Sam Collins

When Will the Sell-Off End?

by Sam Collins   10/23/08

For the second-straight day, stocks plunged Wednesday as concerns about a worldwide recession and futures earnings from some of the global giants made headlines.

The fear of recession spread from stocks to other markets, as hard assets like gold and other commodities sold off. Energy, financial and materials led the decline and all 10 economic sectors posted losses ranging from negative 10.4% (energy) to negative 3.8% (consumer staples).

The losses occurred despite impressive earnings gains by some of the great global names: Apple (AAPL), McDonald's (MCD), Merck (MRK), and Phillip Morris International (PM) all beat estimates. But Apple was the only one that closed higher, at $96.57, up $5.08.

Yahoo (YHOO) reported earnings after the close on Tuesday, beating estimates by a penny and announcing a 10% cut in its workforce. Yesterday, YHOO rose 32 cents to $12.39.

But the losses Wednesday weren't primarily due to past earnings but to future earnings, as the overwhelming majority of companies have said that Q4 2008 and at least the first half of 2009 look much slower.

"It's been a bad earnings season, and what companies tell us has not been inspiring. The news has been gloomy and, if we believe executives, it is going to get even more gloomy," said Hugh Johnson, chairman of Johnson Illington Advisors.

At the close, the Dow (DJI) lost 514 points at 8,519, the S&P 500 (SPX) was off 58 points to 897 and the Nasdaq (NASD) fell 81 points to 1,616.

The New York Stock Exchange traded 1.5 billion shares and breadth was more than 6-to-1 in favor of decliners. The Nasdaq traded 1.1 billion shares with the same negative breadth as the NYSE.

Oil prices are down almost 50% in the past three months and, yesterday, the December crude oil contract dropped $5.43 to $66.75 a barrel due to a stronger dollar and total consumption reported to be down 8.5% from last year. The Amex Energy SPDR (XLE) fell $4.76 to $44.20.

The December gold contract fell $32.80 to $735.20 -- its lowest close since October 2007 and its ninth decline in 10 trading sessions. The PHLX Gold/Silver Index (XAU) fell $14.16 to $71.69, its lowest close since May 2003.

What the Markets Are Saying

Yesterday I pointed out that the three tops in as many days at Dow (DJI) 9,305 and S&P 500 (SPX) 985 represented major resistance and the top of the current trading range of 8,176 to 9,305 on the Dow and 866 to 985 on the S&P 500.

The next support zone is from the October low of Dow 7,774 to 8,176 and S&P 840 to 866.

With such a sharp sell-off Wednesday, momentum appears to favor the bears and a test of the October lows. But volume yesterday was very low, considering the breadth and the "nose-bleed level" sentiment number of CBOE Volatility Index (VIX) at a new high at 81.85. That says that gloom and doom are now at such a high level, we may see a reversal back to the three tops area.

And we may soon even see a final bear market low, which can only happen when investor confidence has been destroyed.

Consider that the S&P 500 (SPX) is off 23% in one month, a decline that in itself would be a bear market. And it is off 43% year-to-date from its record close of 1,565.15 on Oct. 9, 2007.

The Dow Industrials (DJI) have been down 13 of the last 16 sessions, and four of the 10 biggest drops in the Dow occurred this month. This blue-chip index of 30 of the largest and most widely-held public companies in the world is off 35% from its high. It is time to go shopping for the best of the best -- if not now, when?

Today's Trading Landscape

Earnings to be reported include: ABB (ABB), Aetrium (ATRM), Affymetrix (AFFX), Aflac (AFL), Airgas (ARG), AirTran Holdings (AAI), Alaska Airlines (ALK), Alexion Pharmaceuticals (ALXN), Altria Group (ALTR), Arch Capital Group (ACGL), Arctic Cat (ACAT), Ariba (ARBA), AU Optronics Corp (AUO), Avid Technology (AVID), Avnet (AVT), AVX Corp (AVX) and Aware (AWRE).

Baldor Electric (BEZ), Belden (BDC), Benchmark Electronics (BHE), BJ's Restaurants (BJRI), Black & Decker Corp (BDK), Bookham (BKHM), Bristol-Myers Squibb (BMY), Brunswick Corp (BC), Bucyrus Int'l (BUCY), Bunge Ltd (BG) and Burlington Northern Santa Fe Corp (BNI).

Caraco Pharmaceutical Labs Ltd (CPD), Celestica (CLS), Celgene Corp (CELG), Chubb Corp (CB), Ciber (CBR), City National Corp (CYN), Coca-Cola Enterprises (KO), Coca-Cola Femsa S.A. de C.V. (KOF), Cohu (COHU), Compania de Telecomunicaciones de Chile S.A. (CTC), Complete Production Services (CPX), Compuware Corp (CPWR), Consol Energy (CNX), Cooper Industries Ltd (CBE), Credit Suisse Group (CS) and Cybersource Corp (CYBS).

Daimler AG (DAI), Deluxe Corp (DLX), DeVry (DV), Diamond Offshore Drilling (DO), Dr. Reddy's Laboratories Ltd (RDY), DST Systems (DST), Eastman Chemical Co (EMN), Elan Corp plc (ELN), Electronics for Imaging (EFII), Eli Lilly (LLY), Emcor Group (EMKR), Emulex (ELX), Ensco Int'l (ESV), Equitable Resources (EQT) and Ethan Allen Interiors (ETH).

F.N.B. Corp (FNB), Federated Investors (FII), Flextronics (FLEX), Franklin Resources (BEN), Friedman Billings Ramsey (FBR), GATX Corp (GMT), Goodrich Corp (GR), Harte-Hanks (HHS), IMS Health (RX), Ingram Micro (IM), Insituform Technologies (INSU), Interactive Data Corp (IDC), Invacare (IVC) and ITT Educational Services (ESI).

Janus Capital Group (JNS), JetBlue Airways (JBLU), Johnson Controls (JCI), Journal Communications (JRN), Juniper Networks (JNPR), Kennametal (KMT), L-3 Communications Holdings (LLL), Laboratory Corporation of America (LH), Lattice Semiconductor (LSCC), MEMC Electronic Materials (WFR), Microchip Technology (MCHP), Microsoft (MSFT), Microtune (TUNE) and Minerals Technologies (MTX).

NCR Corp (NCR), NOVA Chemicals (NCX), NuStar Energy L.P. (NS), Old Dominion Freight Line (ODFL), Old Republic Int'l (ORI), Olin Corp (OLN), Peoples Bancorp (PEBO), Performance Technologies (PTIX), PerkinElmer (PKI), Petro-Canada (PCZ), Pixelworks (PXLW), Potash Corp of Saskatchewan (POT), Potlatch (PCH), Precision Drilling Trust (PDS) and ProLogis (PLD).

RadioShack Corp (RSH), Rambus (RMBS), Raytheon (RTN), Regal Entertainment Group (RGC), Regis Corp (RGS), Roper Industries (ROP), Shaw Communications (SJR), Silicon Image (SIMG), Snap-on (SNA), Southern Co (PCU), Starwood Hotels & Resorts (HOT), SunTrust (STI) and Superior Uniform (SGC).

Teledyne Technologiesn (TDY), Tennant Co (TNC), Terra Industries (TRA), The Cheesecake Factory (CAKE), The Dow Chemical Co (DOW), The New York Times Co (NYT), Thermo Fisher Scientific (TMO), Thomas & Betts (TNB), TradeStation Group (TRAD) and Transatlantic Holdings (TRH). Union Pacific (UNP), United Parcel Service (UPS), US Airways (LCC), Valley National Bancorp (VLY), Varian Medical Systems (VAR), W.R. Grace & Co (GRA), WESCO Int'l (WCC), Western Digital Corp (WDC), Xcel Energy (XEL), Xerox Corp (XRX) and Zimmer Holdings (ZMH).

Economic reports due today: initial jobless claims for the week of Oct. 18 (the consensus expects negative 1,000) and the DJ-BTMU Business Barometer for Oct. 11.

Dow Chemical (DOW) reported Q3 earnings of 63 cents versus an estimate of 57 cents (see today's Trade of the Day for more information on DOW), and the Altria Group (MO) reported Q3 earnings of 46 cents versus an estimated 44 cents.

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