Instead of opening higher and bouncing lower later, the markets stumbled right from the get-go on Tuesday but the end result was the same as last week. After Monday's modest gains -- despite another late-afternoon fade -- there were few signs of strength as the crumbling and bumbling market of 2005 ground lower again. The Dow Jones Industrial Average lost almost 65 points, or 0.6%, to 10,556.22. The day's low at 10,531.60 was lower than Monday's low, the eighth consecutive such drop. The S&P 500 also lost 0.6% to 1183.02. And the weak sister of 2005, the Nasdaq Composite, had another lousy day, falling 0.8% to 2079.62. The Comp's intraday low of 2072.62 was lower than the previous day, marking seven out of the past eight trading sessions with that warning sign. Breadth, which had been modestly positive on Monday, again turned decidedly negative as twice as many stocks fell as gained on both the Nasdaq and New York Stock Exchange. Aside from the technical weakness, disappointing earnings and/or guidance from Advanced Micro Devices ( AMD), Alcoa ( AA) and Genentech ( DNA) put investors in a sour mood on Tuesday. AMD, which said sales and operating income would be below forecasts for the fourth quarter, dropped through the floor, ending with a 26% loss. Alcoa, posting weaker earnings due to higher commodity costs and the falling dollar, fell 2.7%, and Genetech lost 7% after sales of its Avastin cancer drug were below expectations. After the close, chip bellwether Intel ( INTC) reported stronger-than-expected fourth-quarter earnings and -- more importantly -- gave
bullish guidance. Down 1.5% in regular trading, Intel was recently up 2.6% in after-hours trading.
Parsing the IndicatorsWhether Intel can reverse stocks' early 2005 funk remains to be seen. Regardless, the market's early-year weakness doesn't doom equities for the year, as past years have seen similar trends reverse. But how much solace to take from history, which doesn't repeat itself but does often rhyme, as Mark Twain used to say.
The ugly opening swoon of the markets in 2005, with the Nasdaq now off 4.4% after the first seven days of trading, has analogs in recent history. Most recently, consider 1998. After a 22% gain in 1997, the Nasdaq dropped 7% in the first two weeks of 1998. The technical warnings looked similar to today, in that for five days in a row the index made a lower high than the previous day and a lower low. The streak ended when the index hit an intraday low of 1465.61 on Jan. 12, 1998. That day the market finished with a modest gain and began climbing. The Comp broke 1600 by the end of the month, 1700 in February and it was off to the races. The close above 2000 came in July. In the fall of 1998, an emerging market debt crisis took its toll on stocks -- but not for long. The Composite ended the year at 2192 with the intraday high for the year reached on Dec. 31. It's reassuring to recall the 1998 scenario but the analogy doesn't hold. The index gained 15% in the fourth quarter of 2004 and 24% from its August low. Back in 1997, the index had a great start but dropped in the fourth quarter. In fact, the fourth-quarter high of 1748.78 on Oct. 9, 1997 wasn't regained until Feb. 23, 1998. There was less pressure to take profits and more opportunities for bargain hunting. And the Federal Reserve -- always the Fed -- wasn't raising interest rates back then, it was about to start cutting them. Heading into 2005, not only is the Fed likely to raise rates but expectations for how high rates will go rose last week after the central bank released minutes of its last meeting.
Kevin Marder, chief strategist at Ladenburg Thalmann Asset Management, was calling for a
rally back on Sept. 13, before warning of a break down on Dec. 20. He's still urging investors to keep a high cash position until much clearer signs of undervaluation and/or institutional buying appear. "This will be evident -- or not -- on the first rally attempt by the averages with volume, breadth and leadership being important items to watch," Marder wrote on Tuesday. There are other historical correlations that traders cite when looking at how January goes. According to the The Stock Trader's Almanac's "early warning signal," the first five days of a new year can predict how things will go for the next 11 months. Since 1950, there have been 34 times that stocks rose in the first week of the year and in 29 of those cases, stocks rose for the entire year by an average of almost 14%, according to The Almanac. In the 20 cases when stocks dropped in the opening week, the full year produced 10 gains and 10 losses. Ralph Acampora at Prudential Equity Group calls the indicator more "folklore" than accurate predictor. Still, he sees the makings of a continuing correction. "At best, we can expect some choppy action at current levels because the market is not yet oversold near-term," he writes. The early warning signal and the related January Barometer -- which says the full month of January dictates the tone for the full year -- is also about as accurate as the Super Bowl indicator. That says that when a team from the old American Football League, now called the American Football Conference, wins the championship then the stock market will be down for the year. If the National Football Conference team wins, the core of the old NFL, stocks go up. It's held true 29 out of 36 times, though not in 2004, when the New England Patriots of the AFC vanquished the NFC's Carolina Panthers, and yet the market gained. With the Pats and Pittsburgh Steelers -- both of the AFC -- looking like the two most likely to win the Super Bowl, bulls should hope that the football barometer fails again.