Let the Despair Begin

By Dr. Duru written for One-Twenty

January 18, 2006

The stock market has stalled out and declined the past three days, so you cannot say you were not warned. Several technology companies reported earnings Tuesday night, and the initial response has been antagonistic. As is often the case, expectations are everything. For example, IBM had very little good news and managed to hold firm in after-hours as few people expected much out of them. The stock has even lagged the rest of tech and is only up by 1.2% on the year. Intel's stock had just completed a "roundtrip" for 2006 before earnings time. The company reported record revenues and operating profit, but Intel did not meet the expectations they themselves set with investors just a few weeks ago. They also issued a sour outlook. In after-hours, the stock was absolutley crushed to levels that essentially wipe out even 2005's gains. Again, expectations can mean more than anything else, and Intel is finally getting a clue by ridding themselves of the unnecessary pressures of the mid-quarter update. While Intel no longer moves the NASDAQ as it once did, every tech bull should take pause at the vicious action we are witnessing in Intel's stock.

Last week, I spoke of the amazingly sharp cycle of hope and despair that we have seen in the markets the past few years. I have also repeated warnings that the market in recent days had extended deep into the hope part of the cycle. With oil prices pressing on toward $70 a barrel given the growing geo-political drama in unstable oil-rich regions, we have a final catalyst to turn us back toward despair. Watch how quickly the market forgets about the good tidings the Fed is supposed to bring us in the coming weeks or months. Watch how painful it feels to give back almost all the gains of the year and to hear that sickening thunderclap as we lock in an apparent top in the major indices for the time-being. And watch how quickly the bears will declare their final victory...

For real despair, we can turn our eager eyes to Japan. As displayed by the Japan ETF, EWJ, the Japanese stock market has been on a an absolute tear reminsicent of bulls of days past. After bouncing around to nowhere for the first 7+ months, EWJ has bounced nearly 50% in short order. Now, the market has plunged deeply for two days due to potential misdeeds at a Japanese internet company. The losses are not even triple digit millions in American dollars, but the unfolding drama threatens to expose weaknesses in Japan's financial infrastructure. Now, I can understand dumping related (internet) stocks, but the entire Japanese exchange? I can barely contain my eagerness to participate once agian in Japan's long-awaited economic recovery.

Earnings season has kicked off with some serious fireworks. You might want to wear shades on this one...

As always, be careful out there!

DrDuru, 2006