Strong earnings from eBay and Microsoft weren’t enough to carry the rest of the market on Friday, as a strong rally at the open disappeared by the close.
The ISDEX http://www.wsrn.com/apps/ISDEX/ rose 5 to 417, and the Nasdaq added 1 to 2770, 71 points off its high. The S&P 500 slipped 5 to 1342, and the Dow fell 90 to 10,587. Volume rose to 1.4 billion shares on the NYSE, and 2.7 billion on the Nasdaq. Decliners led by 15 to 12 on the NYSE, and 19 to 18 on the Nasdaq. The Michigan consumer confidence survey declined sharply, yet another sign of a slowing economy. 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.
eBay surged 3 1/8 to 50 after posting earnings of 9 cents a share, 2 cents better than estimates. Commerce One
soared 6 5/16 to 28 after beating estimates by 2 cents with a 5-cent loss. Revenues rose 1,000%.
Microsoft , up 5 1/2 to 61, and Nortel
, up 3 1/2 to 40 3/16, traded higher after matching estimates. Sun Microsystems
fell 3 15/16 to 30 15/16 after coming in light on revenues, and Critical Path
plunged 10 15/16 to 9 1/16 after missing estimates by 17 cents with a 16-cent loss.
Inktomi fell 2 1/8 to 15 3/8 after meeting lowered estimates but lowering forward guidance. CMGI
fell 1 3/32 to 5 3/4 after warning.
Broadbase Software fell 1 5/16 to 6 3/16 despite beating estimates by a penny with a 15-cent loss.
Visual Networks added 7/16 to 5 1/2 despite missing estimates by 3 cents with a 31-cent loss.
Micromuse surged 7 3/4 to 77 1/4 after the company’s 10-cent earnings beat estimates by 2 cents. Emulex
rose 4 1/4 to 101 3/8 after beating estimates by a nickel with 23-cent earnings.
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The Nasdaq and Nasdaq 100 broke out of their rising channels today (first and second charts), as we said they might. However, in the process, the indexes formed the second black candlestick (a close that is lower than the open) on an up day this week, a negative sign. The Nasdaq managed to finish the day positive, but the Nasdaq 100 finished the day on the downside, forming a fairly reliable one-day reversal pattern, and on rising volume to boot, signaling that a pullback may be in store. And we continue to be concerned about the weakness in the Dow, which we will get to in a moment. However, we still expect any pullback to be modest, perhaps to the gaps at 2618.55 on the Nasdaq and 2470.72 on the Nasdaq 100, and certainly no lower than 2450 on the Nasdaq, the lower channel boundary. The Nasdaq and Nasdaq 100 have formed smaller, steeper uptrends (the gray lines), which led to the breakouts of the larger channels. If the indexes break down out of those gray channels, that would be a good hint that a correction has begun. The Nasdaq closed today right on that lower gray line.
The S&P 500 continues to struggle around its September downtrend line (first chart), which it fi
nally took out yesterday. Note in the second chart that the S&P has only reached the middle of its large channel, which shows how much the S&P is lagging the Nasdaq, weighed down by its old industrial components. The S&P also closed right on that lower gray line.
Which leads us to the Dow. As we’ve been saying for days now, the weakness in the old industrials is troubling, and today the Dow Transports joined in, breaking back below the 3000 breakout level. Rather than the Dow closing above 11,007 to confirm a new bull market under Dow Theory, the Transports are joining the Industrials in a non-confirmation; not a good sign. Remember the inverted treasury yield curve (short-term yields higher than long-term yields) we wrote about from August until October, an 86% predictor of a recession? The old industrials may be telling us that a recession has already hit the manufacturing sector. It will likely take at least one more rate cut for investors to regain confidence in this sector, and in the meantime, we have extreme sector rotation, which is never a good sign. One last comment on the issue: a linear regression of the major indexes back only to 1995 comes up with a fair value of 11,000 on the Dow, 1300 on the S&P 500, and 2300 on the Nasdaq. After briefly coming back into line, the indexes are now getting out of whack again. And we should note that the yield curve hasn’t completely uninverted yet. The Fed would appear to have more work to do. Critical support on the Dow is 10,300.
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