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Market Wrap

After a four day stampede did the bull stumble?

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        07-18-2000        High      Low     Volume Advance/Decline
DJIA    10739.90 - 64.40 10799.20 10703.10  912 mln   1164/1679
NASDAQ   4177.17 - 97.50  4237.85  4161.89 1.50 bln   1550/2481
S&P 100   807.19 - 10.56   815.66   806.13   totals   3878/4160   
S&P 500  1493.74 - 16.75  1507.64  1491.35           48.2%/51.8%
RUS 2000  536.28 -  8.90   545.18   535.91
DJ TRANS 2899.37 -  0.90  2912.54  2892.79
VIX        22.55 +  0.49    23.29    22.29
Put/Call Ratio       .51

After a four day stampede did the bull stumble?

OOPS! Was that a slightly higher CPI number on top of a higher than expected Retail Sales number last week? Yep, you guessed it. That interest rate hike nightmare just keeps coming back like the Freddy Kruger movies. It was not a strong surprise for the CPI but when everyone wants to see a drop, a rise is not a welcome surprise. The Nasdaq rested today with a -97 point drop after four days of strong gains. Even without external reasons the index was due for a rest. The Dow finally gave up the battle to pass 10,800 and traders becoming nervous with the lack of progress started moving to the sidelines.

The CPI report only came in with the headline number at +.06% with expectations of +.05% and the core rate at +.2% as expected but it was the change in direction from expectations that sent a chill through the markets. With the markets just starting to recover from the previous six rate hikes investors are gun shy about the Fed over reacting and making that one hike too many that crashes the economy instead of the soft landing.

The earnings were out in force. Almost every big name in the market announces this week. Today was a list too long to publish with MSFT, INTC, AAPL, CMRC, ITWO, RMBS, VRTS, GM, MER, SCH being just a few. This week is the culmination of the earnings cycle for this quarter. Sure there will be more reports over the next several weeks but the headliners are mostly this week.

Microsoft announced $.44 vs estimates of $.42 and beat the lowered expectations for revenue. Because of the earnings weakness rumors MSFT had been moving lower all week and the stock rallied +1.50 on the news. Intel announced $.50 vs estimates of $.49 and after trading down -3.31 during regular trading actually rose about +$3 in after hours. The news that powered the after hours trade was a comment from Intel that the 3rd quarter would be higher with a continuing strong demand and margins were expected to be in the 63% range. News to investors ears and coupled with the coming stock split there was a little buying enthusiasm. Don't look now but there might be a backlash on Intel however. In the conference call it was disclosed that the numbers contained over $2 billion in profits from sales of stock from their portfolio. Without the sales of stock the numbers would have come in at only $.36 instead of the $.50 reported. Analysts don't normally react positively about gains not from continuing operations. The positive conference call with glowing words about the third quarter may blunt this impact but be aware.

Not all the earnings news was good with Aetna issuing an earnings warning. Citing higher HMO costs and medical expenses they dropped -$7 on the news. Boston Scientific also announced earnings today but warned that future quarters could be flat. BSX was held in after hours trading. YUM, Tricon Global also warned that sales would be weak in their Taco Bell business.

A TV commentator said today that the market was acting strange. We have record earnings announcements from dozens of high profile companies and the stocks are selling off. I should email them a complementary subscription. We preach constantly that stocks go down after earnings more often than not. The best analogy still remains "buy on rumor, sell on news." The pre-earnings run up is based on speculation and once the news is out there is nothing left to provide momentum to the stock. Professional traders sell half or more of their holdings before the announcement and the rest the day after to capture any bounce from retail traders buying on the news. To give you an idea of the number of announcements this week, today alone over 90 companies announced earnings after the bell. Now if all of those investors sold on the news.....

The selling on the news was prevalent today. Big companies with record earnings much higher than expected sold off after the announcements. Merrill Lynch beat estimates of $1.70 with a blowout of $2.01 and announced a 2:1 stock split. MER dropped -3.50 on the news. Not even the split announcement could hold back the sellers. Why? Because the news is out and the split is over six weeks away. No speculation is left to buoy the stock. The post split announce depression can last two to three weeks until traders start coming back into the stock 2-3 weeks before the actual split. GM announced $2.93 vs estimates of $2.82 on stronger sales but closed up only fractionally.

The big loser was Veritas Software, VRTS. They beat estiamtes of $.12 by a penny with $.13 but dropped -$24 in after hours. The results appeared good on the surface but included a huge $253 million entry for the Seagate purchase. Rambus also announced results that only matched Wall Street estimates of $.04 per share and lost -$4 in after hours after losing -6.63 in regular trading. Apple Computer beat the street by a penny but traded down -$3.88 in after hours. VRTS and RMBS had big gains last week which added to the profit taking intensity.

Internet stocks got hit again today after a cartoon ran in the Wall Street Journal depicting a dot.com balloon as the Hindenburg in flames with the caption, "what were we thinking." Internet analyst Mary Meeker continues to proclaim the strong shall survive but that leaves investors searching through the maze of business plans and results to see who the strong are. Of course the sector leaders YHOO, AOL are profitable but with slowing growth. YHOO traded down slightly today -$1.69 but traded up after the close. AOL continued to lose ground after an almost +$10 run in the last week and posted -2.25 today in advance of their earnings. DCLK beat the street today but had to fight news of lower advertising spending system wide.

Even the Senate passage of a $245 billion tax cut over the next ten years by eliminating the marriage penalty could not provide any lift to the markets. Of course it will probably end up in the same dead file as the death tax repeal that was passed last week. Clinton has vowed to veto that one. He said he will sign the marriage penalty cut only if they Will approve prescription drugs for Medicare. Ahhh the old hostage tactic that both parties do so well.

The event Clinton cannot veto is the semi-annual Humphrey Hawkins testimony by Alan Greenspan on Thursday. Even the great earnings news will be pushed to the back burner by interest in the Greenspan testimony. This is the busiest week in the earnings cycle and with the expectation balloon deflating the focus will be on Alan. Will he or won't he pull another "irrational exuberance" comment out of his lexicon of market attack phrases? Or will he be calm and non-confrontational this close to an election that may change the ruling party. My guess is it will be a "don't rock the boat" speech peppered with qualifications about productivity and the ever vigilant Fed. Still, investors have learned to watch, listen and prepare for the worst.

If you have been reading my wraps for the last two weeks you know I have been warning about a possible dip in mid July. Historically it comes after expiration Friday but the day falls very late this month on the 21st. Will we make it to Monday? I looked at a lot of charts today and there were a lot of them looking very toppy and quite a few looked like they were already rolling over. Because of the nice rally last week normal profit taking and rolling over look the same on the first day so that is no help. Whether we get a sell off soon or not, the concept I am trying to get across is be prepared. Remember Austin Passamonte reported a five year record high in short interest by large commercial traders last Sunday. If the market rallies into next week instead of selling off, these traders will be forced to cover and the short squeeze could be huge. Whether I am right or wrong about the next eight days is immaterial. What is material is that you the trader be ready to react to a move in either direction.

Don't fight the tape. Trade the trend!

Good luck and sell too soon.

Jim Brown

Current long positions include: none

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