by Sam Collins 08/20/08
A combination of economic reports -- including the July total Producer Price Index (PPI) and the July housing starts -- did in the market again yesterday.
The PPI startled market followers -- up 1.2%, putting the year-over-year increase to 9.8% for the highest inflation reading for the PPI since 1981. Along with that, a July housing starts number at an 11% decline started trading on a negative tone just like Monday.
And also like Monday, the financial sector led the selling with the Dow's (DJI) blue-chip financials taking a large share of the losses. American International Group (AIG) fell 5.7%, American Express (AXP) lost 4.2%, Bank of America (BAC) was off 4.2%, and J.P. Morgan (JPM) dropped 3.2%.
But of the closely-followed financial stock, Lehman Bros. (LEH), took the biggest hit, down 12.8%, following a report from the Wall Street Journal that its third quarter "has turned ugly" and that it has approached potential billers about selling part of its investment management division.
Home Depot (HD), the nation's largest home improvement retailer, had a drop in Q2 earning but still beat forecasts. Despite that, HD fell 2.8%. Both Saks (SKS) and Staples (SPLS) fell; SKS lost 8% after reporting Q2 results, and SPLS was off 4.2% after warning of poor Q2 results.
At the close, the Dow Jones Industrial Average (DJI) was off 131 points closing at 11,348. The S&P 500 (SPX) was off 12 points at 1,269 and the Nasdaq (NASD) fell 33 points and closed at 2,384.
The September crude oil contract gained $1.66, ending the day at $114.53 a barrel. And the Amex Energy SPDR (XLE) rose $2.51 to $72.41 as it held the low just under $70, which represents the lower support line of a bullish channel with a high at just under $90.
Gold futures were up for the second day in a row with gold for December delivery climbing $11.10 to $816.80. The PHLX Gold/Silver Index (XAU) was up $43.25 and closed at $142.71.
What the Markets Are Saying
Any extension of the last two days of selling will break the upward channel of both the Dow (DJI) and the S&P 500 (SPX). The important NYSE Composite (NYA) has already broken down by closing at 8,212, which is just above its closing low of 8,158 set on July 15.
Our internal indicators are now negative, sentiment is still neutral, and the chart patterns point lower.
Look for a test of the July 15 lows for all indices but the Nasdaq (NASD) if the above channels are broken. But holders of small- and mid-cap stocks should not take solace from the Nasdaq's higher prices, since a retreat there could easily turn into a more dramatic percent decline than stocks of the other major indices.
Remain defensive and only take on new positions in stocks that are extremely undervalued and sit at, or close to, major support zones. Stocks with higher-than-average dividend yields are preferred.
Today's Trading Landscape
Earnings to be reported today include: Acorn Int'l (ATV), Bally Technologies (BYI), BJ's Wholesale Club (BJ), Eaton Vance Corp (EV), E-House (China) Holdings Ltd (EJ), Hot Topic (HOTT) and JDS Uniphase (JDSU).
Limited Brands (LTD), Mentor Graphics (MENT), Phillips-Van Heusen (PVH), Regis Corp (RGS), Ross Stores (ROST), Salesforce.com (CRM), Semtech (SMTC), Symmetricom (SYMM), Synopsys (SNPS), Tower Semiconductor (TSEM) and Trintech (TTPA).
In terms of economic reports, the Aug. 16 MBA Mortgage Application Survey Refinancing Index is due today.
Goldman Sachs (GS) has cut estimates for Wall Street firms and was especially gloomy on the outlook for Lehman Brothers (LEH). Wachovia (WB) sold $40 million in troubled land and construction loans to a venture group. Suntech Power (STP) reported Q2 earnings of 38 cents versus an expected 32 cents, and after Tuesday's close Hewlett-Packard (HPQ) said that its Q2 was 86 cents versus an expected 83 cents a share.
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FAST is now consolidating and recently flashed a buy signal from our internal indicator.
Options Expiration Adds Volatility
The opening looks to be higher but today is options expiration day, and anything could happen.
Chances are high stocks will sell off further, but be alert for a dead-cat bounce after such a dramatic breakdown.
Traders and longer-term investors should sell any new positions at the first opportunity and short ETFs on a temporary recovery in the market.
CAT, the blue-chip of its industry, is the first to attract attention when it's time to dress up a portfolio.
