The NASDAQ also saw 82 stocks hit new highs as opposed to 49 hitting new lows.
Turning to the DOW (INDU), the old economy average held up a little better, posting a 77.89 loss to close at 10454.34. The Dow is still about 100 points above where it was just prior to the Wednesday morning Fed announcement, but is still technically overbought; so further pullbacks may be yet to come. Again, volume was light on the NYSE, with 1.2 billion shares finding new homes today.
Long dated treasurys continued to sell off amid fears that further Fed cuts will trip inflationary pressures down the line. The 10-year note was off 5/32 to yield 5.205% and the 30-year bond was down 9/32 to yield 5.755%.
The recent rise in the long dated securities has also served to tip mortgage rates back to the upside. They had been plummeting to two-year lows, right along with the 30-year bond. Now that home loan rates are again rising, we could see a slowdown in refinancing that could stifle an already weak consumer. This is because quite a bit of capital is put into the hands of consumers when they refinance, since lower rates enable the homeowner to borrow additional monies for everything from home improvement projects to buying a new car.
Stocks and Sectors on the Move
It looks like the shorts are still in the game. There is no doubt that they were flat on the mat last week, but it looks like they have managed to crawl off the canvas to fight another day. How do we know this? The shorts want stocks to drop in price. What better way to get a stock to fall than to float some rumors? And given all the rumors flying around the Street the last two days (all bad) there's no doubt that the shorts have gone back to work, albeit bruised and hobbled.
Two rumors in particular affected the trade in two headline tech stocks today. The first rumor involved speculation that Applied Micro Circuits (NASDAQ:AMCC) would miss their earnings number after the bell and that they would announce layoffs. The rumors, as it turned out, were off base, as AMCC reported earnings of $0.09/share after the bell and announced that it wouldn't cut jobs but that it would slow hiring. After plummeting more than $3.00 after the rumor hit, AMCC managed to close down by $1.62 to $23.99 on the day.
Applied Material (NASDAQ:AMAT) was the other rumor victim in today's session. The stock went from $54 to $50 in a matter of about 20 minutes on rumors of weak earnings. The stock closed at $51.70, down $1.09 on the day. The only reason I mention these calamities is to illustrate the point that the bulls and the bears are still battling. These rumors also point to the fact that the bears are getting very nervous, which we can certainly take as a good sign.
Turing to earnings (or the lack thereof), the feel good story of the day goes to Lucent Technologies (NYSE:LU). After reporting a loss of $0.22/share, beating estimates by a penny LU rocketed higher by $1.05, or 11.41% to $10.25. The company also said that sales growth is due to accelerate into next year. Topping off the Bad News Bears style report, LU was upgraded by Salomon Smith Barney from a "neutral" to an "outperform". Solly indicated that LU is not "out of the woods yet" and that "a rally into the low teens" might be warranted.
JDS Uniphase (NASDAQ:JDSU), after reporting last night that it had an important announcement to make this morning, announced before the bell that it met earnings expectations of $0.14/share. Had they stopped there, everything would have been just fine, however, they went on to announce layoffs of 5,000 employees and warned for their fourth-quarter. They now see fourth-quarter earnings of $0.05/share instead of the previous bogey of $0.12/share. JDSU closed down $3.36, or 13.90%, to $20.82.
Rounding out today's highlights, we actually had a successful IPO start to trade today, and trade at a premium. Aquilla (NYSE:ILA), a carve out from Utilicorp United (NYSE:UCU), was priced at $24 (the upper end of the range), opened at $29.75 and closed at $27.85. The strong demand for shares of the trader of natural gas, bandwidth, coal and other commodities shows that investor optimism may be on the rise. One of the hallmarks of a bull market is of course a healthy IPO market. With only a few successful IPOs coming to market as of late, we won't jump the gun and say this is a great sign, but it's better than the stale IPO market of 2000 so far.
Looking Forward, Always Forward
Wednesday brings with it the Durable Goods orders number as well as Existing and New home sales figures. Durable goods are expected to rise 0.50% and new and existing home sales are expected to have fallen off from February levels.
With mostly positive earnings news flooding the news wires after hours, we may just get the rebound we were looking for tomorrow. Of course, the market will probably go back to questioning any strong rally, so be ready to lock in profits if we see signs of failed breakouts and or resistance levels that turn back buyers.
The Splittrader Current Play list remains well diversified, with emphasis on the early cyclical stocks such as our new play, Lear Corporation (NYSE:LEA). We have not yet pulled the trigger on any tech stocks but remain ready to pounce, should the charts tell us it is time.