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Thursday, April 28, 2005
Market Recap
The market was right on cue today as it followed up yesterday's up day with another big down day. The day started with a negative reaction to the GDP number released before the bell and, with the exception of some minor strength after lunch, the sellers controlled the market the entire day. The final blow was when oil reversed into the positive after, at one point, dropping below $50 a barrel. The NASDAQ finished the day lower by –26 points, the DOW finished with another triple digit loss down –128 points and the S&P closed lower by –13 points. Today's volume was above average so we continue to see strength on low volume and weakness on heavier volume. All three indices have now fallen below the bear flags on the charts that I have been talking about. There really is no positive way to spin how negative the charts look at this point, therefore I will not even make an attempt.
Since hitting the lows for the year, the action in the markets for the last 2 weeks has now relieved the oversold conditions in the charts. We all know that markets do not go straight up or down so there will be pockets of strength that look like the market is forming a base, when in fact it is setting up for more declines. The lack of volume to the upside and the formation of bear flags on all of the indices are both strong indications that this market is headed lower. The NASDAQ continues to be the weakest of the three as it managed to close below the 1908 low it made 2 weeks ago. An index or stock making a new yearly low on a closing basis is not good. The concern now is that the only things holding the markets up from a technical perspective are price support and the 200SMA's on the weekly chart. The NASDAQ needs to hold above 1900 and the DOW needs to hold above 10k for this market to have any chance of reversing in the short term. Tomorrow is Friday and history says the odds of a market reversal happening tomorrow are very slim. Investors will rarely commit to a market that is in a downtrend, going into the weekend. This certainly does not mean that we should expect a repeat of 2 weeks ago, but we should not expect much strength to the upside.
MSFT posted “ho hum” earnings after the bell and is basically trading right where it closed. They missed their top line revenue number slightly but met earnings estimates and guided in line with expectations. KLAC, after posting strong results, is forecasting a decline in sales in the upcoming quarter, sending that stock down 6% in AH. Expect NVLS and AMAT and most of the chip sector stocks to be down on this news. It is looking to me like the markets are setting up for a gap down in the morning.
Growing Pains
We are getting more and more information on the growth of the economy. Or should I say the lack of growth in the economy? Now the GDP numbers are showing declines. The most recent reading shows the GDP grew at the slowest pace in the last 2 years. This is not exactly the kind of sign we have been hoping for. A slowing economy could spell some long term problems for the markets.
With consumers spending less, particularly the wealthy consumer, we can expect to see economic growth numbers slipping. Part of the issue is rising costs, which in turn effects the prices to the consumer. I am not talking about the rising prices in oil and gas exclusively either. A general rise in prices is putting pressure on consumers and causing some of the economic slowdown.
We would be looking at deflation rearing its ugly head at that point. Businesses would have to devalue products and services, just to be able to move them. Now, that is not such a bad thing when you are in the market looking to buy. Low prices are what every consumer is looking for and what they are coming to expect. Just look at how poorly the auto manufacturers do when they do not offer massive discounts.
Oil prices are beginning to tick down once again. This could help ease some of the pressure on the general economy. Less money needing to be spent on fuel is going to allow consumers more money to spend elsewhere. This is what we need to see happen otherwise we could be in for a very long summer.
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