Stocks Recover, But EDS Warns

Stocks recovered from steep losses on Wednesday on disappointing earnings news from Oracle and JP Morgan. But a warning after hours from EDS threatened to send stocks lower again on Thursday.

The Nasdaq lost 7 to 1252, the S&P 500 slipped 4 to 869, and the Dow fell 35 to 8172. Volume rose to 1.47 billion shares on the NYSE, and 1.57 billion on the Nasdaq. Decliners led 19 to 12 on the NYSE, and 20 to 12 on the Nasdaq.

After the close, EDS plunged 30% on a warning. IBM tumbled 4 points in sympathy.

During the day, Oracle fell 8% after missing revenue estimates and guiding lower.

Intuit slipped 1% despite reaffirming guidance, and Red Hat lost 6.6% despite matching estimates.

Lucent closed below the important $1.00 level for the first time ever.

Intel touched a new 52-week low.

QLogic lost 3.8% and closed below the $30 level for the first time in 10 months.

Some technical comments on the market: Note: To see the charts in the text email newsletter, click on the story link at the top of the newsletter.

We have two conflicting pictures here: charts that look very weak, but sentiment that is extremely bearish. Today was the second consecutive equity-only put-call ratio close above 1.0. The only other time in the last 5 or 6 years that had back-to-back closes above 1.0 was September 17-21, 2001, when there were four readings above 1.0. That indicator has in the past occurred within a day to 10 days of a rally of at least a few weeks’ duration, most recently in July. At its most bullish – on October 8, 1998 and September 21, 2001 – it coincided with a major peak in the VIX, the options volatility index, but that bullish element is missing here (see first chart below). In fact, the VIX was down today, a short-term negative divergence. Our preferred scenario would be for a small bounce here and then hard selling for another week or so, similar to the August 21, 1998 equity PC reading of 1.0, but then the market always has its own ideas. Another possibility is for a bounce into the end of the month and then more down in October. Either way, we would like to see more 90% downside days into whatever low occurs to cement a bottom of some duration. We can dream, can’t we?

The banks (first chart below) finally broke down today, and should be headed for at least the 670 level. There have been a number of troubling implosions in the credit sector this week, among them Americredit, MGIC, JP Morgan and Fannie Mae. If trouble were to begin in the financial sector, firms with sub-prime exposure like Americredit and MGIC would be the likely place for it to begin. And the $20 level is rumored to be extremely important for JP Morgan, below which the company is reputed to have massive derivative exposure. Some big issues to keep an eye on. The Nasdaq (third chart below) barely held onto support today; a close below 1244 would likely target the 1192-1206 lows. 1220 is a possible support. 1263-1270 should now be tough resistance. The Dow (fourth chart) held 8050 support. Below 8030, 7950 and 7875 are possible supports. 8200-8300 should now be tough resistance. The S&P (fifth chart) held 854 support; 844 and 830-833 are next supports below that. Resistance is now 870-875.






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