Nightmare on Election Street

Nov. 10, 2000

No matter what your party affiliation, no matter who you voted for (you did vote, didn't you?), no matter what you'd like to see as an outcome, I believe it's safe to say that we'd all like to see a resolution to this. But politics being what they are, we can expect this to be drawn out to the point that we'll all be so relieved to have a president-elect that we won't necessarily care who it is.

At this point, it appears that's what the market is saying. Do you think the drug stocks will even care if Gore gets the nod? Or do you think Microsoft (MSFT:Nasdaq - news - boards) and Philip Morris (MO:NYSE - news - boards) will care if Bush is the one? Seems to me we're going to get to the point that no matter what the outcome, it will be priced into the stock market by the time it gets here.

The whack Thursday took the Nasdaq Composite Index back down to that all-important 3000 level once more. Some folks cheered because we held that magical number yet again. While I don't put much stock in holding absolute levels, something positive happened under 3100: Once again, the Nasdaq stocks didn't see a huge expansion in the number of stocks making new lows. That tells us that despite their declines, some stocks were still faring better than they did the last time the Nasdaq took a trip below 3100.

Even with Thursday's poor statistics, the intermediate-term indicators continued to hold their own. Granted, one more day like Thursday, and they'll give way to the downside. Until then, however, it continues to be a tale of two markets. The Nasdaq continues to act more like the NYSE acted last January and February, and the NYSE acts more like the Nasdaq did during that same time frame. It's as if tech stocks and consumer nondurables couldn't live under the same roof; it's either one or the other.

The fewer new lows on the Nasdaq suggest that the stocks that are down and out are seeing less selling pressure. That doesn't mean we're out of the woods -- there are plenty of still-up tech stocks that have plenty of room to fall, are still overowned and will continue to see selling pressure.

For example, I2 Technologies (ITWO:Nasdaq - news - boards) has broken an uptrend line going back to the April lows. While we may not break this 150 support immediately, the broken uptrend line should be considered a warning that this stock's run is close to over for now. And I2 is now vulnerable to a 50-point slide (200 - 150 = 50).

In addition to I2, Network Appliance (NTAP:Nasdaq - news - boards) has also broken an important uptrend line. In this case, it dates back one year to the lows this stock saw last fall. These stocks may not be down as much as many of the others, but it doesn't make them any less vulnerable. It's likely just a matter of time before these begin to crack as well.

Wednesday I showed the S&P 500 chart at resistance. While this was before we knew we wouldn't have a president-elect, I suggested that a Bush win would mean a failed rally and a Gore win would mean a market decline. You may note that with either outcome, the market appeared poised to back off from that 1430 to 1440 level on the S&P. While we didn't expect there to be no outcome, it did appear that the S&P was ready to retest the 1375 level. Thursday it traded down to 1369 intraday.

You can see from the chart that the S&P came down and bounced off that broken downtrend line. It now seems likely to meander around this 1360 to 1430 area until this uncertainty is cleared up, but also until the NYSE oscillator works off its overbought condition.

We also need to watch for the same sign we've watched for in the past: the advance/decline line holding. When the S&P was down about 20 points in the late afternoon Thursday, the A/D line was reading 800 to1900, or a net differential of minus 1100 -- but as the SPX rallied, so did the A/D line. The A/D line closed the session with a negative net differential (minus 653), but we've got to give it credit for coming back at all. There have been plenty of times that the averages have come back and the A/D hasn't. That's when we know it's just the futures traders or program traders. But when the A/D tags along for the ride, there's usually more to it than just a few programs.

If we didn't have this nightmare of election uncertainty hanging over the market, we'd think this was just another trip down, another day of retesting the lows. Instead, like the sword of Damocles, this uncertainty hangs over the market.

(And for the record, would someone please tell the folks at CNN that overseas absentee ballots are not only from the military? Here in Singapore, the nonmilitary Americans outnumber U.S. military folks by at least 50 to one!)

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