Wednesday, the stock market sold off following days of euphoric buying in the face of not-so-good news.
But the really bad news of job losses shook buyers to the core when the Automatic Data Processing (ADP) employment index showed that private-sector firms lost 693,000 jobs in December and set the stage for a nasty employment report on Friday.
And the corporate news also had a negative impact: Alcoa (AA) led the blue chips lower after announcing a cut of 13,500 jobs and the closing of plants to conserve cash. This was followed by technology icon’s Intel (INTC) warning that Q4 revenues were expected to fall 23% from a year ago and the stock fell more than 6%.
The technology sector received another body slam from Indian giant Satyam Computer Services (SAY) when it revealed that it had overstated its cash and balance sheet by more than $1 billon. Satyam’s ADRs halted trading after the shares plunged more than 90% in the pre-market. Satyam’s founder resigned in the wake of what could be the largest corporate fraud in India’s history.
And the bad technology news continued as Apple Inc. (AAPL) fell following what observers noted as an “underwhelming performance” by the company at the annual Macworld Expo on Tuesday. Microsoft fell 6%, Hewlett-Packard (HPQ) was off 3.7%, and Oracle (ORCL), Cisco Systems (CSCO), and a host of others participated in a broader sell-off of the sector.
Topping off a perfectly horrible day for the bulls, the Congressional Budget Office estimated that the U.S. government would run a $1.2 trillion budget deficit in fiscal year 2009 and that unemployment could exceed 9%. And new spending from the incoming administration could take that number to more than $2 trillion in fiscal year 2010.
At the close, the Dow (DJI) was off 245 points, closing at 8,770. The S&P 500 (SPX) fell 28 points to 907 and the Nasdaq (NASD) was off 53 points to 1,599.
The New York Stock Exchange traded 1.2 billion shares, with decliners ahead of advancers by 4-to-1. The Nasdaq traded 808 million shares with decliners ahead by 3-to-1.
The February crude oil contract tumbled $5.95 to close at $42.63 a barrel, and the Amex Energy SPDR (XLE) lost $2.20 at $49.69.
Gold for February delivery fell $24.30, ending the day at $841.70 an ounce, and the PHLX Gold/Silver Index (XAU) lost $10.16, closing at $111.29.
What the Markets Are Saying
Investors were handed a sharp dose of reality Wednesday as markets, and especially the technology sector, were hammered by the worst pullback in a month.
Market momentum reversed, the stochastic issued a very visible sell signal, and the overly optimistic internal indicators I mentioned yesterday have turned down. This rout of the techs could infect the entire market since the technology sector is often cited as a key to a recovery.
In retrospect, the buying on Friday and Tuesday gives the impression of a “false breakout” from the series of minor tops at Dow (DJI) 8,900 and 8,925 and S&P 500 (SPX) 900 to 918.
The bulls must get their act together at the conjunction of the 20- and 50-day moving averages of the Dow 8,665 and S&P 889 — or at least at the next support at 8,350 and 850, respectively.
Optimists are citing yesterday’s low volume as a reason to treat yesterday’s action lightly, but low volume is only an indication of few buyers and many sellers, and it has been falling for weeks on both up and down days.
The ball is again in the possession of the bears.
Today’s Trading Landscape
Earnings of note to be reported include: Apollo Group (APOL), Chevron (CVX), Franklin Covey Co (FC), Great Atlantic & Pacific Tea (GAP), Healthways (HWAY), Helen of Troy Ltd (HELE), IHS Inc. (IHS) and Lawson Software (LWSN).
Matrix Service (MTRX), MSC Industrial Direct (MSC), Penford (PENX), PriceSmart (PSMT), Rocky Mountain Chocolate Factory (RMCF), RPM Int’l (RPM), Saba Software (SABA), Schnitzer Steel Industries (SCHN), Shaw Group (SGR) and Synnex Corp (SNX).
The following economic reports are due today: initial jobless claims for the week of Jan. 3 (the consensus expects an increase of 63,000), the DJ-BTMU Business Barometer for Dec. 26, and November Consumer Credit (the consensus expects $2.1 billion).
The Wall Street Journal reports that the Bank of England cut its key lending rate to 1.5%, the lowest rate since its founding in 1694. Wal-Mart (WMT) estimates that Q4 earnings will come in at $0.91 to $0.96 versus an expected $1.06.
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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.
