Where Did The Buyers Go?
Or the sellers for that matter. Volume remained subdued, as we barely squeaked over 800,000 shares on the big board today. Of course, here in Denver, folks were too busy celebrating the victory of the Avalanche over the Devils in the Stanley Cup finals to worry about placing a stock order. Even if you aren't a sports fan, the Ray Bourque story is one that everyone can appreciate. There wasn't a dry eye anywhere on Saturday night, as Bourque finally lifted Lord Stanley's Cup over his head after 22 years of trying to win the coveted chalice.
In a world where the terms perseverance and dedication have come to mean something akin to going coffee less for a WHOLE week before breaking down and hitting Starbucks for a morning fix, Ray Bourque should be a lesson to us all. Here is a guy that spent his whole life striving towards one goal and didn't let up for an instant along the way. He also did it with a sense of class and respect for others that is largely absent from sports (and society) these days.
Why do I bring this up and what does it have to do with the market? The answers to these questions are: "I don't know" and "nothing" respectively. Maybe it's because I have found that life's little lessons can and do apply themselves to whatever we wish, even trading. That being said I think we all need to approach the market as Bourque approached hockey for all those 22 years: with respect and discipline. This won't win any of us a shiny 35-pound trophy, but it will keep us out of trouble and may even make us a few bucks along the way.
So hockey and sportsmanship aside, today was indeed Monday and stocks did indeed trade. Since volume was light, stocks were easily swayed to the downside by a few high profile earnings warnings.
Dupont Photomasks (NASDAQ:DPMI), a company that makes equipment for the production of semiconductor chips, had the honor of being the company to warn of the biggest earnings shortfall. DPMI was expecting earnings of $0.52 per share for its fourth quarter and now anticipates earnings will come in between $0.00-$0.19 per share. The company also said it will be trimming 6% of its workforce to keep expenses down. Needless to say, the stock headed south on Monday. More specifically, DPMI lost $6.03 or 11.6% to $45.97.
The DPMI news unfortunately served to shake up the whole semiconductor sector. The PHLX Semi Index (SOX.X) lost 22.70 and finished just above near term support at 650. This is not what we like to see when companies warn. The more contained the damage, the more bullish for stocks in general. When investors get the herd mentality when selling stocks, a lot of damage can be done to charts and to investor psychology that delays the healing process by sometimes weeks or months.
The indices got off on the wrong foot and unfortunately for the bulls, there weren't enough market participants out there to even attempt a run at righting the ship. In addition, further evidence out of Japan (GDP was -0.2% versus expectations of +0.2%) added to the U.S. market weakness since the weak GDP numbers support a global economic downturn.
The NASDAQ (COMPX) closed down 44.32, or 2.00%, to 2170.78. Volume was weak, with only 1.4 billion shares changing hands.
The Dow (INDU) also headed lower on Monday, losing 54.91 to 10,922.09. Volume on the NYSE was only 857 million shares and advancing stocks outnumbered decliners 1244 to 1801.
Stocks and Sectors on the Move
As already mentioned, today's losses were kicked off by profit warnings. Of note is the fact that according to First Call, there have been 459 warnings quarter-to-date, which is down 1% compared with this point in the quarter during last quarter. But, lest you think that this means we are definitely rounding the corner, this figure of 459 warnings is up 512% from the number of warnings one year ago at this time. In addition, a full 36% of these warnings have come out of the tech sector.
Given the above research findings from First Call, it's no wonder that investors have recently turned to industries that are least likely to warn for the current quarter. As it turns out, it's the REITs (real estate stocks) that have become a favorite hiding place.
The reason for the migration into these typically slow moving, economically sensitive investment vehicles appears to be twofold. First, with money market rates hovering at a low 4%, investors are attracted to the REITs' high dividend yields that often approach 7%. Second, these REIT stocks have been appreciating on rumors that the bigger ones will be added to the S&P 500, which when added to the dividend yield, can make for a nice investment.
While scanning stocks for breakouts late last week, it became apparent that something was up in the world of real estate stocks. The REITs have been breaking out of base patterns left and right. But before you dive headlong into these stocks, remember that they are "trendy" and tend to run in waves. However, a couple REITs that have been real outperformers lately include Equity Residential (NYSE:EQT) up $1.09 to $55.29 and Simon Property (NYSE:SPG) up $0.32 to $27.84.
In addition to the REITs, we have seen a renaissance within the machinery/tool stocks. These are early cycle plays and the fact that these stocks are moving higher means that investors are betting on the fact that we will see an economic turnaround within a year. Some strong stocks with these sectors include Pall Corp. (NYSE:PLL) up $0.28 to $23.90, Stanely Works (NYSE:SWK) up $0.30 to $40.35 and Graco (NYSE:GGG) down $0.27 to $31.65.
Lastly, while they were shunned in the previous bull market, conglomerates are again appealing to investors who want to avoid the earnings-warning bomb. Conglomerates are naturally recession proof due to the fact that they operate within many diverse business sectors and can make up for a shortfall in one area with revenues in another.
Two conglomerates that look good technically and fundamentally include Crane (NYSE:CR) down $0.21 to $30.91 and Tyco (NYSE:TYC) down $0.37 to $55.48.
Looking Forward, Always Forward
We'll have to wait until Wednesday to get a better read on the economy. With no reports scheduled until Wednesday's retail sales figure, earnings warnings will continue to have their way with the market.
We will also continue to keep a close eye on some sector rotations that have been taking place lately. Namely the breakdown within the drug sector and the pickup within the utility stocks again.
As always, when you are unsure about a trade, hold off until you have conviction. Trading just for the sake of trading in a jittery market like this rarely pays off.