A profit warning last night by
Electronic Data Systems
, plus disappointing earnings from
and a weaker-than-expected housing-starts report this morning had major averages doing the electric backslide Thursday.
About the only thing in doubt today was whether major averages would hold above key technical support levels, as they struggled to do through much of the session. But a late-day swoon condemned the averages to breach those levels, suggesting a retest of the July lows is increasingly likely.
Dow Jones Industrial Average
closed down 2.8% to 7942.39, its first close below 8000 since July 23. The
tumbled 3% to 843.33, and the
surrendered 2.9% to 1216.44; today's closes are the lowest for both indices since Aug. 5.
After today's slide, "the next
major levels of support are the July lows" at 7532.66 for the Dow, 775.96 for the S&P and 1192.42 for the Comp, said John Dodd, technical strategist at Morgan Stanley. "There might be some attempt to rally, but looking at all the major
indices, you're not that far away from the July lows. We think prices are going lower."
Dodd described today's action as "nothing dramatic, just a weakening
technical picture that's gotten weaker" in the past few days. "The action is poor, but there's no significance to Dow 8000 per se," he said, although the headline-grabbing Dow 8000 breach isn't likely to sit well from a psychological perspective.
The technician was more concerned that volume "has picked up to levels not seen since mid-August" when stocks were rising. "You've had very light volume until this point and a pickup in volume on the downside is not a good sign," he said, noting today's volume was "not climactic."
New York Stock Exchange
, nearly 1.5 billion shares traded, with down volume equaling 85% of the total and losers besting gainers by more than 3 to 1. Downside volume was 92% of the 1.3 billion shares traded over the counter while declining stocks bested advancers 2 to 1.
The 90% downside volume for the Comp is half the requirement of a so-called 90% downside day, as described by Paul Desmond, president of Lowry's Reports. I cannot ascertain if the other half, 90% downside price action, was completed today and Desmond was unavailable at press time.
But even if today proves to be a full-blown 90% downside day, today would mark only the second one in recent history -- the first being on Sept. 3. But as
reported here, Desmond's work suggests a series of these downside days emerge before major market bottoms, the average being five. He recommends investors take defensive action until there's a series of downside days,
a series of 90% upside days, indicating strong buying interest has returned.
Tomorrow's triple-witching expiration was expected by some to support stocks this week. But that clearly has not been the case.
"There's always a lot going on in expiration
weeks but what we've observed is that high
put/call ratios at the beginning of expiration week leads to
continuing higher put/call ratios, and the market tends to decline," said Jerry Wang, market strategist at Schaeffer's Investment Research in Cincinnati.
As expiration approaches and the markets fall, more put contracts become "in the money" Wang noted. Furthermore, the delta of the contracts -- which measures the expected change in an option's premium for a given change in the price of the underlying stock or future contract -- increases as expiration approaches.
"If the market falls, then you end up with a self-fulfilling cycle where the market falls, delta picks up and
market makers have to short more stocks to hedge" their positions, he said. "This causes shares to fall even more and you end up with a vicious cycle" akin to the reverse of a short-covering rally.
In addition to traders who've sold puts hedging their positions, the market's decline encourages put holders to book profits on the soon-to-be-expiring put contracts, and open up new defensive bets for the coming months, he said.
On Monday, the CBOE's equity put/call ratio hit 0.99; on Tuesday it was 1.14. Yesterday, it was 1.17, and today 1.05.
As noted above, today's decline was triggered by EDS' warning last night that its third-quarter earnings may be as low as 12 cents a share vs. its prior forecast of 74 cents. EDS shares tumbled nearly 53% and dragged down other IT service providers in sympathy, namely
, which lost 6.8%.
The EDS news rippled throughout the tech sector. The Merrill Lynch High-Tech 100 fell 5.1%, the Philadelphia Stock Exchange Semiconductor Index lost 3.9% and the Nasdaq 100 shed 3.3% to 865.93.
Meanwhile, Morgan Stanley fell 11% after posting third-quarter earnings of 55 cents per share, down 13% from a year ago and well below analysts' consensus estimates of 67 cents. Morgan Stanley's disappointment, news the New York attorney general is recommending criminal charges against Credit Suisse First Boston and the
ongoing reverberations of
J.P. Morgan Chase's
warning earlier this week sent financial shares reeling. The Amex Broker/Dealer Index slid 5.6% and the Philadelphia Stock Exchange/KBW Bank Index lost 4%.
Without the underpinnings of support from technology and financials -- two of the most heavily weighted sectors in the S&P 500 -- the index's steep demise was unavoidable. Conversely, what plagued equities once again benefited Treasuries. The price of the benchmark 10-year note rose 18/32 to 104 29/32, its yield falling to 3.77%, the lowest level since 1961.
Bonds also got a boost from today's economic data, namely the 2.2% decline in August new home starts to an annualized rate of 1.609 million units vs. expectations for a slight rise to 1.670 million units. Applications for permits also fell, by 2.5% last month. Separately, the government reported jobless claims totaled 424,000 for the week ended Sept. 14, down from the prior week but higher than economists anticipated.
Gold and related shares also profited from equities misery; the price of gold rose 0.7% to $323.90 while the Philadelphia Stock Exchange Gold & Silver Index rose 2.7%. Conversely, the U.S. Dollar Index fell 0.77 to 107.48
Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
Aaron L. Task.