As Tech Goes, So Will the Market

By Duru

March 21, 2005


The persistent weakness in technology this year has been one interesting sight to behold.  Today, the NASDAQ did a typical tease around the pseudo-important level of 2000.  I do not even dare count how many times in the past 4 years that the NASDAQ has danced around the magical 2K level, but I suspect the market is about to add a lot of days to the running 2K madness.  Before the NASDAQ finally gives up its games and breaks lower, I thought I would whip out a quick bearish piece so that I can look like a genius sometime this summer….or earlier.

Actually, a blurb I read in this past weekend's Barron's finally got me motivated enough to write about my latest guesses: "John Roque, the technical analyst at Natexis Bleichroeder, points out that, excluding the energy and materials sectors, the rest of the S&P 500 is down a striking 6.3% this year" ("Aging Bull Suffers From Bad Breadth" by Michael Santoli, Barron's, March 21, 2005).  This means that were it not for energy and materials stocks, the general market would look about as weak as the NASDAQ does (the NASDAQ is down about 8% this year).  It means that those folks who have been smug in their anti-tech stance have really been relying on the narrow performance of two sectors to make their point.  Most of all, it means that as tech goes, so will the market, and right now, the going is not looking too good.

Minor bounces, snapback rallies, and oversold buying sprees aside, this market looks very weak to me (look for one of these teaser rallies to mark the post-Fed action in the next week or two).  The complacency phase of the recent trading range ended with a bang.  I declared the phase over with the Ebbers conviction, but perhaps the blow-up of GM last week was a more important marker.  GM made a big whiff as it predicted a major earnings shortfall for the coming year, and the stock took a most convincing 14% tumble right past the $30 option "strike" price that should have held right before the expiration of March options. Adding to my list of worries are the following "big-boy" stock worries in tech and retail:

1.      Intel (INTC) issues what was supposed to be a bullish mid-quarter update and promptly fades 6% in the next 4 days.

2.      Best Buy (BBY) continues to languish below its 200 day moving average (DMA). It has spent most of the last 4 months below its 50 DMA, and this technical indicator has been ramping downward for the last 3 months. BBY is important as a sign for discretionary consumer spending.

3.      Bed, Bath, and Beyond (BBBY) has recently failed at is 200 DMA and in the past weak has pointed straight down. BBBY is important as a "home-maker" stock. Housing-related economic activity has been strong for several years now.

4.      Home Depot (HD) is another important home-maker stock. Its stock chart has gotten ugly quickly again. I thought that the earnings report in late February would provide the shield to save the stock. After some brief celebration, HD resumed its slide and has now broken hard below its 200 DMA.

5.      After making a nice breakout move last November as part of the big post-election rally, Dell (DELL) has slowly but surely worked its way back for a nasty roundtrip. Its 50DMA is now pointing downward.

6.      Cisco (CSCO) has been irrelevant for a while, but I will include it anyway as a former tech "big dog." A long-term view of the chart shows that the stock is on the edge of breaking downward from a sluggish trading range it has struggled to maintain since a mini-collapse in August of last year. Its 50 DMA has been ramping downward all year.

7.      Wal-Mart (WMT) is the company everyone seems to care about…except for traders. This one has essentially gone nowhere since 1999!!! Hard to believe right? Wal-Mart is supposed to be the quintessential retailer - the corporation everyone wants to emulate. Yet, investors have been rewarded with almost nothing for the entire 21st century…and then some. I mention them only to call your attention to what looks to be sure and steady weakness that I suspect will drag the stock down another 10% to the lowest points of this dreadful trading range. This move alone will finally set off alarm bells in retail stock-land….even if overall it will be the same old story for WMT.

It is of course easy to come up with signs of weakness when the overall market is weak. These stocks are just pieces to the obvious overall story you get from looking at the major market indices. But the one stock I have been watching the most lately is IBM. It has been an excellent barometer on what folks really think about tech. Its struggles have been tech's struggles. And at this point, I cannot imagine any real or sustained rally in tech (or the S&P 500 for that matter) that does not include IBM. At the juncture of Dec/Jan, IBM failed to take out 2004's high of around 100 and has been spiraling downward ever since. Watching IBM in 2005 has allowed me to remain skeptical about the market all year. I post two views below to explain my thinking in more detail.



Now, of course, there is no guarantee that IBM is headed for such a nasty tumble, but the alternative seems even less likely. I will again point to the behavior during last week's options expiration. The $90 point should have held fast as a point where the stock gets "pinned" from the push and pull of longs and shorts battling over positions at this point. Instead, IBM cut clean through this important level on the day of expiration. This behavior was a sure sign of weakness. I will remain unconvinced that IBM is a good buy (and thus much of tech) until first the stock can break up and above $95. After that, IBM will have to crack and maintain $100 to look like a good longer-term prospect again.

As usual, be careful out there!


© DrDuru, 2005