Cracks already evident in the rally's armor widened dramatically on Thursday, with tech proxies suffering the biggest hits. The acceleration of recent weakness heightened the debate about whether the postwar rally has indeed breathed its last.
Disappointing results and/or guidance from
-traded stocks -- spilled over into over-the-counter trading, helping send the
down 2.9% to 1698.02, its lowest close since July 3.
Further reflecting the extent of the weakness, almost 90% of the 1.9 billion Nasdaq shares traded were to the downside, while declining stocks bested advancers by more than 4 to 1.
Relative to the Comp, blue-chip proxies fared far better. The
Dow Jones Industrial Average
fell 0.5% to 9050.82 while the
lost 1.2% to 981.73.
Declining volume was 79% of the Big Board's 1.65 billion share total, and declining stocks led advancers 25 to 7.
The Dow and S&P were buoyed by better-than-expected results from multinationals such as
. Stronger-than-expected economic data -- including the Philadelphia Fed survey and new housing starts -- along with a decline in weekly jobless claims also helped stem weakness in the Dow and S&P.
Still, the overriding tone in equities was decidedly negative, and that helped Treasuries rebound partially from early selling brought on by the decent economic data. The price of the benchmark 10-year Treasury ended off 6/32, its yield rising to 3.94%.
IBM's second-quarter earnings matched analysts' expectations and its revenues rose 10% from a year ago. But much of the gains were attributed to currency translations, and IBM executives played down hopes for a revival in IT spending, much as
had done Tuesday evening. IBM shares fell 3.9%.
Meanwhile, Nokia lost 19.9% after reporting weaker-than-expected second-quarter results and offering tepid guidance for the third-quarter. SAP shed 8.5% after posting disappointing second-quarter sales results.
The fallout from the three -- IBM, Nokia and SAP -- weighed heavily on all tech proxies. The Philadelphia Stock Exchange Index fell 4.2%, the Nasdaq 100 shed 2.8%, and the Merrill Lynch High-Tech 100 lost 4.7%.
Fundamental news aside, there were already some technical indicators suggesting the market was vulnerable, particularly tech stocks given their huge percentage gains year to date, as noted here
"It is normal to pull back after such a move,
and I believe it is a lock we continue lower," Gary Kaltbaum, president of money management firm Kaltbaum & Associates, said during the early stages of Thursday's slide.
Kaltbaum, a technical analyst by training, noted the advance/decline line had been "downright ugly" in the past two sessions, even as major averages suffered only modest declines. Furthermore, the Dow and S&P never confirmed the technical breakout produced last month by the Comp and Nasdaq 100.
In the parlance of technical analysis these developments are "negative divergences," which often presage declines for the averages themselves. (
Helene Meisler made similar observations, noting the gradual decline in stocks making new 52-week highs in recent weeks, even as major averages hit new highs.)
Kaltbaum believes the setback remains in the realm of normal-after-a-big-rally, provided the Nasdaq doesn't violate its recent breakout level at 1686 while the Dow and S&P stay above support at 8970 and 974, respectively. "A break of these levels will turn the correction into something a little bit more tough to take," he said.
Despite the sharpness of Thursday's decline -- especially for the Comp -- the prevailing wisdom on Wall Street seems to be that this indeed was an acceptable setback for a technically overextended market.
"I'm not terribly concerned," Liz Ann Sonders, chief investment strategist at Charles Schwab said late Thursday afternoon. Noting the Nasdaq's relative strength index had previously been rising in parabolic fashion, she dubbed the setback "natural" and probably unavoidable.
"As long as we keep getting better-than-expected earnings and no implosions in
forward guidance, the market's direction should largely be up," Sonders said, suggesting the same holds true for economic data, which has taken a somewhat more positive tone of late. Still, "the easy money has been made," she conceded.
Thursday's session recalling the old saw about "easy come, easy go."
Other assignments took my attention away from the market for much of the day Thursday, so my comments on it will be limited to the above. I suspect they'll be further opportunities to discuss the significance of the session, especially if the decline resumes Friday.
On the surface, news after the close from
should provide tech bulls a chance to make amends for recent failures and Thursday's floundering. Whether or not they're able to do so will be crucial in determining the market's next phase.