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Market Wrap

The Meaning Of Pain

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        10-04-2000        High      Low     Volume Advance/Decline
DJIA    10784.50 + 64.80 10850.00 10713.60 1.17 bln   1254/1565
NASDAQ   3523.10 + 67.27  3532.43  3382.53 2.13 bln   1874/2140
S&P 100   762.03 +  4.00   765.48   751.17   totals   3128/3705   
S&P 500  1434.32 +  7.86  1439.98  1416.31           45.8%/54.2%
RUS 2000  507.49 +  2.82   507.79   499.40
DJ TRANS 2560.00 + 61.82  2576.35  2499.08
VIX        23.75 -  0.64    25.80    23.15
Put/Call Ratio       .68

The Meaning Of Pain

This earnings warning season is inflicting cruel and unusual punishment on market participants alike. The major indices finished solidly higher today despite a fresh round of earnings warnings, which spread across several sectors. Although both the DOW and NASDAQ finished well into positive territory today, another broken box maker might bring the bears out again tomorrow. Is this deja vu, or what? The last time I wrote the wrap was the night of the Apple warning. Hopefully the Dell warning won't have the same bearish implications on the markets. We'll know more tomorrow.

But, before we expand upon the bearish news, let's focus on the brighter spots in the market today. After the Fed's indications of leaving interest rates alone yesterday, the cyclicals extended their two-day rally, which lead the Dow higher from the opening bell this morning. The leaders of the Dow today included: HD, IP, MO, SBC, INTC, and IBM.

Despite the attempts from the bears, the DOW has held up relatively well during the past weeks. After bouncing off support at the 10,600 level last week, the DOW is now positioned to retest resistance at 10,850, again. The 10,850 level has proved to be a significant site of struggle for the DOW over the past three weeks of trading. If the DOW can breakout above the resistance level, we might see the INDU move very quickly to the 11,000 level. However, if the cyclicals lose their steam and another sector doesn't pick up the slack, the DOW could retest support near 10,600.

The NASDAQ finished three points better than the DOW, on volume that was reminiscent of days gone by. It was a wild and volatile session with an impressive 2 billion shares trading hands on the NASDAQ today. However, despite the green on the COMPX, breadth on the NASDAQ remained in bearish territory. Decliners outpaced advancers yet again in today's trading by nearly 300 issues. Although, of the advancing issues, the chip sector was by far and away the clear leader on the NASDAQ today. The Philadelphia Semi Index (SOX.X) gained a full 6% today, ahead of several high-profile earnings announcements from chip manufacturers and equipment makers in the coming weeks. The best performing chip stocks on the NASDAQ today included: VTSS (+6.31), XLNX (+4.88), ALTR (+4.63), NVLS (+5.87) and even INTC (+1.69) joined in the chip bull bandwagon. What's more, the beaten down communications equipment makers rebounded with gusto today. Leading the charge was: JDSU (+6.44), SDLI (+20.00), CIEN (+4.31), and QCOM (+5.94). It was definitely nice to see the once market-leading stocks reassert themselves today during the NASDAQ's rally attempt.

The NASDAQ's five-week downtrend remains well intact, despite today's rally. The fact is the NASDAQ has yet to find a solid bottom to rally from, and the DELL earnings warning might complicate matters further. On the other hand, the strong performance of the semiconductor sector today might extend into tomorrow's trading, especially after the bullish report from Micron (MU) after the bell. MU posted profits of $1.16 versus estimates of 96 cents. The stock traded up fractionally in the after hours session.

The wild trading on the NASDAQ was epitomized by Oracle (ORCL). Trouble began brewing yesterday morning after ORCL concluded its analyst meeting. Apparently, ORCL's CFO and flamboyant CEO did not impress Wall Street analysts with bullish visions. ORCL's presentation created a great deal of controversy which resulted in the stock losing 12% yesterday. The construed comments of ORCL's executives continued to weigh on the stock today, with ORCL trading as low as $60.50. However, late in the day, the company issued a press release which reiterated guidance. Toward the close of trading today, executives said that the company was on track to meet current estimates. The stock paired its losses, which helped the NASDAQ climb well into positive territory on the day. It seems the market is searching for any reason to sell stocks, and unfortunately for the NASDAQ, ORCL fell victim to the bears' evil ways yesterday and again today.

ORCL's wild gyrations over the past two days could have been the result of two earnings warnings in the software sector. After the market closed last night, Computer Associates (CA) warned that its second-quarter profits would fail to meet analysts previous estimates. BMC Software (BMCS) also warned of weakness in its mainframe software business. BMCS expects to report earnings nearly 50% lower than previously anticipated. CA and BMCS are competitors of ORCL, which makes their respective warnings significant. The ramifications of the CA and BMCS warnings were felt by other software makers today, with none other than Mr Softee (MSFT) falling (-1.13), and finishing at a new 52-week low.

As much as I dislike writing about earnings warnings, I must mention one other profit problem in the brokerage sector. The leading market maker in NASDAQ stocks, Knight Trading Group (NITE), warned of lower-than-expected third-quarter earnings due to a slowdown in trading activity last summer and less volatility in the capital markets. It's somewhat ironic that the very things we have been missing in the markets, i.e. volatility and volume, have been detrimental to the brokerages. NITE told analysts it expected to record earnings of 13 to 16 cents per share versus consensus estimates of 31 cents. That's a pretty significant miss! As such, the brokers took it on the chin today, lead lower by NITE (-3.69), MER (-2.06), AMTD (-1.25), and GS (-4.44).

Away from stocks and into the commodities market, the American Petroleum Institute reported crude oil supplies rose by 3.4 million barrels last week. The Department of Energy confirmed the rise in oil supplies last week. The market responded to the news by taking crude oil below $32 a barrel, again. The easing oil prices continue to pressure the energy sector with refiners and drillers taking the brunt of the selling. However, the lower oil prices are providing much-needed relief to several other sectors of the market including cyclicals and the transportation sector.

More economic news in the form of the Nonfarm payrolls number will be released Friday. Although the market expects the Fed to remain on hold for some time, the payrolls number is significant because it could influence the Fed's bias. The consensus estimate for the Nonfarm payrolls number is around 225 K. If the number comes in lower than expected, the Fed might adopt a neutral bias, which could relieve the equity markets. Also reported on Friday is the Jobless rate for September, which is expected to come in at 4.1%.

Today's high-profile earnings warning came from Dell Computer (DELL), who pointed to weakness in the European markets and slowing demand from small-businesses on their failure to meet revenue growth targets. DELL told analysts that revenues were trending toward a shortfall for its third-quarter, and the company might fall one or two pennies short of EPS estimates in its fourth-quarter. DELL lost (-2.69) in after hours trading, and could weigh on the Tech sector tomorrow.

Over the past three weeks, every time the NASDAQ has attempted to find a bottom and rally, a high-profile tech company warns of lower-than-expected profits. Today's rally might be quickly erased tomorrow, depending upon how the market receives the DELL earnings warning. In the case of the bulls, the NASDAQ is well into oversold territory and due for an extended bounce. Moreover, market participants have been expecting bad news from DELL given the stock closed at another new 52-week low today, so the company's warning might not be that unexpected nor have much impact on the markets. Finally, the bullish report from Micron might clear the case for the once-beloved semis, which could very well lead a rebound on the NASDAQ. On the other hand, the bears still have a stronghold on the market, which is evident in the NASDAQ's five-week trend of lower lows. If the market shrugs off Dell's warning, we might be trading at near-term lows on the NASDAQ. However, if the bears show up with strength again tomorrow, lower lows on the NASDAQ are not out of question.

Eric Utley
Research Analyst

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