Consumer Confidence Fades, Rate Cut Hopes Dim

Stocks got a double-dose of bad news on Tuesday, as another big drop in consumer confidence spurred recession fears, and another Fed official downplayed hopes for an immediate rate cut.

The ISDEX http://www.wsrn.com/apps/ISDEX/ lost 23 to 288, and the Nasdaq plunged 100 to 2207, a new closing low. The S&P 500 lost 9 to 1257, and the Dow slipped 5 to 10,636. Volume declined to 1.1 billion shares on the NYSE, and 1.8 billion on the Nasdaq. Decliners led 15 to 14 on the NYSE, and 25 to 12 on the Nasdaq. For earnings reports, visit our earnings calendar at http://www.wsrn.com/apps/earnings/internet.xpl and reported earnings at http://www.wsrn.com/apps/earnings/ireported.xpl. For after hours quotes and news, visit our after hours trading site at http://www.afterhourstrading.com.

Consumer confidence dropped to 106.8, well under expectations for a 111 reading. Future expectations plunged to 68.7, the lowest reading in 7 1/2 years. However, two top Fed officials have cooled hopes for an intermeeting rate cut in the last 24 hours, so traders will likely have to wait until March 20 for the next rate cut. Even so, the Fed funds futures market is still pricing in a 25 basis point intermeeting rate cut, so the pros are betting real money on an intermeeting rate cut. Fed Chairman Alan Greenspan will testify before Congress tomorrow morning. The Fed confirmed yesterday that he is revising his excessively rosy Senate testimony of two weeks ago, a rare step that could mean that Greenspan will hint of further rate cuts tomorrow.

i2 Technologies fell 7 15/16 to 27 9/16 after Nike blamed i2’s software for Nike’s huge earnings warning. Ariba lost 2 7/16 to 17 1/4, and Commerce One dropped 3 1/8 to 19 1/16.

JDS Uniphase lost 4 5/8 to 28 after announcing that it will lay off 3,000 employees. In a negative sign for the Nasdaq, Cisco broke $25 support, falling 2 to 24. Juniper lost 9 9/16 to 62 9/16. Avanex warned after the bell, putting further pressure on the sector.

Broadcom fell 9 3/8 to 53 5/8 on accounting concerns raised by the Wall Street Journal.

Yahoo lost 2 1/8 to 23 5/8 after speakers at a new media conference said the company was not an attractive takeover target at its current valuation. Analysts also expressed concern about the company’s earnings in the weak Internet advertising environment.

eToys announced that it will file for bankruptcy protection, and said its stock has no value.

GoAmerica slipped 7/16 to 4 7/16 despite topping loss estimates.

Some technical comments on the market: Note: We are now including charts in the technical market commentary. If you can’t get the charts via the e-mail newsletter version, try this link: http://www.afterhourstrading.com/column.html

The Nasdaq broke down out of a 50-point trading range today, setting up the test of 2200 (first chart). Given the lighter volume on the decline, and better new highs/new lows, the index is likely to hold its recent lows around 2150-2200 (2050 is the next strong support below that). However, the index sure looks weak to us. There are absolutely no buyers north of 2300, and the only thing holding up the market here is the threat of further Fed rate cuts; those hopes are being dashed, but the threat is always present. To the upside, the 2300 level is tough resistance, and needs to be broken with force. It is also where the middle of three downtrend lines from September can be found, adding

to the resistance at that level (second chart). As we mentioned yesterday, the weakness in semiconductor stocks was worrisome for tech stocks; the semis got hit even harder today. Hopefully Fed Chairman Alan Greenspan can rally the markets tomorrow.

The most troubling of the indexes is the S&P 500, which may have broken down out of a rising wedge or bear pennant today (first chart), setting up a potential retest of the 1215 lows, and possibly lower lows, as low as 1160. The index could find support in the 1250 range, and we’ll set critical support at 1240. The S&P 500 became the second major index this year to undercut last year’s lows (the Nasdaq was the first, on January 2). That’s the first time since the 1981-1982 bear market that the major U.S. stock indexes have undercut the previous year’s lows, one more sign that the market environment has changed. To the upside, the S&P got turned back at 1275 resistance today, the early January low. The index’s September downtrend line is around 1280 (both levels in the second chart below), making for a lot of resistance in the 1275-1280 range.

The Dow is holding 10,600 support, but was unable to sustain any advance above 10,650 resistance. Above 10,650 (the middle of the 10,300-11,000 trading range), and the Dow trades with an upside bias. Critical resistance is 11,000; the Dow Transports must get back above 3000 and stay there, and the Dow must close above 11,007 to get an all clear signal under Dow Theory. The Transports closed at 2971 today. To the downside, 10,500 is next support on the Dow, and 10,300 is strong support, but the index could go as low as 10,100 without a major technical breakdown.

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