Stocks plunged Friday on a much stronger than expected reading in the Producer Price Index and earnings warnings from Nortel Networks, Dell and Hewlett-Packard. The market dropped even further around 1:30 Eastern Time when U.S. and British planes bombed Iraqi air defense systems.
The ISDEX http://www.wsrn.com/apps/ISDEX/ plunged 20 to 342, and the Nasdaq plummeted 127 to 2425. The S&P 500 dropped 25 to 1301, and the Dow fell 91 to 10,799. Volume was unchanged at 1.1 billion shares on the NYSE, and declined to 1.9 billion on the Nasdaq. Decliners led 19 to 10 on the NYSE, and 26 to 10 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.
The Producer Price Index rose 1.1% in January, well above 0.2% estimates. The 0.7% gain in the Core also beat 0.1% estimates. It was the biggest jump in inflation in 10 years. The Consumer Price Index will be reported next Wednesday.
Nortel plunged 9.78 to 19.97 after warning that it will lose 4 cents a share, 20 cents below estimates. Nortel noted that it was now “seeing a faster and more severe economic downturn in the United States” than previously expected. Almost all stocks in the networking and equipment space were hit on the news, but none were hit harder than Nortel suppliers Corning
, down 9.01 to 33, and JDS Uniphase
, down 9 1/2 to 35 5/8. Corning said it would cut costs in response to Nortel’s warning.
Warnings from Hewlett-Packard , down 3.35 to 33, and Dell
, down 1 7/16 to 23 9/16, didn’t help. Together, traders took the warnings as a sign that corporate earnings may not recover in the second half of the year, as hoped.
Covad was halted after postponing its earnings report to review its revenue recognition practices. The few trades that went through were down substantially from yesterday’s 2 7/8 close.
Agile Software fell 3 1/2 to 28 3/8 despite topping estimates. Priceline.com
fell 3/8 to 2 5/8 after missing estimates and warning, but the company said it expects to return to operating profitability in two quarters. NaviSite
lost 9/16 to 2 1/4 on an earnings warning. Mail.com
, down 1/8 to 1 17/32, also warned.
The one bright spot of the day was that a networking company was able to go public. Riverstone Networks priced at $12, opened at 13 5/8, and closed at 13 1/8.
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Back to critical support. The Nasdaq closed today right above critical support, the 1990 logarithmic trendline, at 2388 (first chart). The index got as low as 2397 today. That line would definitively break on a close of 2340 or lower, but the Jan. 3 rally attempt wouldn’t be negated unless the Nasdaq closes below its Jan. 2 close of 2291, right about at the level where the Fed cut interest rates on Jan. 3. To the upside, a move above 2460, the downtrend line in the second chart, could give the index some room to run. That gap down today created an “island reversal” with yesterday’s gap up, which called for a retest of the recent lows at 2388. Also, the Nasdaq gapped back below its September downtrend line today (
the third chart); that line is at about 2500 at this point.
The S&P 500 broke back below its September downtrend line at about 1300 today, but recovered to close just about on that line. While the recovery is encouraging, piercing is often a prelude to breaking, so we’ll need to watch the S&P 500 carefully the next few days. The index managed to turn up around 1294, the same level as the November 30 low, preserving a potential inverted head and shoulders bottom; a strong move above that neckline at 1375-1390 could carry the S&P 500 all the way to 1500. That may sound like a lot, but the average one-year gain in the stock market after two Fed rate cuts is 28%.
The Dow broke back below its October uptrend line at 10,800 today, but recovered to close just below that line. Again, the index should be watched carefully for the next few days because of that piercing action. Next support is 10,600-10,650. To the upside, we want to see the Dow take out 11,000 resistance; a close above 11,007 would also be bullish under Dow Theory, the oldest school of technical analysis, particularly if the Dow Transports can stay above 3000; the Trannies closed at 2994 today, back below that level.
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