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Looks Like The Catalyst Is Earnings Warnings, Not Earnings

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       7-05-2000           High     Low     Volume Advance Decline
DOW    10483.60 -  77.10 10572.70 10463.20 1,008,255k 1,492  1,445
Nasdaq  3863.10 - 128.83  3950.19  3859.20 1,338,105k 1,618  2,446
S&P-100  783.37 -  12.66   796.01   782.11    Totals  3,110  3,891
S&P-500 1446.23 -  23.09  1468.63  1442.42            44.4%  55.6%
$RUT     518.25 -   5.79   524.02   517.50
$TRAN   2770.13 +  65.30  2780.00  2708.79
VIX       23.63 +   1.30    24.13    23.28
Put/Call Ratio       .55

Looks Like The Catalyst Is Earnings Warnings, Not Earnings

It became very clear today that earnings concerns will be the next focal point. Or should I say nail-biting, hair-pulling stress of the month. Well, I hope that your Independence Day festivities were more relaxing than today's market action, as the hangover for the market was unmistakable. High-profile profit warnings added to a lurking employment report due Friday and we've got ourselves a nervous market. The elusive "summer rally" that many analysts have been predicting continues to be a phantom menace. Everything that the bulls wanted to see after Monday's gains proved to be non-existent. And it's this lack of follow-through which keeps the markets in a shackled range.

A trio of culprits came to market today warning the Street of profit shortfalls. That was enough to set the tone for the day. Entrust(ENTU) led the bleeding today when they announced that 2nd quarter would come in closer to 2 cents a share, off 75% from Street estimates of 8 cents. Investors wasted no time in selling the stock as ENTU gapped down almost $37. It just goes to show that in a cranky, nervous market, bad news is not tolerated. The Plano, TX, security software company said that the downfall lies strictly in deal closing delays, not in a loss of business. Timing is everything and traders wasted none as ENTU lost 52%, closing at $36.69, down $40.44.

Also dragging down the NASDAQ was BMCS, another software company. Indicative of lagging revenue growth, BMCS warned that fiscal first-quarter profits would be as much as 57% below previous year's results. The blame: weakness in mainframe sales. CEO Max Watson said, "We attribute the shortfall in mainframe license revenues to a lack of a sufficient number of customers committing to enterprise transactions." No sugar-coating there. This is a significant shortfall as BMCS lowered its guidance to $0.18 - $0.21 per share, in comparison to analyst expectations of $0.46. If you cross the Street like that, you will be punished. BMCS lost almost 40%, shedding $14.19 to close at $21.31. The entire software sector fell in sympathy, with the Computer Software Index(CWX.X) off 6.37% for the day.

The third spoiler was Computer Associates(CA). Shares of CA plunged 43%, or $22.19, as the company warned that disappointing sales in their mainframe business and overseas revenue problems would severely hurt earnings. CA halved its first-quarter earnings prospects to between $0.26 and $0.31 per share while the Street was looking for $0.55. This growing trend may just be the beginning of a bigger problem that is shaking investors' confidence. IBM, one of the largest mainframe providers, felt the heat as well, falling $5.50 to $104. CA closed today at $28.94, a level not seen since Sept '98.

By now, the question is not "was the NASDAQ down?" but rather, "by how much?" It was an ugly day for techs, as buyers were nowhere to be found, except for one fleeting moment. If you look at the NASDAQ 60-min chart below, you will see that buyers did lift the index for one-hour between 11:30 and 12:30 EDT. I would be willing to bet that was a product of the sellers being out to lunch. As you can see, after their sirloin and martini lunch, the NASDAQ went to the floor. There wasn't a lot to be excited about today. We are approaching a key support level of 3850 and will need to see a bounce from there to maintain a pattern of higher lows. If we can get that bounce, a higher high could take the NASDAQ back over 4000. Failure to breakout above 4000 could mean we will be sitting in limbo until September. With increasing earnings fears spreading through markets, Friday's Employment Report may be the saving grace. Or it may be the straw that breaks the NASDAQ's back. The markets are at a very precarious point right now, and it can be seen in their behavior as of late. The NASDAQ gave up 128 points, ending the day at 3863.

Another negative for the NASDAQ was Salmon Smith Barney's industry forecast for the Semiconductor Sector. Analyst Jonathan Joseph downgraded the sector, stating that the current supply shortage may be nearing an end and that price wars may result later in the year. Having led the NASDAQ throughout June, the Semis have been coming off their recent highs since June 22nd. The SOX.X lost 9% today on the news. Semiconductor stocks fell across the board as a result: RMBS(-10.19), LSCC(-9.25), AMAT(-9.13), AMD(-9.00), KLAC(-8.25), XLNX(-7.19), and INTC(-5.25). Today's selloff has brought most of these stocks down to support and to the levels at which they started the month of June. This may provide a very good buying opportunity. Both Chase HQ and Deutsche Banc think so as they came out in defense of Semiconductor stocks, saying that Salmon Smith Barney was premature in downgrading the sector.

The only sector to buck the trend today was the Biotechs. These high-fliers continue to attract buyers, especially when the Semis lose favor. The Biotech Index(BTK.X) climbed almost 5%, keeping its uptrend intact. Highlighting the sector was: HGSI(+12.19), INCY(+9.31), AMGN(+5.31), and SEPR(+4.75).

On the NYSE, techs and oil stocks slid on barely 1 bln shares as the INDU finished down 77 points at 10483. With all eyes on the markets' reaction to the warnings, traders left more to be desired as many blue-chips were sold. In addition to IBM, mentioned above, HWP dropped $4.63. The big news on the floor was the weak oil stocks. With crude near recent highs, one would think that investors are throwing money at oil stocks. Yet, that's not the case. Saudi Arabia's announcement on Monday that they would increase output by 500,000 bpd, effective immediately, put a damper on the buying that oil service stocks have enjoyed over the past month. Concern for the sector revolves around the high valuation of many of these stocks, some of which have had impressive gains recently. Although price relief at the pumps isn't expected until September, initiatives by OPEC nations to ease the exorbitant price of oil are enough to slow down the buyers. Taking hit in the oil sector today were: BPA(-4.44), SLB(-4.31), P(-3.75), CHV(-3.44), and XOM(-2.63).

The INDU continues to waver in its trading range, yet it managed to hold its head above the 10300 level. That is the red alert level, DEFCON 5. In the chart below, the INDU is under the force of a strong downtrend. Under the current market nervousness, any breakout move to come will need to be convincing. On the upside, the INDU will have to come up with some heroic efforts to break this dominating trend. To the downside, we will be watching the 10300 support level cautiously. It continues to be the same old story for the INDU and we wish it would just make up its mind.

All in all, the market today continued to bring down my bullish spirit. Just when we think we might be getting out of the woods, the follow-through that everyone anticipates does not materialize. Tomorrow's trading will be dominated by the uncertainty of Friday's employment report. The question is will we get some good news on the earnings front tomorrow, or more warnings to rain on our parade? Rangebound trading is difficult and wearing. At this point, a move either way would at least give us something to hang our hats on. After today's selloff, bargain hunters may help with a bounce from support. Yet, I cannot stress enough that when you have profits in front of you, take them, no matter how big. They add up and sure beat holding a loser.

Matt Russ
Asst. Editor

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