Early Nasdaq Rally Loses Legs.Again

The market continued to discourage the bulls in today's trading session. The Nasdaq (COMPX) opened on strength but faltered soon after. The Nasdaq closed off 52.11 points to close at 3689.11 on volume of 1.8 billion shares.

The strong open and subsequent sell-off is a pattern we saw yesterday as well. Today, however, the selling pressure asserted itself much earlier in the session. The market simply refused to rally despite two days of earnest efforts. As we've said before, with economic news taking a back seat, the market lacks a catalyst to move forward ahead of the October earnings season.

The Dow Jones Industrial Average (INDU) followed the Nasdaq down today (or led it down, however, you want to look at it). The Dow finished the day down near its session lows at 10,631.32, down 176.83. Volume was fairly robust with 1.1 billion shares changing hands on the NYSE. Meanwhile, the S&P 500 (SPX) closed the day down 11.69 points to close at 1427.34.

To me, this is a troubling pattern. In recent weeks, we have seen the Nasdaq and the Dow diverge. The market's lack of conviction following Friday's mystifying bounce off of the opening lows underscores a lack of investor confidence at these levels. Apparently, people thought the market sold off too much in response to the Intel announcement.

Speaking of Intel, I am truly surprised the market didn't experience a bit more carnage on the news that weak European sales would hurt third-quarter profits. As this warning was not company specific, but rather indicative of general business conditions, I would think the market would take it a bit more seriously. However, we did point out in last week's wrap that earnings warnings in particular represented a real risk over the next few weeks. While the market managed to rally on the heels of the Intel news, the lack of a follow through rally and subsequent weakness affirms last Tuesday's assessment that any hope for a potential fourth-quarter rally is premature.

Chart of the NASDAQ Composite:

Speaking of earnings warnings, we had another one today from Eastman Kodak (EK). Kodak cited the weak Euro (sound familiar?) as well as lower than-expected sales of both film and digital products during September. Kodak shares fell nearly 25% to close at $44.38. Now if the market doesn't sit up and take notice of the world's biggest photography company, a Dow component no less, I would be really worried. As it turns out, I am glad the market is considering a strong dollar and its potential effect on multinational firms' sales.

Lexmark International (LXK), the laser printer manufacturer, also announced third quarter earnings will come in $0.10 to $0.15 below estimates of $0.60. Guess the reason. weakness in the Euro. Go figure. Lexmark sold off by almost 28% to close at $37.5.

There were some bright spots in today's earnings reports, but we had to wait until after the bell to get it. 3Com (COMS) reported a narrower than expected first-quarter loss after the market closed today. The company reported a loss of only $0.12 per share, easily beating analyst estimates of $0.33 per share. Looks like there might be something to that new SEC Disclosure Rule preventing company officials from providing earnings insight to analysts without disclosing the same information to the public.

Tibco Software (TIBX) also announced a profit of $0.07 per share during the past quarter, compared to consensus estimates of $0.05. The company cited strong demand for its infrastructure software.

In other market news today, Microsoft (MSFT) won a minor victory in its ongoing litigation with the Justice Department. The Supreme Court announced that it would not hear the appeal of the breakup order issued by Judge Jackson. The Supreme Court deferred its decision to hear the case to a Washington appeals court where Microsoft scored a victory back in 1998. The announcement will probably extend the litigation anywhere from six months to a year. Microsoft shares rallied as high as $65 on the news and then fell steadily to close at $62.69.

Rodamco North America, a Dutch owned shopping center mogul, announced that it would purchase Chicago based Urban Shopping Centers (URB). Shares of URB rose $12.88 to $47.31, just a shade below the acquisition price of $48 per share. A 40% gain in a shopping mall stock has to be pretty good I would think. I have never exactly followed the industry. Actually, replace the word "followed" with "paid any attention to", and you know where I'm coming from. The stock, before today's jump, was up 27% on the year, so maybe I should pay attention.

All this talk of shopping malls brings about a nagging little mystery to ponder. Using URB as a proxy, we can assume other shopping mall stocks have been appreciating in value over the year. Yet the S&P Retail Index (RLX) is down 20% for the year. How can this be? From this analysis, we can conclude there are a lot of retail shops losing money because they are paying exorbitant rents to shopping mall owners. Could this signal the beginning of the de-mallification of America? Only time will tell.

This would probably be a good time to discuss the Consumer Confidence Index for September. The index of consumer confidence increased to 141.9 this month from a revised 140.8 in August. A strong job market is fueling optimistic expectations among consumers. Both sides of the index, present conditions and expectations going forward, registered positive increases. However, the data suggests that plans for purchasing big-ticket items, such as cars, homes, and appliances, are falling off.

Oil service shares rallied today on expectations that the weekly reserve numbers due out Tuesday afternoon will show continued tightness. The government's decision to release 30 million barrels from the "strategic reserve" is largely a psychological gesture. Daily global demand for oil is somewhere near 80 million barrels. The slow drip from the reserve will do little to stem rising demand and limited production capabilities. Still, the Philadelphia Oil Services Index (OSX) advanced 2.2% to close at 128.7.

Looking ahead in the week, we have the Initial Claims report on Thursday as well as the August Personal Income report on Friday. Neither one is expected to generate much interest in the financial markets.

Corel Corp (CORL), a linux distributor, reports earnings on Wednesday after the close. A positive report could generate some trading interest in linux stocks such as VA Linux Systems (LNUX) and Redhat (RHAT).

Research in Motion (RIMM) has been making a strong run ahead of earnings this Thursday. The stock hit an intra-day high of $100 before selling off to close at $93.5 providing solid evidence for the $100 price level as a critical support/resistance area. The stock was still up over $7.25 today. RIMM received a "Strong Buy" reiteration today from S.G. Cowen. The company is expected to report a loss of $0.03 on Thursday.

As for the general direction of the market, the positive reports from COMS and TIBX could rally the techs tomorrow. I'm not convinced the market has reached its bottom though. When strong earnings growth starts to become a reality, I will be a believer in the staying power of the market.

Good luck and trade wisely.

Chris Pikul, CFA
Assistant Editor