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Market Wrap

Hot Potato, Wall Street Style

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        10-12-99            High      Low       Volume Advances Decline
DOW     10417.10 - 231.10  10648.80 10417.10  772,437k      853   2,162
Nasdaq   2872.43 -  43.52   2923.32  2869.44  968,215k    1,491   2,391
S&P-100   686.24 -  11.52    698.30   685.43    Totals    2,344   4,553
S&P-500  1313.04 -  22.17   1335.77  1311.80              33.9%   66.1%
$RUT      424.68 -   5.51    430.46   424.67            
$TRAN    2961.49 -  64.53   3026.58  2959.38
VIX        24.60 +   2.55     25.45    22.17
Put/Call Ratio       .68

Hot Potato, Wall Street Style

While farmers in Idaho are bringing in the potato harvest for the year, investors on Wall Street are playing a game of Hot Potato. This is an ugly game played among traders with no real winners and unfortunately, that is what we saw today. Traders were throwing their tech shares around like a hot potato and no one seemed interested in holding on to them. This kept pressure on any intra-day rally and defined market sentiment. The talk was of a general lack of buyers to support stock prices.

It was Intel that started the game by throwing the Street a bad earnings report. Their miss of estimates by .02 cents after the close on Tuesday brought the market to its knees today. Forget about the 1.5 billion dollars they earned for the previous 3 months, analysts were expecting more. This has caused investors to fear that Q3 earnings estimates (which is what had been holding up the market) may be too high. So we have the makings of a sell-off. INTC closed down $4.56 at $72.13 on over 60 million shares traded.

The technical picture is what is especially ugly in both the charts and market internals. The statistic that made me gasp today was the new highs vs. new lows on the NYSE. This area has been a concern for some time but today's 19 new highs against 284 new lows is hard to look at. The advance/decline line was also poor at 2137/920 on the NYSE. Support for the indices doesn't look strong either although the NASDAQ was able to just barely hang on to 2800. But maybe not for long as firm support is at 2700, not 2800. Yep, that is another 100 points to the downside for the index that hit a new high on Monday. The official close for the NASDAQ was at 2801.39, down 71.04 and volume was brisk at 968 million shares.

The other markets didn't fare any better. The Dow Industrials closed at 10232.16, down 184.90. The S&P 500 closed lower by 27.49 to 1285.55. Both were right at the low for the day when the closing bell finally rang to end the carnage. But at least we are not alone! The entire world capitalization is now lower thanks to INTC (talk about power) as markets around the world sold off on Wednesday. Japan's Nikkei -1.9%, Hong Kong's Hang Seng -2.2%, Germany's Xetra Dax -1.18%, London's FTSE -1.00%, Mexico's IPC -2.43% and Argentina's Merval -2.91%. In fact, of the 45 major world markets, only 5 went up (way to go Peru +1.25%). You get the picture though. Nobody likes to see INTC miss numbers like that.

Here are the charts. Notice the breakdown right at 3:00pm when the bond market closes. We have seen this happen more frequently of late.

DOW INDUSTRIALS

NASDAQ

S&P 500

Another catalyst today was the 30-yr bond. The yield hit a 2-year high which has bond traders very nervous. The yield hit 6.29% before settling out at 6.28%. This has broken major technical indicators that bond traders follow and has traders left scratching their heads as to when the bond selling might end. The dollar was stronger against the yen today which points to interest rate fears as the main culprit for the rising yield. Our hope here is that Retail Sales numbers tomorrow, the PPI on Friday along with Alan Greenspan speaking will curb inflation fears.

Oil was on the move again today. After six straight losing sessions for the price of oil, it has now got a string of 3 straight winning sessions. Price per barrel was up sharply today to $22.95 after a positive inventory report yesterday evening. This helped the Oil and Oil drilling groups but, of course, played out negatively for the Transports. The Dow Transports closed at 2921.51, down 39.98.

Obviously INTC was the stock of the day but other companies were in the news as well. Consolidated Edison will buy Northeast Utilities for $7.5 billion in cash, stock and debt. The merger will create the nation's largest electricity- distribution utility and signals further competitive pressure for other companies to hook up. ED finished at $36.38, down $0.06 while NU was up $0.44 to $21.69.

Abercrombie and Fitch was back in the news today. You may remember on Friday the company lost over $5 on concerns and rumors of weak Q3 results. Well today the company responded by saying quarter-to-date comp sales were up 12%. Investors didn't seem to care and instead focused on the negative. ANF shares sold off another 19%, down $6.19 to $26.31. Robertson Stephens and First Union both lowered their rating on ANF.

The big after-hours news was on Apple. They reported earnings of 0.51 cents vs. an estimate of 0.45 cents. They talked of strong demand in all aspects of their business plus they were upbeat about having enough chips to make their computers, thanks to a supply pact with IBM. "With our product transitions during the September quarter behind us and an order backlog of over $700 million, we're poised for a very strong December quarter," said Fred Anderson, chief financial officer, in a statement. As you might have guessed, AAPL was up between $4-$5 after market and it looks like an up day for them tomorrow. I had my finger on the order button today ready to take a position but with the overall market weakness and INTC's disappoint fresh in my mind, I got gun shy. Therefore I will not be making money with the rest of the Apple faithful unless it gives me a real good entry point in the morning. Other stocks reporting earnings today are listed at the bottom with their numbers and stock price reactions.

SNDK, our newest put play from last night's letter, performed beautifully today. The stock dropped on big volume today as someone obviously let slip the bad news concerning earnings which were released after the close. They earned $0.21 which was in line with a First Call estimate of $0.21 but said that revenue growth would slow due to the Taiwan earthquake. The real beauty to this play was that it opened unchanged this morning, thereby offering plenty of entry points on the way down. It is down big after-hours so congrats to all of you who have put contracts. This is the kind of news that is bad for the overall markets though, despite SNDK's relative small size, because it confirms that conditions in Taiwan may be worse than previously thought.

One interesting story, Phillip Morris broke rank among the Tobacco group and confessed that cigarettes probably do cause cancer. (What a shocker!) But it was apparently news to tobacco investors as the entire sector sold off, breaking support levels. MO ended the day down $1.06 at $32.94.

So how do we avoid getting burned in the Hot Potato game? One way is to not play. Wait for the market to cool off if you fear a true October sell-off. This is nothing compared to the damage some of the October's of the past have done. Another way is to play it safe. The Dow has dropped 470 points from its intra-day high on Monday. It sounds like it may be time for a bit of a relief rally as investors try to jump in ahead of the PPI. Fair enough, that has worked in the past, but in this environment you may want to limit the amount of capital you are investing. AAPL's results did turn some of the tech sector around after-hours but not by much and Apple doesn't carry the same weight as INTC. Also we ended right at the lows for the day which typically means some more selling at the open. There may be some bargains there but wait for the turn first.

Finally, when in doubt, sell too soon.

Ryan Nelson
Asst. Editor

Here are some bigger companies that reported earnings today...

          Est      Act     Close   Change 
BSC       1.00     1.15   $36.75   -$3.50     
EGRP     -0.13    -0.10   $25.63   +$0.22
TWX       0.04     0.08   $62.06   -$1.25
LLTC      0.36     0.35   $55.78   -$2.72
EFII      0.45     0.53   $53.94   -$2.81
NITE      0.18     0.19   $24.38   -$0.75                 

  -NITE's estimate before Monday's warning was 0.30

After the close
          Est      Act     Close   Change 
AAPL      0.45     0.51   $64.03   -$3.66
TRB       0.38     0.40   $50.94   -$0.44 
RBAK     -0.05    -0.04   $135.06  -$9.81  

  -RBAK was at $124.25 after-hours

SNDK      0.21     0.21   $46.13   -$8.00

  -$38 on Instinet, down another $8.00 from the close

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