The Market Is Kissed by A Prince

Waxing poetically about the great future of the market, multi- billionaire Price Alwalleed was the latest Bull to come to the market's rescue. The Saudi Prince, whose U.S. stock holdings are staggering, gave a rare interview from his New York hotel room today, saying that he has great faith in the stock market. But just like Abbey Joseph Cohen and others who have taken the stage on the market's behalf, the indices chose to slump anyway. While the Prince seemed to enjoy his interview, what we really need is some more positive words from the only pundit that can move this market to the upside, Greenspan.

Many on the Street are attributing today's losses to more disappointment seeping out from yesterday's announcement that the Fed will keep in place their tightening bias. While Greenspan still stubbornly holds onto the tight labor market theory, the market is shouting from all corners that a loser monetary policy is needed. Bonds, commodities and a global shortage of dollars are all pointing to the need for a switch in the Fed bias and ultimately a cut in rates.

The day started off on a sour note, as Merrill Lynch took a hatchet to the price targets on a gaggle of chip stocks. The flock of recent high flyers included PMC-Sierra (PMCS), Applied Micro Circuits (AMCC), Vitesse (VTSS), Broadcom (BRCM) and TranSwitch (TXCC). The negativity spread through the NASDAQ quickly with no other news to focus upon.

We have seen downgrades to the telecom semiconductor sector before. The rationale behind these negative comments were inventory build-up and telecom spending concerns (also not new). I think these stocks will come back, as they have after other negative analyst actions. Investors have had selective memories in the very recent past. They should be enticed to buy these chip shares at levels. Most chips have been beaten down to levels that have already priced in downturns within the chip cycle.

Tuesday's Happenings:

OK, so the holiday rally is on hold. The good news on today's session is that it came on lighter volume. Expect volume to remain weak and volatility to continue into the Thanksgiving week.

The NASDAQ (COMPX) posted a loss of 133.61, or 4.22%, to close below 3100 at 3031.88. As mentioned, the telecom chip stocks had a big influence to the downside. Decliners edged out advancers 2707 to 1168. Volume came in at 1.5 billion shares. Anything under 2 billion is now considered weak.

The DOW (INDU) also recorded a loss, but of a smaller magnitude. The widely watched index closed off 51.57, or 0.48%, to 10656.03. Defensive shares within the index kept it from picking up speed to the downside. Coca-Cola (KO) closed up $0.63 to $61.94 and Phillip Morris (MO) finished up $0.56 to $36.31. Volume on the big board was also lower at 943 million shares and decliners beat advancers 1650 to 1213.

The broader market treaded water, with the S&P 500 closing down 17.50, or 1.26%, to finish at 1372.31.

Treasuries cheered the release of the Consumer Price Index, which showed that prices rose by an expected 0.2%, both overall and at the core rate (excluding food and energy). It was further proof that we are experiencing an economic slowdown. The 30-year note finished up for a second day in a row, posting gains of 12/32, the yield moving down to 5.75%. The benchmark 10-year note moved up 8/32 to yield 5.68%.

Stocks and Sectors On the Move:

Starwood Hotels (HOT), the hotel and gaming company, was added to the S&P 500 at the end of business today. The announcement late Wednesday, created huge buying demand at the open today. The stock gapped up $3.00 but then proceeded to sell off for the remainder of the day. Volume was a stunning 35.9 million shares. The folks that bought on the open would have done better at the tables of one of Starwood's casinos, as the old strategy of buying the stock that gets added to the S&P did not work well today.

Looking at the sector movers today, it becomes blatantly clear that investors are putting their seats in the upright position and getting ready for a hard landing. The sectors that will be hit the most by a further economic downturn continued their death rattle. The cyclicals turned in a miserable day on concerns that demand for their products will drop off sharply as businesses ramp down. International Paper (IP) finished off $1.69, or 4.69%, to close at $34.31. Bethlehem Steel (BS) dropped $0.13, or 4.26%, to close at $2.81.

On the upside were the stocks most resilient to downturns. Food and beverage stocks set the table for investors and they gobbled them up. Budweiser (BUD) stumbled up $1.13, or 2.42% to finish, at $47.56. The stock has been breaking out, among others in the beverage group, including Coors (RKY). Coors closed at a new 52-week high of $68.94, bubbling up $1.38 on greater than 3 times average volume. In the chow arena, Hershey (HSY) continued its sweet run, rising $0.81, to $60.69. Wrigley (WWY) popped $0.56 to close at $87.19.

Looking Forward, Always Forward:

Even though there was not much for bulls to cheer about today, not much has changed since I sprouted my horns earlier this week. We still think the market will have these pullbacks while we are in this nervous mode. However, these pullbacks should not be too damaging as we move towards resolution in the election and towards a potential change in the Fed's bias at their next meeting in December.

In the short run, we need to get above 3200 in the NASDAQ, for the nervous mode to dissolve (illustrated below in the 60- minute chart of the NASDAQ). Once we get through this area of near term resistance, the pullbacks should get thinner and the big volume should come on the upside as institutions place their bets going into the New Year. These big bets will be placed in the stocks that are seen to be the least likely to pre-announce earnings disappointments come early January, when the earnings fun begins all over again. The bottom line is that the rally will be selective as to which stocks it takes along for the ride.

The Volitility Index (VIX.X) is still close to the 30-level, which commonly marks market tops and bottoms. More volatility comes into the markets around tops and bottoms because of the uncertainty of direction. With low volume expected through next week, we may just see the VIX climb back above 30. We would like to see the VIX drive close to 30 once more, then settle back into a range in the mid twenties, once we break the 3200 level on the NASDAQ. This would be secondary confirmation of a new up trend.

One last note before we slip quietly into another trading day. There has been so much talk of a post-election-decision "relief rally" that we need to be careful when this event actually materializes. There is no sure thing on Wall Street and the more traders and analysts talk up a relief rally, the more it stinks of a sell-the-news event. All I am saying is heads-up and let the market speak for itself before diving in indiscriminately.

Trade Smart!