A technically overextended market met a series of potentially negative fundamental developments Thursday, and stocks fell in reaction. Still, major averages ended off their intraday lows, suggesting many traders currently view declines as opportunities to buy rather than to sell shares.
After trading as low as 8395.70 at midday, the
Dow Jones Industrial Average
rose steadily thereafter before retreating again the final hour to finish down 0.9% to 8440.04. Following similar patterns, the
ended off 0.8% to 911.43 vs. its nadir of 906.69, while the
slid 0.6% to 1457.23 after trading as low as 1448.10.
The declines followed a higher-than-expected rise in weekly jobless claims to 455,000, the highest level since March 2002. The four-week moving average rose to 439,000, also its highest in a year.
Despite a surprising 2% rise in March durable goods orders -- expectations were for a 0.6% drop -- Treasuries rallied in reaction to the jobless claims data, while the dollar weakened in concert with shares.
The price of the benchmark 10-year note rose 18/32 to 99 22/32, its yield falling to 3.91%. Treasuries did come off their session highs as stocks bounced from their session lows. Similarly, the dollar rebounded somewhat from its early lows in concert with shares; the U.S. Dollar Index ended off 0.46 to 98.56 after having traded as low as 98.36.
Still, the dollar's inability to benefit from the durable goods data proved disappointing to those expecting a short-term rally in the greenback, such as Anne Mills of Brown Brothers Harriman. "Battered but unbowed, we would note the key $1.1085
euro level, has not been tested," Mills wrote. "As long as this holds, we will remain positive on the dollar vs. the euro for the short term."
Late Thursday in New York, the euro was trading at $1.1042, up from $1.0961 the prior day.
Dropping Shoes Abound
Other contributors cited for weakness in shares included:
Disappointing earnings and/or guidance from DaimlerChrysler , KLA-Tencor , Overture Services and Aflac ;
Fed Governor Ben Bernanke's admission in a speech that "an undercurrent of pessimism has persisted among business leaders for some time now," and that policymakers have been unable to "ascertain its cause or causes." (Perhaps business leaders don't see the "generally good fundamentals of the U.S. economy," that Bernanke cited.);
The earlier-than-expected conclusion of joint talks between the U.S., China and North Korea, as well as the latter's admission it has nuclear weapons, according to wire service reports;
Wall Street's "sudden" awakening to the economic and human impact of SARS.
"I think the market was down all day because people were concerned about valuations, the North Korea talks breaking down, and some downgrades this morning based on lowered guidance," said Jim Volk, director of institutional trading at D.A. Davidson in Portland, Ore. Among the downgraded (by Merrill Lynch and Salomon Smith Barney, respectively) were Aflac, which fell 11.5%, and Overture, which lost 31%.
"Nobody believed the durable goods numbers -- there's always a lot of flukes in there -- and futures sold off before the open when the jobless claims hit," Volk continued. "A number of shoes dropped here."
Some observers also cited OPEC's decision to cut production by 2 million barrels of oil per day and/or Alan Greenspan's acceptance of a fifth term as Federal Reserve chairman. However, crude futures fell to a five-month low of $26.65 per barrel midday, and few Fed watchers ever doubted Greenspan's desire for another term. Moreover, some pundits had said the renomination helped fuel Tuesday's rally. (While the Fed chair is no longer accorded deity-like status, faith in Greenspan remains intact among the majority of market participants.)
Concurrent with the aforementioned fundamental factors, stock proxies had become technically overextended in the rally from the mid-March lows, and more recently beginning on March 31.
"All the short-term timing stuff I look at was pointing to an intermediate-term top," said Brian Belski, fundamental market strategist at U.S. Bancorp Piper Jaffray. "When you see these type of
intraday swings, it's quintessential of a short-term reprieve."
Among the short-term indicators, the CBOE Market Volatility Index "spiking lower" in recent days, put/call ratios falling and McClellan indicators "all pointed toward the market being overbought," Belski said. (Similarly,
Helene Meisler observed the market was approaching a "maximum overbought level" heading into Thursday's session.)
On a more fundamental note, the strategist observed that earnings season is starting to tilt more toward smaller-cap names that are lagging big-caps in terms of meeting/exceeding expectations by a nearly 2-to-1 margin.
Belski has long suggested the market would make its high for the year by the end of April and is now "waving the yellow flag" that the topping process is happening. While still believing 2003 will prove to be a modest up year for major averages, he frets there's "significant risk" to consensus earning estimates for the second half of 2003, which (by the way) starts in about six weeks.
On the other hand, D.A. Davidson's Volk observed a "better tone" in the market with participants "willing to buy on dips vs. selling on strength or continuing to short." Valuations are a concern, but money managers heretofore on the sidelines are "running out of things to do almost a month into a new quarter" and are thus "throwing money" at big-cap names, the trader said.
Between those diverging influences, something has to give. It did Thursday, in favor of the sellers, although not wildly so.
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.