Sour mood invades Wall Street

Sour mood invades Wall Street

NEW YORK (CBS.MW) — The Nasdaq and Dow Industrials buckled this week under the weight of rallying energy prices and a raft of profit warnings.

The Nasdaq fell 3.5 percent for the week and 8.8 percent during the month of September. The tech-packed index is down 5.8 percent for the year. The Dow Industrials lost 2.6 percent this week and 2.6 percent this month. The blue-chip barometer has fallen 5 percent for the year.

The big-cap tech stocks that didn’t correct as much as the rest of the market during the spring rout are now getting hurt, according to John Hughes, market analyst at Shields & Co. Investors are worried these companies won’t be able to maintain the earnings and revenue growth they’ve become accustomed to over the past quarters.

In addition, many tech stocks enjoyed big upward moves during the month of August and are now seeing the flip side of the coin.

“A lot of damage has been done from a technical standpoint in a very short period of time,” Hughes remarked. The swiftness of the move, he added, is what makes it so worrisome.

“The market may still need to go lower before it can recover,” Hughes said.

Beneath the averages, however, some stocks have been putting on an extraordinary show. “The market really has only four areas that have been doing extremely well: the oil drillers, alternative energy stocks, utilities and the financials,” noted Terry Gabriel, technical analyst at IDEAglobal.

But the strength of these groups won’t be sufficient to support the averages, he said.

The financials, for example, can’t sustain the kind of upward move they’ve enjoyed recently, Gabriel continued.

“If the economy slows, loan defaults will pick up, commercial lending will fall and merger and acquisition activity will dry up,” Gabriel observed. And trading volume hasn’t picked up, which will continue to be a negative for the brokerages.

Earnings and data watch

Investors won’t have lots of economic data to chew on next week. August housing starts and building permits will be out. Also on tap: the July trade data, the Philadelphia Fed Index for September and the August Treasury budget statement.

Meanwhile, the real question for the market isn’t how well third-quarter earnings will fare but how much they will slow in the fourth quarter, earnings compiler First Call said.

The number of negative pre-announcements thus far stands at 136 versus the 129 registered at this same stage during the third quarter last year and the 98 seen during the second quarter of 2000. Still, though many more large companies have pre-announced this quarter, the shortfall amount has remained relatively small, according to First Call.

Earnings growth for S&P 500 companies are expected to come in at 17.3 percent in the third quarter, down from the 18.8 percent projected on July 1. First Call notes that earnings growth will drop more in the fourth quarter than in the previous two quarters.

Among the companies reporting next week: Cyberian Outpost, Circuit City, Jabil Circuit, Progress Software, Lennar, Goldman Sachs, FedEx, Engage, Bed Bath & Beyond, Dean Foods, Lehman Brothers, CMGI, Liberate Technologies, ConAgra, Morgan Stanley Dean Witter and Texas Industries.

Friday’s trading activity

The major averages got clobbered as investors remained nervous over future revenue growth and higher oil prices, which staged a furious rally Friday. The Nasdaq fell to its lowest level in five weeks while the Dow closed below the 11,000 mark for the first time since Aug. 10.

Even news that consumer prices dropped for the first time in 14 years failed to generate excitement on Wall Street, with investors instead zeroing in on the day’s batch of profit warnings.

“There’s uncertainty over future inflation data,” said Gabriel of IDEAglobal, referring to the impact of oil on the inflation data over the next months.

“This is a market with expectations that are too high,” Gabriel continued, noting how companies, like Oracle Friday, get clocked even after they report better-than-expected results.

A rise in crude oil futures Friday –with the October contract up a heady $1.85 to $35.92 after reaching an intraday high of $36.10 — hobbled stocks. But oil and oil service shares thrived on Friday, checking in with the heftiest gains. The CBOE Oil Index ($OIX) climbed 3.6 percent.

Within technology, chip and Internet stocks saw the heftiest declines while the broad market struggled on the heels of losses in the bank, brokerage, retail and paper sectors. But utility stocks bucked the market’s downward trend, with the Dow Jones Utilities Average ($UTIL) hovering close to all-time highs.

The Dow Jones Industrials Average ($DJ) tumbled 160.47 points, or 1.4 percent, to 10,927.00.

Downside movers included Intel, which declined for the third straight session, Microsoft, Hewlett-Packard, General Electric and Caterpillar.

Among the gainers in the Dow were shares of Exxon Mobil, which jumped 4.1 percent, reaching a fresh 52-week high amid a rally in the oil sector. Some of the Dow’s consumer stocks — like Procter & Gamble and McDonald’s — recovered after taking it on the chin Thursday.

Barry Hyman, chief investment strategist at Weatherly Securities, said it’ll be crucial for the market to react positively to better or as-expected earnings news.

“We need to get a positive response. While it’s still too early to [draw conclusions], I’m nervous that what we’re seeing Friday in Oracle — a negative reaction to good earnings news — will become a trend, like the one witnessed in the first and second quarters,” Hyman said.

The Dow, Hyman said, is being held down by earnings worries in many of the global conglomerates.

But beneath the surface, Hyman spots a healthy trend. The market, in fact, has been broadening, with many downtrodden areas — such as the banks and the utilities — getting their day in the sun.

The Nasdaq Composite ($COMPQ) lost 78.62 points, or 2.0 percent, to 3,835.24 while the Nasdaq 100 Index ($NDX) shaved 61.07 points, or 1.6 percent, to 3,676.35.

With the big Nasdaq stocks under the gun, observers say the index lacks crucial support. And breadth has been incredibly negative on the Nasdaq.

Indeed, the recent action in shares of market leaders Cisco Systems (CSCO) and Intel (INTC) haven’t given investors any confidence or reason to step away from the sidelines. Intel fell 3.5 percent to $57.52 while Cisco added $1.50 to $62.75.

“The charts of Microsoft and Intel look really ugly and Cisco and Sun Microsystems look like they’ll be the next to roll over,” Gabriel said.

“There are no catalysts to drive prices [right now.] You’re seeing some really nervous tech players and many charts are looking suspicious,” Hyman said.

The Standard & Poor’s 500 Index ($SPX) erased 1.0 percent while the Russell 2000 Index ($RUT) of small-capitalization stocks declined 1.5 percent.

Volume was heavy due to triple-witching — a quarterly event that sees the simultaneous expiration of futures, options on individual stocks and options on stock indexes. A total of 1.23 billion shares changed hands on the NYSE while 1.77 billion traded on the Nasdaq Stock Market. Breadth was negative, with decliners beating advancers by 18 to 11 on the NYSE and by 25 to 14 on the Nasdaq.

Separately, Trim Tabs reported that all equity funds had zero inflows over the week ended Wednesday, Sept. 13 versus outflows of $800 million in the prior year. Equity funds that invest primarily in U.S. stocks witnessed inflows of $500 million vs. outflows of $500 million in the prior week, Trim Tabs said.

Inside the data

The August consumer price index dipped 0.1 percent versus expectations for a 0.2 percent rise — the index’s first drop since 1986. The core, which excludes food and energy components, added 0.2 percent, as expected.

A fall in energy prices — the largest drop in nine years — kept the headline CPI under wraps in August. Within energy, gasoline prices fell 6.0 percent. But that won’t continue in September with crude oil futures hovering at their highest levels in a decade.

For the year, consumer prices have risen 3.4 percent with the core rate up 2.6 percent.

“Next month, look for another 0.2 percent core, but the headline will rebound,” said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

John Lonski, chief economist at Moody’s Investors Service, said it’s crucial to watch the core CPI to see if the recent surge in oil prices begins to seep in. He believes there’s too much complacency in the market that higher oil prices will rein in consumer spending enough to keep the Fed on the sidelines.

In other economic news released Friday, August industrial production added 0.3 percent while capacity utilization came in at 82.3 percent. And business inventories added 0.2 percent in July. See Economic Preview, economic calendar and forecasts and historical economic data.

Specific movers

Oracle (ORCL) gave up $6.63 to $78.31 following a 3.8 percent increase on Thursday. The company’s first quarter earnings-per-share came in at 17 cents, well ahead of the 13 cents expected by First Call. Oracle’s fast-growing application software business saw its sales increase by 42 percent to $156 million but those numbers failed to impress analysts, who expected 57 percent growth in application sales. The company also declared a 2-for-1 stock split.

Among the companies warning of an earnings shortfall, Briggs & Stratton said it’ll lose between 13 and 18 cents a share in its first quarter versus expectations of earnings of 14 cents a share, per First Call. The stock (BGG) fell $2.63 to $41.50.

And Maytag (MYG) fell 6.1 percent, or $2.19 to $33.63 after announcing late Thursday that it expects earnings-per-share in the second half to be down 8 to 10 percent from last year’s second half.

Shares of Red Hat (RHAT) took a hit, sliding 16.1 percent, or $4.06 to $21.18. The company posted a loss of 1 cent a share versus the First Call estimate for a loss of 2 cents per share. However, the company suffered a downgrade by AMN Amro, which cut the stock to a “buy” from “outperform” due to concerns over future revenue growth. VA Linux Systems (LNUX) fell $3.50 to $49.50.

See for post-market trading activity.

Treasury focus

Treasurys took a veritable beating for the second straight session as the jump in oil prices and continued pressure from corporate supply generated another wave of profit-taking.

The 10-year Treasury note dropped 11/32 to yield ($TNX) 5.84 percent and the 30-year Treasury bond swooned 1 7/32 to yield ($TYX) 5.90 percent.

In the currency sector, dollar/yen (C_JPY) inched down 0.3 percent to 107.18 while euro/dollar (C_EUR) tumbled 1.3 percent to 0.8528.