Stocks ended lower, but off their worst levels of the day after buying activity spurred by bottom-fishers and short covering curtailed an initial plunge on negative earnings pre-announcements and brokerage downgrades.
A plethora of negative earnings pre-announcements in the technology sector -- and rumors that Microsoft (MSFT ) may do the same -- weighed on sentiment. However, a the Nasdaq scored a minor victory, managing to remain above the psychologically important 2,000 level.
Volume was heavy, as one would expect from a triple witching session where stock options, stock index options and stock index futures expire on the same day. On the NYSE, 1.57 billion shares changed hands, making it the fifth heaviest volume day in history. Nasdaq volume topped 2.09 billion. On triple witching days the market tends to be unusually volatile and unpredictable as traders and investors sell and purchase stocks quickly to cover and settle their options and futures contracts.
"The market came back from lows of the morning on the Nortel and JDS Uniphase warnings, but the GE-Honeywell deal is still hanging over us," says Stephen Carl, Principal and Head of Equity Trading, The Williams Capital Group LP. Looking ahead, Carl predicts, "Until we start seeing signs of an economic recovery, we'll probably drift sideways or slightly downward."
On the economic front, the Consumer Price Index (CPI) rose 0.4% in May, which was in line with consensus expectations. However, the core came in a little below forecasts, rising 0.1%. University of Michigan sentiment fell to 91.6 in early June from 92.0 in May. Expectations dipped to 84.9 from 85.4, while current conditions were unchanged at 102.2. Standard & Poor's MMS says the modest erosion in sentiment is consistent with the weakness seen in most of the other real sector data, and the decline in the stock market on the month.
Larry Rice, chief investment officer at Josephthal & Co. says today's weakness is a good thing. "Valuations got stupid a few weeks ago and optimism came back too fast." He says technology stocks had gotten ahead of themselves with the S&P 500 trading at 25 times earnings before the recent correction. Rice says today's activity is "ugly, but healthy."
The strategist also says the Nasdaq is likely to break the lows if the earnings outlook continues as poor as it is currently. Even at 2000, Rice says that with the earnings decline the way it's been, valuations are still too high. "And we all knew the second quarter wasn't going to look good and the third quarter is probably going to look mediocre to poor."
Among Friday's stocks in the news, Nortel Networks (NT ) forecast a $0.48 per share second quarter loss from operations on $4.5 billion in revenues. The company also sees a $19.2 billion Q2 net loss including charges from the discontinuation of access solutions operations, layoffs, plant closures and the write down of intangibles. Nortel plans to discontinue paying dividends.
In other news, JDS Uniphase (JDSU ) says it expects to report Q4 sales of about $600 million vs. its previous guidance of $700 million. The company also forecasts a $0.06 t $0.08 per share Q4 loss, including inventory write-downs.
The Dow Jones Industrial Average shed 66.49 points, or 0.62%, to 10623.64. The Nasdaq Composite dropped 15.65 points, or 0.77%, to 2028.42. The broader S&P 500 index lost 5.51 points, or 0.45%, to 1214.36.
Treasuries closed mixed with weakness on the long end but shorter maturities benefited from increased Fed easing expectations. Standard & Poor's MMS says today's economic data shouldn't stand in the way of the Fed, on either a 25 basis point or a 50 basis point move at month-end.
European markets closed lower in a carryover of Thursday's negativity. In London, the Financial Times 100 Index ended off 29.50 points, or 0.51% to 5723.00. France's CAC 40 Index closed down 53.23 points, or 1.00%, to 5243.84. Germany's Dax Index lost 83.99, or 1.39%, to 5947.28.
In Japan the Nikkei finished down 0.4% at 12,790.38, recovering from heavy losses in early trade after Japan's central bank decided Friday to keep its monetary policy unchanged, despite growing fears about the nation's deteriorating economy.
By Alan Hughes in New York