Sam Collins

Correction Will Cease -- Stay Ready

by Sam Collins   11/06/08

One day after the largest election-day rally in two decades, stocks sold off sharply following the American Data Processing (ADP) national employment report: Non-farm private employment suffered its biggest decline since 2002. The report also showed that the service sector was hit the most.

Google (GOOG) announced termination of its advertising agreement with Yahoo (YHOO) and GOOG fell $24.37 on the news. But YHOO rallied on the speculation that the termination may open the door for another Microsoft (MSFT) offer. Time Warner (TWX) reported lower earnings for Q3 and the stock fell 5.4%.

But most of the selling was attributed to fear of a deep global recession and a financial crisis that has yet to be resolved.

President-elect Barack Obama has not yet made a policy statement concerning his plans to address the crisis. "Obama's honeymoon with the markets was a short one as stocks unwound their Election-Day relief rally... as the credit and financial mountain remains a tall one to climb," said analysts at Action Economics.

At the close, the Dow Jones Industrial Average (DJI) was down 486 points to 9,139. The S&P 500 (SPX) fell 55 points to 953 and the Nasdaq (NASD) lost 98 points closing at 1,682.

On the New York Stock Exchange, 1.3 billion shares crossed with decliners in the lead by 4-to-1. On the Nasdaq, decliners led by 10-to-3 and volume was 902 million shares.

December delivery crude oil fell $5.23 to $65.30 a barrel, and the Amex Energy SPDR (XLE) fell $2.37 to $50.65.

The December Gold fell $14.90 to close at $742.40 an ounce, and the PHLX Gold/Silver Index (XAU) closed at $89.80, off $3.33.

What the Markets Are Saying

Wednesday's violent low-volume reversal is typical of the volatility of bear-market intraday moves.

On Tuesday, the indices looked like they had broken cleanly through the resistance built since Oct. 17 and were on their way to Dow (DJI) 10,500-11,000 and S&P 500 (SPX) 1,100.

Instead, selling took over almost immediately after the opening yesterday, driving prices through the first minor support at SPX 985 (Dow 9,305) and heading to the next line at SPX 925 to 930 (Dow 8,975) -- they stopped short at SPX 953 and Dow 9,139.

Investors who trade Exchange-Traded Funds (ETFs) in markets like this must be able to watch the daily movements very closely and jump when a good profit is in and/or protect against a sizable loss. This is especially true when trading the "Ultra" ETFs, which may give more bang for the buck but can also turn and bite like the Ultra Dow ETF (DDM), yesterday's Trade of the Day.

Big profits can be made on both longs and shorts, but if you can't watch the ticks or have little experience with day trading, it's better to gain experience with paper trades before going for the real thing, have a specialist trade for you or focus on other profit strategies.

The rally off of the October lows has been very broad and that is a favorable sign. And, as Standard & Poor's points out, "The 10-day NYSE advance/decline ratio has jumped from 0.71 in early October to a recent high of 2.89 on Oct. 23. This was the strongest breadth statistic since the beginning of the great bull market in August 1982."

And volatility, though still high, has dropped sharply with the major volatility indices -- the CBOE Volatility Index (VIX) and the CBOE Nasdaq Volatility Index (VXN) -- much lower than October peaks.

Look for this trading correction to flatten out soon and prepare to latch onto some cornerstone portfolio blue chips or trade the ETFs.

Today's Trading Landscape

Earnings to be reported include: 3D Systems (TDSC), 99 Cents Only (NDN), AbitibiBowater (ABH), Accuray (ARAY), Accuride Corp (ACW), ACI Worldwide (ACIW), Adventrx Pharmaceuticals (ANX), Advocat (AVCA), Aercap Holdings N.V. (AER), Air Methods (AIRM), AirMedia Group (AMCN), Akeena Solar (AKNS), Alexza Pharmaceuticals (ALXA), Alkermes (ALKS), Alliance One Int'l (AOI), Allied World Assurance Company Holding Ltd (AWH), American Reprographics Co (ARP), American States Water (AWR), American Vanguard (AVD), Anheuser-Busch Companies (BUD), Ansys (ANSS), Anworth Mortgage Asset (ANH), Arcadia Resources (KAD), Arena Resources (ARD), Assured Guaranty (AGO), Atlas Air (AAWW), ATP Oil & Gas (ATPG), Aurizon Mines Ltd (AZK), AutoNation (AN), Avis Budget Group (CAR) and Axesstel (AFT).

Bally Technologies (BYI), Barr Pharmaceuticals (BRL), Bio-Rad Laboratories (BIO), Biovail Corp (BVF), Blockbuster (BBI), Bofi Holding (BOFI), Boots and Coots Int'l Well Control (WEL), Borland Software Corp (BORL), Bristow Group (BRS) and Broadridge Financial Solutions (BR).

Cablevision Systems Corp (CVC), California Pizza Kitchen (CPKI), CB Richard Ellis Group (CBG), CDC Corp (CHINA), Cedar Fair LP (FUN), Cell Genesys (CEGE), Cenveo (CVO), Chyron Corp (CHYR), Citadel Broadcasting Corp (CDL), Citizens (CRBC), Cogent Communications (COGT), Comforce Corp (CFS), Constellation Energy Group (CEG), Continental Resources (CLR), Cornell Companies (CRN), Corrections Corp of America (CXW), Cott Corp (COT), Crown Media Holdings (CRWN) and CVR Energy (CVI).

Dana Holding Corp (DAN), Darling Int'l (DAR), Deutsche Telekom (DT), DJO (DJO), Dolan Media Co (DM), Duff & Phelps Corp (DUF), Dune Energy (DNE) and Dynegy (DYN).

Echelon Corp (ELON), Eddie Bauer Holdings (EBHI), El Paso Corp (DP), El Paso Pipeline Partners LP (EPB), Elizabeth Arden (RDEN), Emergent Biosolutions (EBS), Emisphere Technologies (EMIS), Endurance Specialty Holdings (ENH), Energy Partners Ltd (EPL), Entercom Communications (ETM), Exide (XIDE), Express-1 Expedited Solutions (XPO) and Exterran Holdings (EXH).

FairPoint Communications (FRP), FBL Financial Group (FFG), Ferro Corp (FOE), Flowers Foods (FLO), Fluor Corp (FLR), FMC Technologies (FTI), Frontier Oil (FTO) and Fuel Systems Solutions (FSYS).

Genesis Energy LP (GLS), GenVec (GNVC), Genworth Financial (GNW), Global Partners LP (GLP), GP Strategies (GPX), Halozyme (HALO), Hawk (HWK), Home Diagnostics Inc Del (HDIX), Human Genome Sciences (HGSI) and Huntsman Corp (HUN).

Iam Gold Corp (IAG), Icahn Enterprises LP (IEP), IMAX Corp (IMAX), Int'l Rectifier (IRF), James River Coal Co (JRCC), Key Energy Services (KEG), King Pharmaceuticals (KG), Knightsbridge (VLCCF), Koppers Holdings (KOP), Lexington Realty Trust (LXP), Lifetime Brands (LCUT), Live Nation (LYV), LSB Industries (LXU), Lumber Liquidators (LL) and Luminex Corp (LMNX).

Macrovision (MVSN), Mannatech (MTEX), Manulife Financial Corp (MFC), Mastech Holdings (MTZ), Medifast (MED), Meridian Resource (TMR) and Microvision (MVIS).

Natco (NTG), National Fuel Gas Co (NFG), Natural Resource Partners LP (NRP), NSTAR (NST), NVIDIA Corp (NVDA), Ocwen Financial (OCN), OfficeMax (OMX), OM Group (OMG), On2 Technologies (ONT) and One Liberty Properties (OLP).

Par Pharmaceutical Companies (PRX), Perini Corp (PCR), Perrigo (PRGO), Petrohawk Energy Corp (HK), Pinnacle Entertainment (PNK), Pioneer Drilling Co (PDC), Playboy Enterprises (PLA), Priceline.com (PCLN), Primedia (PRM), Progenics Pharmaceuticals (PGNX) and Public Storage (PSA).

Qualcomm (QCOM), Reddy Ice (FRZ), Simcere Pharmaceutical Group (SCR), Skilled Healthcare Group (SKH), Sonus Networks (SONS), South Jersey Industries (SJI), Spectra Energy (SE), Spectra Energy Partners LP (SEP), Steinway Musical Instruments (LVB) and Swift Energy (SFY).

TAL Int'l Group (TAL), Tandy Leather Factory (TLF), Taseko Mines (TGB), Tenaris SA (TS), Teva Pharmaceutical (TEVA), The Blackstone Group (BX), The DIRECTV Group (DTV), The Greenbrier Companies, Thermogenesis, TICC Capital Corp, TLC Vision Corp (TLCV), Toyota Motor Corp (TM), Trimeris (TRMS), True Religion Apparel (TRLG) and Tyco Electronics (TEL).

UniSource Energy (UNS), Universal Corp (UVV), URS Corp (URS), US Concrete (RMIX), U-Store-It Trust (YSI), Venoco (VQ), VeriSign (VRSN), ViaSat (VSAT), Vonage Holdings Corp (VON), Walt Disney (DIS), Warnaco Group (WRC), Wendy's/Arby's Group (WEN), Western Refining (WNR), Westlake Chemical Corp (WLK) and Williams Companies (WMB).

In terms of economic reports, the following are due today: Q3 productivity and labor costs (the consensus expects 0.7%), initial jobless claims for the week of Oct. 27 (the consensus expects negative 4,000) and the DJ-BTMU Business Barometer for Oct. 20.

The Bank of England cut key rates by 1.5% to 3%.

Costco (COST) said that same-store sales for October fell 1%, hurt by unfavorable foreign-exchange rates, but Wal-Mart (WMT) said it sees comparable U.S. store sales up 2.4% versus an estimate of 1.6%.

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Sam Collins is a registered, fee-based portfolio manager who may be contacted at samailc@cox.net. You can also check out an archive of some of his most recent market outlooks by clicking here.