Stung By a Butterfly

With a name like the "Butterfly Ballot" who would have thought that it would have the ability to sting the market and the nation like it has in the last 48 hours. When news of balloting irregularities surfaced from Florida this afternoon, the market dropped like a frozen orange. The phrase, "the market hates uncertainty" was uttered no less than 149 times by the talking heads on CNBC today, and with good reason. There are not many certainties on the Street, but the market's reaction to the lack of certainty is never good.

The folks in Palm Beach County in Florida are claiming that they were confused about the Butterfly Ballot format, which included information on both sides of the ballot fold. There were also reports of over 19,000 people voting for two candidates for president amidst the confusion. This boggles me to no end. Without harping on the ins and outs of punching holes in a piece of paper, all I can say is that for the markets sake, I hope that this does not turn into a long protracted legal battle. If this does materialize into a strung out legal battle, the market will waffle. A bull market, as I have stated before, climbs a wall of worry. It cannot, however, overcome the indecisiveness created by not knowing who will emerge as the next leader of the free world.

This morning, traders were simply concerned with earnings and the economy. At just about 1pm Eastern Time, with the announcement of legal battles and hand recounts out of Florida, the market stopped worrying about earnings and started worrying about political gridlock. Bids eroded and we experienced a free fall in both the NASDAQ (COMPX) and the DOW (INDU). We did recover from the dizzying fall, but with plenty of damage having been done in the techs and the "Bush Beneficiaries", the oils, drugs and tobaccos. These latter sectors had been running up on the hopes of a Bush victory.

Many charts in techland were dented today. Stocks that had been recovering and building constructive bases either crashed back into their bases or broke resistance levels. Sun Microsystems (SUNW), a NASDAQ stalwart, crashed through its 200-dma on almost 40 million shares to end down $2.69, or 2.68%, to $97.63 after being down over $5 on the day. EMC, another market favorite fell $3.63, or 4.09%, to $85.00 after bouncing off support at $80.00.

This sets us back on the road to recovery but the breakdown in tech becomes the least of our worries. The problem comes when we further test the already deteriorated resolve of investors with the falling stock prices and the political uncertainty, and expect them to buy the dips again.

Investors might just be distracted from the political fray by Dell's (DELL) earning report, which came in after hours today. The Round Rock, Texas computer giant announced earnings of $0.25 a share, matching analyst's estimates. In addition, Michael Dell said that over 50% of revenues for the third quarter came from sales of its notebook computers, enterprise products and services. Gross margins remained flat, at 21.3%, for the third quarter. But, (and lately it seems there is always a "but") the company guided towards revenue growth of 20% next year, off from growth of 27% this year. Dell shares were lately down 6.4% in after hours trading.

Tuesday's Happenings:

Today's markets can be summed up by three words, fear, fear and finally, hope. After suffering dramatic losses after the announcement that there might be prolonged legal battles over balloting issues, the market staged a quiet rally off key support levels.

The NASDAQ woke up with a hangover from Wednesday's down action but looked as if it would shake it off around 11 am. The COMPX fell back into a funk, however, after the balloting news hit the wires. Just when it looked like we might revisit 3026, the COMPX turned, slowly crawling its way north for the remainder of the day. The NASDAQ finished down only 31.35, or 0.97%, to finish at 3200.35. Not too bad, considering the COMPX ploughed through the 3100 level earlier in the day like it wasn't even there. Volume was respectable at 1.9 billion shares and as expected, decliners beat advancers 2605 to 1265.

The DOW (INDU) experienced the same amusement park ride as the COMPX. Trading curbs were instated after the bad news from Florida kicked the legs out from under the index. The DOW dropped over 180 points in 20 minutes, with no sector being spared. The DOW finished down 72.81, or 0.67%, to 10,834.25. Volume on the NYSE came in at 1.1 billion shares. Decliners edged out advancers 1730 to 1086.

The treasuries market received a bump up from favorable economic data in the morning and from the downturn in the equities market. The Producer Price Index was largely ignored by the stock market early in the day, but was cheered by the governments. The report showed that the core rate, minus the volatile food and energy prices, actually dipped by 0.1%. Analysts had predicted a 0.1% rise in the core rate. The 10-year benchmark bond reacted by moving up 9/32, to yield 5.81%. The long end of the curve was up 18/32, to yield 5.85%. The University of Michigan Consumer Sentiment index will be out tomorrow, but will have tough competition for the limelight, with the elections still taking center stage.

Stocks and Sectors On the Move:

Merrill Lynch helped to take Disney (DIS) stock to levels not seen since the beginning of the year. After reporting earnings that beat estimates by $0.04, Merrill downgraded the stock, saying that advertising pressures would all but ensure no more upside surprises going forward. Disney ended the day down $5.75, or 15.6%, to $ 31.13.

Holiday sales came early for most retailers today, in their stock prices. The catalyst for the downhill slide in the retail sector (RLX.X) came in the total breakdown in the sector's safe haven stock, Best Buy (BBY). The electronics retailer shed $20.31, or 38.8%, to close at $32.06. Long thought to be insulated from pricing pressures by high margins on selected electronic products, Best Buy indicated that it would come up well shy of analysts estimates for their third quarter earnings. That was all it took for investors to take a broad selling brush to the whole sector. The Best Buy admittance is further proof of an economic downturn, as consumers are expected to put a leash on what has, until this year, been a prolonged spend spree. Other retailers on the downside included Wal-Mart (WMT) off $1.63, to $47.13, Kohl's (KSS) down $3.13, to $54.31, Home Depot (HD) slipping $2.44, to $38.81 and The Gap down $1.63, to end at $24.63.

Bucking the trend on the day was a rejuvenated Microsoft (MSFT). Mr. Softee ended the turbulent session up $1.44, or 2.07%, to $70.88. The stock is coming off of a "v" bottom and has broken resistance at $70. Ironically, in a meeting today, Microsoft defeated a shareholder proposal for the first time in its 14-year history. The proposal would have required the company to disclose lobbying and campaign contributions. Microsoft is seen as benefiting from a "business friendly" Bush administration, as it is still plagued with antitrust issues.

Other rocks to hide under today were the bank and insurance sectors. The Bank Index (BIX.X) was up 8.21, to 613.16 and the Insurance Index (IUX.X) finished up 10.46 to 819.40. These sectors do better in a falling interest rate environment and with the recent data pointing to a slowdown, that is precisely where we may be headed. The Bank of America (BAC) closed up $1.00 to $49.75, Mellon Financial (MEL) was up $1.38 to $48.56 and American Int'l Group (AIG) moved up $1.63 to $100.50.

Looking Forward, Always Forward:

It was heartening to see the markets battle back from the early afternoon pummeling. Watching this market has been like watching a "Rocky" movie; any one of the 10 or so that was pumped out in the 80's and 90's. Rocky gets beaten like a dog and the audience slowly builds up angst towards the evil perpetrator. There comes a time in every one of the films, however, when the audience can feel the tides turn in favor of the Italian Stallion. Rocky gathers strength from within and starts to rise up against the bully. The audience rallies behind the champ and all is well.

We are now against the ropes and in desperate need of a pep talk from Coach. The rally that had commenced in the COMPX from October 26th slipped and fell. The rally music had already started, we had the bully reeling, but we were sucker punched by the elections. I believe the strength that the market gathered from the rally off of the October 26th low is still alive and well behind the curtain of uncertainty in the markets. We bounced off key support at 3080 today and closed in the upper half of today's range. As long as Dell does not produce the KO punch tomorrow, we should get through the elections with only a few bruises, to later dance victoriously around the ring in the first half of next year.

The DOW (INDU) is still has its wits about it after taking a beating right along with the COMPX today. It recovered nicely on the day and still remains within its recent range between 10,700 and 11,000. It bounced off its 40-dma (a natural 2 month trading average) and also closed in the upper half of its daily range.

It is pertinent to look at the big picture. We may go back to test support in the NASDAQ again tomorrow, especially with the Dell report weighing on the NASDAQ futures. Any trades should be accompanied with a protective stop and please don't get caught in the trap of thinking that just because we rallied off a sharp decline today, that buyers will again step up to rally the market off another free fall. You are much better off to wait until the market shows that it has support, by waiting for strong rallies to materialize, before committing your capital.

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