Option Investor
Market Wrap

Welcome to summer earnings!

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        7-11-2000        High      Low     Volume Advance/Decline
DJIA    10727.20 + 80.60 10807.40 10626.80  980 mln   1613/1294
NASDAQ   3956.42 - 23.87  4029.30  3936.75 1.71 bln   1849/2166
S&P 100   801.05 +  1.46   807.05   794.96   totals   3462/3460   
S&P 500  1480.88 +  5.26  1488.77  1470.48           50.0%/50.0%
RUS 2000  529.74 -  1.09   533.26   529.04
DJ TRANS 2817.10 +  8.08  2821.59  2796.60
VIX        22.39 -  0.49    22.89    21.62
Put/Call Ratio       .53

Welcome to summer earnings!

Are we having fun yet? The Dow soared to 10807 intraday, a number not seen since June 8th, but then dropped -150 points to 10657 as the earnings euphoria wore off. Dow components Alcoa and International Paper both beat the street and even Greenspan got into the act to provide the intraday move. Alan Greenspan, complete with poker face, spoke at the National Governors Conference and touched on many topics but did not speak about limits on the economy. Applauding productivity and the new economy our economic cheerleader generated significant positive sentiment and about +100 Dow points. The sentiment quickly cooled with a continuing flood of earnings warnings. The Nasdaq rallied back from a negative open on the Greenspan speech but quickly rolled over again to close down for the second consecutive day.

The earnings warnings just keep coming with Pinnacle Systems (PCLE) leading the parade and followed by Intermedia (ICIX) Silicon Graphics (SGI), RPM Inc (RPM), Viatel Inc (VYTL), Landmark Systems (LDMK) and on and on. While earnings warnings are still flowing the real fear of investors is the missed earnings event with no warning. Scientific Learning (SCIL) shares lost -36% after reporting a loss of -$.56 compared to estimates of -$.46. Companies warning were hit with heavy losses but those who fail to warn will be punished severely.

Take the pre-earnings flight from YHOO this week. After a June 20th high of $150 YHOO had traded in a range between $120 and $130 until Monday of last week. The drop from $130 to a low today of $99.88 was swift. It was aided by a downgrade last week but the main culprit was simply fear of a missed number. The actual announcement today sparked a wild ride in after hours trading. The +$15 spike on heavy volume came from decreased expectations and then relief that they beat the street. The joy may be short lived however since there was some trouble spots. The slowing growth in page views was glossed over by the press but with views growing only +9% from 620 mil in March to 680 mil in June there could be some repercussions. Some analysts were still expecting the +30% growth required to support their sky high PE ratios. The more main line analysts were hoping for +15% to +20% growth and the actual number of +9% will cause some to rethink their positions. Slowing Internet growth? Don't even think about the long term impact of that concept.

The Nasdaq was unable to hold over 4000 again on strong volume and with the leaders like MSFT, CSCO, ORCL, WCOM, losing ground before earnings there appears to be some leaks in the rally ship. Dell gained today on the news that the cheap Internet PC was dead. Buyers are opting for higher priced computers with more expensive, high profit features. Intel struggled to hold on to its recent gains after losing almost -$4 from its intraday high but finished positive for the day. Considering that tests announced today showed that similar Intel 933-mhz computers equipped with standard PC-133 high speed memory ran faster in 11 of 14 benchmark tests than the same computers equipped with Rambus memory, the Intel juggernaut may be about to roar again. Even if all the tests were just close Rambus would lose in a tie since the Rambus memory costs as much as double to include in new computers. Before you rush out to sell your RMBS stock analysts point out that the Pentium 4 will run at speeds that will be more able to take advantages of the Rambus features. Here is a link for the whole story:
http://dailynews.yahoo.com/h/cn/20000711/tc/ intel_benchmarks_show_little_advantage_to_rambus_1.html

When everyone starts saying rally it may be time to head for the lifeboats. I don't think I have heard a bear in a week. Everyone is pegging their hopes on the "no more hike" scenario but contrary to popular belief not everyone believes the hikes are over. Sure Greenspan did not mention anything today but did you expect him to? Of course not! Mr. poker face has much to gain by keeping analysts guessing and not revealing his hole cards. Remember PPI is due out Friday with Retail Sales as well. We will get another look at the rate picture as the focus on our crystal ball improves with real data.

As traders we should be concerned that we now have a lower high trend in place for the Nasdaq. On June-22nd we hit 4073 and on July 7th we only managed 4054. Still the difference is not enough to run for the hills just yet. We also have a higher set of baseline lows as well. The weakness this week could be entirely related to the concern over YHOO earnings and with those earnings now quantified the remainder of the Internet sector will be forced to trade on its own merit. The lower trend line on the Nasdaq is dead on 3900 and any fall below that would signify a serious change in market sentiment. The last cycle low was 3820 on July-6th and matched the 3818 from June-19th. A break below 3820 would be lights out in my opinion.

If the YHOO earnings were the culprit then we should see a rebound across the entire spectrum tomorrow. We will be faced with another sector challenge on Wednesday with earnings from Ariba. If investors are disappointed there then yet another sector sell off could begin. Earnings, as you can see, are not the be all, end all, that solves all the market problems. Even great earnings can bring with them problems of a new sort with warnings of future quarters not able to measure up to current outstanding results. Investors are fickle. Beat the street by +25% this time and you are expected to do it next quarter as well. What? Only +10% over estimates, you are out of here! Keep your fingers crossed and those stop losses in place if you decide to tempt fate and hold over earnings on your favorite stock this season.

There are conflicting internals at work in the market. We continue to have advances beating declines and new highs are finally out weighing new lows. This slow but steady under current to the market is encouraging. What is not encouraging is the strong volume on the Nasdaq on a down day. If we just had no buyers and were drifting down in advance of the earnings I could understand but 1.7 billion shares is fairly heavy summer volume and after looking at a bunch of charts I saw very few moving up at the end of the day. The VIX is still hovering around the 22.42 level and indicates a level of bullishness that normally occurs just before some market instability.

Chose your plays carefully and be ready to exit quickly.
Don't you just love summer trading?

Trade smart, sell too soon.

Jim Brown
Editor

Don't buy too soon!

Current long positions include: None - all cash

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