Sam Collins

Bears are Booming

by Sam Collins   10/16/08

Renewed credit concerns, evidence that the world economy is slipping into recession and a there is a consumer pullback brought about a renewed surge of selling Wednesday as stocks fell more than 700 points on the Dow (DJI) and the S&P 500 (SPX) fell more than 9%.

The first piece of bad news was the September retail sales report, which was down 1.2% for the third consecutive drop and the largest decline in three years. The loss was double what economists had expected and resulted in a massive sell-off of retail stocks. Amazon (AMZN) fell 12.8%, eBay (EBAY) fell 14.3% and even Wal-Mart (WMT) lost 8.06%.

Energy stocks were hit hard by falling crude oil prices, down 5.9%, and other sectors were hit by a general decline in futures prices which, as a group, were off 4.5%. It was yesterday's commodities-based sell-off that led some economists to say that this is the first real evidence of an impending worldwide recession.

Selling was in full swing when Fed Chairman Ben Bernanke addressed the Economic Club of New York and afterward the selling on Wall Street seemed to accelerate. The chairman said, "Although much work remains and more difficulties surely lie ahead, I remain confident that the American economy, with its great intrinsic vitality and aided by measures now available, will emerge from this period with renewed vigor … Our strategy will continue to evolve and be refined as we adapt to new developments and the inevitable setback."

Bernanke's comments were seen as indicating that an economic recovery would take more time than most expect. The Fed's Beige Book showed economic activity weakening across all of the Fed's 12 regional districts.

Just before the close, selling accelerated on rumors that a large hedge fund was in trouble and the Dow Jones Industrial Average (DJI) closed off 733 points at 8,577. The S&P 500 (SPX) fell 90 points to 907.84 and the Nasdaq (NASD) shed 151 points to close at 1,628.

Volume on the New York Stock Exchange topped 1.6 billion shares and breadth was negative by a ratio of 9-to-1. The Nasdaq traded 743 million shares and decliners there were ahead by a margin of 6-to-1.

The November crude oil contract fell $4.09 to $74.54 a barrel, and the Amex Energy SPDR (XLE) fell $7.31 to $43.30.

Gold (December contract) closed lower for the fifth consecutive day closing at $839 per troy ounce, off 50 cents. The PHLX Gold/Silver Index (XAU) closed at a new low of $95.16, down $12.19.

What the Markets Are Saying

After an impressive rally on Monday that set a new point record on the Dow (DJI) with the fifth-highest percentage gain overall, most technicians (myself included) were looking for a continuation of the buying after a brief hesitation. We got the hesitation on Tuesday, but instead of a confirming rush to buy, stocks were pummeled with a new bout of selling.

So, in just two days, the S&P 500 (SPX) took back half of the huge gains made from Friday's intraday low to Tuesday's high. This sudden turn down will no doubt result in a test of Friday's close at 899 and perhaps even the intraday low at 840. Below that is the support provided by the triple-bottom at 768 to 960 and in the middle the head-and-shoulders target of 864.

With yesterday's decline, sentiment again runs to record bearish levels, but this is a positive because it indicates that the market is in a final purging, which could soon result in a bottom.

Another favorable indicator is volume, which declined yesterday. The NYSE traded 1.6 billion shares and the Nasdaq (NASD) traded just 743 million versus 3 billion and 2 billion on Friday, which puts Friday's excessively high-volume numbers at relative levels associated with selling climaxes of the past.

Another positive is the lack of resistance immediately above current prices. No real resistance occurs until SPX 1,100 to 1,200 and there isn't serious work until the 1,200 to 1,300 level. In other words, there is a lot of room for a string of advances and declines within a broader range that could ultimately lead to a reversal pattern similar to the triple-bottom of 2002 - 2003.

Today's Trading Landscape

Earnings to be reported include: A.O. Smith Corp (AOS), Advanced Micro Devices (AMD), AMB Property Corp (AMB), AMCORE Financial (AMFI), American River Bankshares (AMRB), Amphenol (APH), Associated Banc-Corp (ASBC), BancFirst (BANF), Bank of New York Mellon Corp (BK), Baxter Int'l (BAX) and Build A Bear Workshop (BBW).

Capital One Financial Corp (COF), CIT Group (CIT), Citizens Banking (CRBC), Continental Airlines (CAL), Cypress Semiconductor (CY), Cytec Industries (CYT), Danaher (DHR), Evergreen Solar (ESLR), Fairchild Semiconductor Int'l (FCS), Gilead Sciences (GILD)and Google (GOOG).

Harley-Davidson (HOG), HDFC Bank Ltd (HDB), HNI Corp (HNI), Huntington Bancshares (HBAN), Illinois Tool Works (ITW), International Business Machines (IBM), Intuitive Surgical (ISRG), Knoll (KNL), Korea Electric Power (KEP) and Leggett & Platt (LEG).

Media General (MEG), MGIC Investment Corp (MTG), Mission West Properties (MSW), Nokia (NOK), Nucor (NUE), Orbital Sciences Corp (ORB), Parker Hannifin Corp (PH), Peabody Energy Corp (BTU), PNC Financial Services Group (PNC) and PPG Industries (PPG).

Reliance Steel (RS), Sherwin-Williams (SHW), Sonoco Products (SON), Stryker (SYK), Tempur Pedic Int'l (TPX), Textron (TXT), The Hershey Co (HSY), Ultratech (UTEK), United Technologies (UTX), Watsco (WSO), Winmark Corp (WINA) and Winnebago (WGO).

Severaconomic reports due: Initial Jobless Claims for the week of Oct, 11 (the consensus expects negative 13,000), August Consumer Price Index (the consensus expects negative 0.1%), August CPI excluding food and energy (the consensus expects 0.2%), August Treasury International Capital Flows, September Industrial Production (the consensus expects negative 0.9%), September Capacity Utilization (the consensus expects 78.0%), DJ-BTMU Business Barometer for Oct. 4, September Philadelphia Fed Business Index (the consensus expects negative 4) and the October NAHB Housing Market Index.

Japan's Nikkei fell 11.4%. Merrill Lynch (MER) has reported a loss of $5.56 versus an estimated loss of $5.22, Southwest Air (LUV) reported a net loss of 16 cents a share (9 cents profit excludes fuel hedging) versus estimated profits of 7 cents, Citigroup (C) reported a loss of 71 cents versus estimated loss of 70 cents, and BB&T (BBT) reported 62 cents net income per share and that met expectations.

Crude oil has fallen below $72 a barrel. The Swiss government will inject $5.3 billion of capital into UBS (UBS) for a 9% stake.

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