Cisco's earnings warning rocked stocks, and traders are now wondering about the vulnerability of the tech sector and market as a whole.
"I would have thought it would have have been down more," said Cowen's John O'Donoghue of the market sell off Thursday.
"I have not been uber negative but now I'm in a camp, where I think we're fully valued. I'm looking for a pull back of maybe 5 percent to 1150," said O'Donoghue, who heads equities trading. He said most vulnerable will be sectors that outperformed in the two weeks before the election and the week after. That would include semiconductors and banks.
The Dow Thursday lost 0.7 percent to 11,283, recovering from an intraday low about 60 points below its closing level. The S&P 500 slid 5 points to 1213, and Nasdaq was down 23 at 2555. Cisco helped drive the tech sector 1.7 percent lower. The energy sector was the best performing, up 1 percent, as oil settled at $87.10, its highest since October, 2008.
For Friday, investors are watching consumer sentiment at 9:55 a.m., and the dollarwill continue to be a focus. The dollar Thursday gained 0.9 percent against the euro, to a level of $1.3659. It also rose slightly against the yen and pound, defying its recent trend of moving lower as risk assets rallied.
O'Donoghue said an issue that might hold stocks back in the next couple of weeks is the rush of companies hoping to issue stock. "I think there's a flood of paper that's going to come to market, and I think there's going to have to be room made for those things," he said.
The most high profile IPO of all is for General Motors, expected to raise more than $10 billion next week when it goes public. Traders expect big institutional buyers to line up for the stock, and they expect it to be heavily oversubscribed.
But O'Donoghue said there's a steady stream of offerings on the calendar for the next several weeks that could sop up investor money. Companies expected to go public next week include LPL Investment, BoozAllen Hamilton, Anacor Pharmaceuticals, Aeroflex Holding, Zogenix and Bitauto Holdings, according to Renaissance Capital.
Another question is whether the market is ready to absorb this wave of offerings. Several companies lately have postponed offerings, including Ikario, which withdrew its offer Thursday, reportedly due to market conditions.
What to Watch
Foreign exchange traders are watching the meeting of G-20 leaders, expected to end Friday and include a communiqué, to be released overnight New York time. They are watching for any comments on currency.
The G-20 could also discuss trade imbalances and banking reform. Analysts have said the markets could be rattled if the meeting ends with discord, triggering a move into 'safe' assets, like gold.
Sovereign debt issues will also remain in the forefront, and the euro could stay under pressure as investors watch the performance of Irish, Greek and Portuguese debt.
"I think there's still more concerns to come," said Brian Dolan of FOREX.com. "I would cycle out of short dollar and be more inclined to short euro and perhaps some other currencies, and definitely short the euro on the crosses."
Dolan said the dollar's steady move higher in the past several days isn't just the result of worries about Ireland's financial state. "It's not just European debt. The U.S. is showing signs of stabilizing and growing a bit. The fears of a double dip recession are receding quickly, and people are modifying their outlooks. That's dollar positive," he said. Stocks, he said, could give back some gains if that trend persists but ultimately both might move higher together.
"If you look at the price action this week, the question is whether the market throws in the towel on the euro. When you think about whether you want to go home long euros over the weekend... I think the answer to that is no. The Germans are going to present their EU insolvency plan next week - the bond bailout package where investors are going to share a greater portion of the risk.. All of a sudden you'll have sovereign investors with no guarantees," he said.
The Fed will make its first purchases of Treasurys under its new quantitative easing program Friday. The U.S. bond market was closed Thursday for Veteran's Day.
"The Fed starts buying for the first time Friday, in its QE program in the range of $6 to $8 billion. That could go either of two ways..either people that bought Treasurys can sell them to the Fed and use them as an out," said Nomura's George Goncalves in an interview Wednesday. The other way would be if the Fed was the only buyer in the market, and rates push higher against it.
"Don't fight the Fed. Don't join them. Sell your Treasurys and move onto something else," he said. For average investors, he said, "I think you are better served in other asset classes."
Jordan Beck at BTIG has spotted a stock market trend worth noting. Friday marks an important day on his calendar, as it is the end date of a market cycle in a pattern he is watching.
"Since the highs in 2007, there has been a rather steady cyclical pattern in the S and P. I'm looking at the SPY over a three-year period, going back to the high, It's clear every 70 days. That would give us around 11 periods of 70-day cycle patterns, There's been a trend reversal at the end of each cycle. The first major one that people will remember was Nov. 21, 2008. This was the first really major bounce after Lehman," said Beck, equity derivative sales trader at BTIG.
Beck said the stock market turned higher that day and moved higher into January, at which point it sold off. That day in November was also the day that Tim Geithner was named Treasury Secretary by incoming President Obama. The next 70-day cycle after that came on March 9, 2009, the start date for the market's current bull run.
"In the grand scheme of things, technicals work sometimes work quite well, and they work dreadfully other times," said Beck. "With that in mind, it's possible that we're in the midst of another cycle end trend reversal."
Interestingly, as we approach the Friday end date, the big news events for the stock market includes a turn in the dollar and Cisco's big earnings sell off.
In the above chart, Beck shows the 70-day trading cycles in SPY, the S&P 500 etf. They are marked by the blue lines. Dates appearing under the chart are represented by the gray lines.
Since the October, 2007 high, 9 out of 10 cycles have occurred on or within days of meaningful intermediate term inflection points on the chart. The exception is June, 2009 when the sell off began earlier in the month. Friday would be the next approximate cycle end. The 122.97 level in SPY is a significant resistance level, corresponding to the 1228 level in the S&P 500, the 61.8 percent Fibonacci retracement form the 2007 high to the 2009 low, to now.
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