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Market Wrap

Time To Digest Some More Worries

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	09-26-2000        High      Low     Volume Advance/Decline
DJIA    10631.30 –176.80 10813.20 10615.80 1.11 bln   1245/1603
NASDAQ   3689.10 – 52.12  3795.79  3677.73 1.83 bln   1417/2592
S&P 100   756.87 -  9.14   771.36   756.21   totals   2662/4195   
S&P 500  1427.21 – 11.82  1448.04  1425.25           38.8%/61.2%
RUS 2000  509.89 -  5.49   516.47   509.41
DJ TRANS 2518.07 – 37.56  2557.50  2507.52
VIX        25.08 +  0.68    25.40    23.28
Put/Call Ratio       .57

Time To Digest Some More Worries

Warnings from Eastman Kodak and Lexmark set the tone for the day on Wall Street. It was the second day in a row where the sellers had their way. The DJIA was the main victim due to the Eastman Kodak warning, despite positive news for Microsoft. The blue chip index fell by 176 points and is resting near short-term support at 10,600. It wasn't one of those quick spike, down days either. This was the slow, bleeding market made up of too many bears on the sell button and too many bulls afraid to buy. All in all, it felt like a typical earnings warning season trading day.

So let's get right to the white meat. Eastman announced before market open that...and I quote..."Our third quarter business plans required strong September sales growth to enable us to successfully offset the earnings pressures of a rising dollar, increased raw material costs and higher levels of digital investment. As a result of the lower than expected sales we are experiencing in September, our third quarter earnings are likely to fall approximately $.20 to $.25 per share below our previous guidance range." That was according to Chief Financial Officer, Bob Brust. Now let me translate. "We really needed September sales to rocket in order to make up for a lousy quarter and it didn't happen. Thus we are letting you know with only three days left in the quarter." Fair enough. It's not like we haven't heard an Eastman Kodak warning a few times in the last year. Actually, in their defense, they had been able to hit estimates for the past few quarters. Nevertheless, EK is in the DJIA and it weighed heavily on the index today as EK closed at $44.31, down $14.69.

Next, please. Lexmark announced yesterday evening that they would also be guilty of lower earnings. The culprit? A reduced forecast of Inkjet cartridge sales and a weak Euro. Revenues are still expected to be on track at a growth rate of about 9% for the quarter, but earnings will be around $0.45-0.50 cents instead of the previously forecasted $0.56 cents a share. For these reasons, plus slower corporate growth, the fourth quarter will also be suspect. Translation? The printer business is and always has been very tough, just ask Xerox. LXK finished at $37.25, down $14.75.

Now fortunately, Microsoft received good news from the Supreme Court who sent the case to a federal appeals court Tuesday, handing the computer giant a giant victory and delaying the government's effort to split it in two. This came out just after market open and provide a nice pop in the DJIA and the Nasdaq. The action means a final decision on whether Microsoft must be broken up could be years away. Unfortunately, the rally didn't last long, for some strange reason. MSFT traded as high as $65.88 on the news, but settled back to $62.63 by the close, up only $1.44. Still, it was able to provide some support for the indices.

The final numbers on the DJIA put the index at 10,631.32, or 31 points above support. This is an interesting level too because it was here that the DJIA took off on a breakout move on August 1st. You may remember the chart that Jim kept showing about the diamond formation that it had wedged itself into. The breakout occurred on the upside and it ran off to 11,400. Now we are right back to where it started. The pivot point, as some traders call it. Will it hold or fail? Tough to call, especially as we head into October, but pivot points usually produce a good move one way or the other. We will look more at the short-term possibilities below. The volume was good at 1.1 billion and decliners lead advancers by a 4-3 margin.

The Nasdaq had more heart today in trying to rally. It traded up 50 points on the MSFT news, but then the slow bleed began and really never ended. Saved by the bell, you could say. The volume was stronger here as well with 1.79 billion changing hands. Decliners were more prominent with a 26-14 margin. The bad news is that official close was at 3689.10, or under the 3700 support level. If there is anything good to add, it's that we are getting closer to major support levels, especially 3500. On the chart you can see the levels we are looking for support in the near-term.

The Vix continued its uptrend and closed out the day at 25. This is better movement than we have seen in the dull days of July and August when it just sat around doing nothing, but it is still in the middle of the historical range. Bonds moved up today. The 10-year climbed 9/32 to yield 5.81, while the 30-year added 15/32 to finish yielding 5.86. The only economic news out today showed a small gain in September consumer confidence from 140.8 to 141.6. The gain was likely due to the strong stock market in August, according to analysts. There is a bigger dose of news tomorrow with the Durable Goods Orders being released before the bell. This report has had some wild swings in recent months and may be one to watch. The expectation is for a 2.4% gain.

3com was the big earnings news after the close today and the news was good. In fact, just what the market may need. They turned in a loss of $0.12 cents, thoroughly beating estimates of a $0.33 loss. Sales were up 20% in the quarter, as well as margins from 26% to 36%. The comments from the CEO sounded positive as well. "The close of our first quarter marks the completion of our restructuring. 3Com is now a new company with a revitalized image and a heightened focus on growth markets. We now have one quarter of experience for the new 3Com and I'm encouraged by the results. The transformation milestones and business objectives set forth in March 2000 and reaffirmed last quarter were completed on or ahead of schedule. We are growing and favorably positioned to create shareholder value." said Eric Benhamou, chairman and CEO. If the growth is returning, it is hard not to like a company with a 5 billion dollar market capitalization, while retaining 3 billion dollars in cash. COMS ended at $14, but was trading around $15.75 after-hours.

Much of the talk amongst traders this week has been about window dressing. Obviously Friday is the end of the quarter, but what impact is it really having? Is that the reason for Yahoo's decline back down to support near $100? Has YHOO finally gone from being bought ahead of the new quarter to being sold? Cisco, Nortel, Microsoft, and obviously Intel, all appear battered, but at support. I don't know if there is time left to shoot the generals for one final capitulation before a possible earnings run as soon as next week. After having made a nice profit on some QQQ puts last week due to the Intel warning, I have been sitting in cash waiting to buy when the bottom arrives. I am actually hoping we hit 3500 on the Nasdaq by Thursday.

My final thought for the day has to do with a comment made on CNBC today. They had an analyst on the show taking phone calls with Maria B. moderating. If you saw this one, you already know what I am talking about. The caller was asking about Lucent and meant to say, "Should I take my loss and get on with my life?" Instead he said, "Should I take my life and get on with my loss?" Is there some sort of subliminal, contrarian indication here? I'm sure it was just one of those blunders that happen with the pressure of 15 seconds of fame on national television, but the timing was impeccable. This is the kind of quote that you will read about in books five years from now as they pin-point the exact bottom on a chart.

Anyway, take it with a grain of salt. But right now I am expecting more entry points than exit points in the coming days.

Ryan Nelson

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