Expirations and Exasperations
Three witches rode into Wall Street on Friday, propelled by an evil wind out of the North. Not only was it triple witching Friday (the expiration of futures, options on stocks and options on indexes), but we also received word out of Toronto that Nortel Networks (NYSE:NT) will suffer a whooper of a second quarter loss.
Nortel warned that it is facing a $19.2 billion loss for its second quarter and outlined an additional 10,000 reduction of its workforce. This comes on top of its previous announcement of 20,000 in layoffs. The networking giant also reiterated that it doesn't see a turnaround until at least 2002. The bottom line is that NT now expects to report a loss of $1.5 billion, or $0.48 per share versus a loss of $0.06 per share expected by First Call. Needless to say, the stock finished lower. NT lost $0.70, or 6.98%, to $9.86.
While the Nortel news served to put a drag on the already frazzled networking sector, traders in other corners of the market were treated to an unusual amount of volume that actually worked to prop up the market. The heavy volume in the morning was the result of traders unwinding options positions. After an initial dip, it appeared as if most of these trades were biased to the upside. Many pros commented that were it not for triple witching, the losses on the major indices would have been more pronounced.
Also acting like a two-ton anchor on the broader market was a gaggle of economic reports that again illustrated that we still have a ways to go down the road to economic recovery. Capacity utilization, the extent to which plants are being used, fell to 77.4%, the lowest level since August of 1993. Industrial production also dipped by 0.8% and the CPI rose 0.4% in May and just 0.1% at the core. While inflation is certainly not in the picture at this time, it is worrisome that companies are not able to pass on cost increases to the consumer.
Once again, the question on everyone's mind is when an economic about-face might occur. The more warnings and economic data that start piling up in the "recovery by 2003" basket as opposed to the 2002 or late 2001 basket, the more buyers are stepping back and wondering if it's worth the opportunity cost to be in the market if the recovery is going to take longer than expected.
After an initial free fall, the NASDAQ (COMPX) found some traction and edged higher into the close. Surprisingly (given some high- visibility earnings warnings) the tech heavy index lost just 15.64 to 2028.43. Volume was a respectable 2.1 billion shares and decliners beat up advancers 2136 to 1626.
Over in the Dow (INDU), we saw a similar picture unfold. Early morning weakness was replaced by buying interest by midday. The old economy average ended the session down 66.49 to 10,623.64. Volume came in at 1.5 billion shares on the NYSE. On the disturbing side, new lows versus new highs came in almost even, with 80 new highs and 62 new lows. Prior to this week new highs had been consistently beating new lows by a wide margin.
Of all the major indices, only the Russell 2000 (RUT.X) remains above major support levels. The Russell has been tracing a double top, but has yet to close below its neckline at 493. However, the RUT.X finished Friday's session dangerously close to neckline support at 495.13, down 0.25.
Stocks and Sectors on the Move
Besides the Nortel bomb, there were a few other mea culpas and one legal ruling that grabbed some headlines on Friday. Chief among these was McDonalds Corp. (NYSE:MCD), which warned for the third quarter in a row that it would not meet consensus estimates. The "not so golden" arches said it will miss estimates by as much as $0.04 per share in posting earnings of between $0.34-$0.35 per share for its second quarter. Currency exchange rates and mad cow were blamed for the shortfall. So much for defensive issues! MCD closed down $1.29 to $28.67.
Another stock which could be considered a defensive play, Proctor and Gamble (NYSE:PG), declared Friday that it will be taking a larger than expected charge for its recent corporate restructuring. The charge will result in a fourth quarter loss for the consumer staples giant. On the news, PG lost $2.26 to $62.60.
On the legal front, a Delaware judge ordered that Tyson Foods (NYSE:TSN) is to go ahead with its merger with IBP (NYSE:IBP) (the giant hog processor). In an unusual ruling, the judge upheld a lawsuit filed by IBP, which sought to make Tyson go through with the merger. Tyson had bailed out earlier, citing IBP's failure to disclose accounting irregularities as the reason behind their walking away from the deal. I can't imagine that anything good will come out of the ruling. If management cannot mesh, any synergies realized from the merger will become a mute point if the companies cannot unite towards on goal.
Turning to sector action, it was not surprising that during a week of warnings and market weakness that the defensive sectors held up the best.
Within the defensive sectors, healthcare and consumer staples (minus the above mentioned PG debacle) were the clear standouts. A couple of healthcare stocks that have grabbed my attention lately are Splittrader favorite Tenet Healthcare (NYSE:THC) and Healthsouth (NYSE:HRC). THC emerged from a symmetrical triangle formation back on 5/31 and has not looked back. HRC just broke out of a double bottom formation on Friday and is less extended than THC at this point. THC closed up $1.14 to $51.09 and HRC closed higher by $0.64 to $14.40.
Checking into the consumer staples stocks, Kellogg (NYSE:K) has been on a tear. The stock just broke out of a huge symmetrical triangle formation that was started back in last December. The bullish breakout in Kellogg was accompanied by volume of 2.5 million shares; four times its average trade.
In addition to Kellogg, Unilever (NYSE:UN) just completed a bullish breakout. The stock busted up through its downtrend line on volume of 1.5 million shares. UN typically trades 600,000 shares. When large institutions decide to start accumulating shares of a stock, it's like trying to hide Shaquille O'Neal at jockey's convention.
Looking Forward, Always Forward
We have another light week coming up as far as economic data goes and let's hope the same is true for earnings warnings. If we can trade sideways on light volume next week, traders will be pleased as punch. Now that we have broken support on the major averages, I am thinking damage control.
That being said there is no reason to make like an ostrich just yet. As mentioned above, there are plenty of stocks within the strong sectors that are just now sharpening their horns and acting bullish. Splittrader's Current Play list is starting to fill up with more defensive names, so if you haven't had a chance to glance at them, you might want to take a peak.
So the trading mode hasn't changed much from last weekend. Keep the stops tight and go for small gains. Heck, you can always get back into a stock that you have just sold for a profit.
Enjoy Your Weekend
Here's to all you fathers out there, mine included. Have a great Father's Day, and may your jug of Old Spice come with the receipt and a tee time.