Setting Up for the Pre-Election Rally
July 06, 2004
It is raining earnings warnings in techland. As if analyst second-guessing has not been bad enough (witness the big downgrade of Intel last week), suddenly tech companies have decided to come out of the closet in droves. Interestingly, most of the companies that are warning are small and mid-cap companies. Yet people are quickly treating them like canaries in the coalmine. Not only are these party poopers getting taken out at the knees and being smashed in the face, but the entire market is getting taken down. Now all this seems overdone given that this pre-announcement season has been on the exceptionally mild side ("Earnings outlook positive - still: Wave of tech-industry warnings may be anomaly" - July, 4, 2004). But it suddenly occurred to me that this could be the perfect set-up for the fabled pre-election rally (for example, see Nightly Business Report - July 5, 2004). Supposedly, the four months prior to an election are historically good months (in sum total), so what better way to set the bull run up than to knock stocks back toward their lower ranges for the year. Sure, in the end we will still have not gotten anywhere, but perhaps we can get a few chills and thrills (and no spills!) from the ride.
For examples of how vicious the selling has gotten one need not look far: look up most any communications stock, especially semiconductors, small software companies are getting slammed, etc.... For the bravest of you, check out the beatings being handed out to the likes of SCUR, JDAS, KANA, CNXT, XTND, THOR (medical devices), FILE, KANA, ASCL, NTPA, KVHI, and VRTS. Yes, the list is long, and it should get longer before it is all over. Scary stuff! QSFT was the lone port in the storm tonight with guidance that at least holds the line at and around expectations. The market in after-hours was kind enough to give back all the beatings metered out in the day's regular session. Let that be a lesson to those of you prone to over-reaction and massive "sympathy" sales.
I do not often mention specific names, but I thought they would provide instructive this time as you try to gauge the prospects for stocks for the rest of the year. So many individual stocks have been so damaged this year, you can only stare and wonder just what was all the excitement over these pieces of paper for much of last year! Was last year's fun worth this year's pain?
Back up to the general market indices…So far, we are batting 0 for 3 since the Fed raised rates for the first time in four years - three straight days of selling, especially in tech. This is completely contrary to expectations of a big relief rally once we got June 30th out of the way. Unfortunately, it seems everyone did his/her buying BEFORE June 30th. The only bright side to all this selling is that it is occurring before this quarter's earnings fest begins in earnest. If sellers can get out all their angst beforehand, then the rest of the market will be much more tolerant when companies start admitting that the future is not as bright as it was, say, in the first half. We may go lower than we are today, but it should provide a platform for some kind of rest of summer rally to take us into the election season. After all, hope must spring eternal when you have before you the prospect of voting for "change" or "more of the same prosperity." (Guess which side I am on?!) This is of course just my own cloudy crystal ball talking…and you know I love trying to personify and explain the market's machinations, so take it all with the usual two tons of salt. And if you doubt that there is any buying firepower left out there, look at the old favorite speculative names that the fast and hot money ran to for the day: NVEC, LWAY, CALM, ESMC, NFLX, and IDSA (I am surprised good old TASR did not pull off the Houdini as well!).
Regardless, do not despair just yet. Bushie did not come this far just to let the market he rebuilt be the same machine that takes him out. Wall Street may try to bite the hand that has fed it, but I have to think there are some tricks still up the sleeves in DC to goose this market just enough….can anyone say a certain forgotten bandit? Hmmm…… Stay tuned!