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Market Wrap

The Churning Continues

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        10-05-2000        High      Low     Volume Advance/Decline
DJIA    10724.20 - 60.30 10843.30 10722.70 1.18 bln   1257/1549
NASDAQ   3472.10 - 51.00  3549.01  3459.58 1.87 bln   1594/2331
S&P 100   764.45 +  2.42   768.41   760.81   totals   2851/3880   
S&P 500  1436.28 +  1.96  1444.17  1431.80           42.4%/57.6%
RUS 2000  502.67 -  4.82   508.98   502.64
DJ TRANS 2568.30 +  8.30  2589.67  2558.21
VIX        23.63 -  0.12    24.45    22.99
Put/Call Ratio       .70

The Churning Continues

I don't think I was the only one to breathe a sigh of relief when the bell rang. It was bumpy ride for the markets today as traders continued to churn stocks in search of ascending issues. For the NASDAQ, DELL's comments from yesterday weighed on hardware stocks and PCLN's problems once again brought selling pressure to the Internets. This is the type of market that we have to take a day at a time, and just getting through it was the biggest relief today.

The first order of business this morning before the open was news of Priceline.com(PCLN) announcing that two of its licensees would be shutting down. The licensees, Webhouse Club, which sold groceries and gasoline at name-your-own prices, and Perfect Yardsale, a used-merchandise seller, will no longer be in business with PCLN. According to Webhouse Founder and PCLN's Vice Chairman Jay Walker, the reason: PCLN needs more capital for the operation and it wouldn't be feasible to raise another $100 mln. As a result, he will be "winding down" the businesses over the next 90 days. It is interesting to note that both of these licensees are separate businesses from PCLN and do not affect PCLN's operations. Yet, in this fickle market, investors and traders will jump on any bit of information to sell. From what was a $100 stock in March, PCLN has deteriorated to $5.81 a share, losing $3.56 on the day, a whopping 38%! That's amazing. Especially considering that this "winding down" will no way affect PCLN's books. Just goes to show the type of market environment October has brought upon us.

Traders took PCLN's woes one step further and used this information to sell other leading, or not-so-leading, Internet stocks. Feeling the heat were old-school Internets AMZN(-2.44,-6.7%), YHOO(-3.25,-3.7%), CMGI(-2.81,-11.5%), and ICGE(-3.31,-21%). Those are some massive percentage losses for these once highly touted and highly capitalized companies. Managing to remain in a league of their own from the old guard was AOL. Although not having an impressive year, AOL broke out over the $60 level once again on word that is merger partner Time Warner(TWX) would not pursue its proposed deal with Britain's EMI record company. This was the major obstacle for approval of the AOL-TWX merger in the EU. European regulatory officials felt that an EMI-TWX marriage would create an all too powerful force in the music recording industry. By walking away from the EMI deal, both AOL and TWX were freed from the burden of potential blocks to their own merger, as well as their stocks. TWX finished up $5.24 to $91.24, and AOL added $2.85 to $61.50. Today's decision will likely clear the way for merger approval by the EU, and the FTC, which expects to reach a decision before the next Presidential Inauguration.

The real story today was the NASDAQ's reaction to DELL's words of warning last night after the bell. Confirming the trend of slowing earnings growth, DELL was the third high profile old tech company to warn, after INTC and AAPL. The announcement rocked hardware stocks from the get-go. DELL lost 10%, or $3, to close at a two year low of $25.19. It dragged down the other box makers including CPQ(-3.64), GTW(-2.77), and HWP(-7.38). For the NASDAQ, it feels like it is just one thing after the other, like a snowball growing as it rolls down the mountain. And the damage was across the board today, with Networkers(SCMR:-13.88), Semis(AMCC:-13.63), B2Bs(ARBA:-13.63), and Software(SWCM:-11.88) all feeling the selling heat. While the NASDAQ traded in a 90 point range, it waffled around the 3500 level for most of the day. On the chart below, notice how the NASDAQ has fallen from its prevailing downtrend that began in early September. This drop off has taken the NASDAQ into a lower trading range that is bound on the upside at 3600. Tuesday's low of 3382 was the arbitrary support point after the previous low of 3521 from August was taken out. Many traders looked to this level for support, and now technicians are nervous about possible tests of May's low of 3042. This morning on CNBC, Ralph Bloch of Raymond James stated that the two major indices, the NASDAQ and the INDU, need to be on the same page to advance. In addition, he said that a breakdown in the INDU would likely result in a market test of the May lows. Volume on the NASDAQ was healthy at 1.83 bln with decliners beating advancers 23-15. Breadth continues to trend on the negative side and is a serious concern for the tech sector.

Now that it appears that the overall market health is hinged on the two major indices getting together and moving in lock step, the INDU becomes ever so important. During the past couple of weeks, the INDU has made a nice recovery from the 10600 level, running into resistance at 10850 on the way. In fact, traders have attempted to break through 10850 three different days since bouncing from 10600 to no avail. Today's close has brought the Dow 30 to critical point: smack dab on the recent trendline that it has recovered on. Tomorrow's trade will be key in determining the sentiment for the INDU and the markets. A breakdown from this level could result in a retest of 10600, and a weak INDU will only add to the pressure on the NASDAQ. A bounce for the INDU will help the index narrow its ascending wedge, in which it can coil to break that overhead resistance. Tomorrow's Non-Farm Payroll will likely determine traders' sentiment and an early direction for the INDU.

On the earnings front, Alcoa(AA) posted earnings of $0.42 per share, in-line with lowered estimates after the company warned on September 18th. AA ran up prior to earnings from the $25 level, and finished today's session down an eighth to $27.13. Merrill Lynch upgraded some of the other old-economy stocks today to a Near Term Accumulate from a Neutral. On their list was CL, PG, G, and CLX. Investors have neglected many of these issues during the past year and their recovery would greatly help the health of the INDU. On the flip side, JC Penney(JCP) warned today that their 3rd quarter earnings will not meet the Street, citing consumer spending slowdown. JCP lost $1.25 and now trades at $10 a share.

Looking ahead, traders will be watching tomorrow's Non-Farm Payrolls and Unemployment Rate for direction. The markets expect 225K and 4.1%, respectively. Equally important will be the technical outlook for the markets. If traders want to sell techs again tomorrow, they probably will either way. There is a downward bias in the market and we have seen many of the high-flying leaders of the NASDAQ fall drastically in the past week. Even, EMC, which has held up relatively well, has come under heavier selling pressure the past two days. As traders continue to churn the market, we must take these October sessions day by day. Interestingly enough, the VIX.X was down today to 23.63, indicating that fear really hasn't grabbed hold of the investment community yet. We are approaching the full swing of earnings season next week, which could be our saving grace or the last straw. Use caution and stop loss orders as price volatility increases. Remember, when in doubt, stay out. Cash can always come in handy on a rainy day. Good luck.

Matt Russ

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