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Market Wrap

Listening, But Only Hearing Noise

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        10-09-2000         High      Low     Volume Advance/Decline
DJIA    10568.40 - 28.10 10641.30 10546.20  720 mln   1208/1562
NASDAQ   3355.56 -  5.45  3376.92  3233.19 1.44 bln   1498/2373
S&P 100   744.23 -  6.74   751.40   741.36   totals   2706/3935   
S&P 500  1402.03 -  6.96  1409.69  1392.48           40.7%/59.3%
RUS 2000  489.53 -  1.49   491.02   481.64
DJ TRANS 2490.63 - 53.02  2543.65  2483.75
VIX        26.33 +  0.66    27.40    25.77
Put/Call Ratio       .77

Listening, But Only Hearing Noise

Do we call it a bottom or discount the day altogether? The COMPX finished marginally lower Monday, extending its five-week losing streak. However, the NASDAQ staged a respectable rebound after losing triple digits earlier in the day. The comeback on the COMPX had bulls cheering this afternoon, but their voices weren't as loud. Missing from the market today were the bulls, and the bears for that matter, celebrating Yom Kippur and Columbus Day. As a result of the two holidays, trading activity on both the NASDAQ and NYSE was bleak at best. The light volume on which the NASDAQ gyrated today created many inefficiencies which were highly tradeable but, had many market watchers discounting the action altogether. The lack of conviction, in the form of volume, during the NASDAQ's sell-off and subsequent rebound this afternoon left more questions than answers.

The big question on the mind of market participants is: When will the NASDAQ hit bottom? Since the first of September, the NASDAQ has lost nearly 20%! The big losses on the COMPX bring up two more questions: Is the NASDAQ in a bear market? - or - Are we simply witnessing an extended correction of Tech issues? The spread of bearish talk among market pundits and media members contrarily indicates we are approaching a bottom. Furthermore, certain market indicators are approaching levels which have historically been indicative of market bottoms, one of which is discussed below. The only ingredient missing from our market- bottom recipe is capitulation selling on convincing volume.

The 1.39 billion shares that accompanied the NASDAQ's volatile session was less-than-convincing. And, although the NASDAQ staged an amazing comeback, the majority of stocks lagged into the close of trading as decliners outpaced advancers 8 to 5. Continued losses in big Tech names prevented the NASDAQ from finishing in positive territory. Among the notable losers on the NASDAQ today: CSCO (-2.50), MSFT (-1.38), and INTC (-0.88). Big cap Internet stocks, and select Optical and Networking issues lead the rebound on the COMPX today. Today's Tech leaders included: JDSU (+2.19), YHOO (+4.50), SCMR (+8.75), JNPR (+9.81), and ARBA (+8.94). The inefficiency in the market, which I alluded to above, was clearly evident in JNPR today; the stock traded in a 30 point range.

The five-week pattern of three down days followed by one up on the NASDAQ continues to unfold. Today's decline, albeit a fractional one, marks the third consecutive down day for the COMPX. With that said, the NASDAQ might be due for an extended rebound tomorrow. But, the viability of an extended bounce tomorrow will depend upon how major market participants act after their respective holiday breaks today. Also worth noting on the chart above is how the COMPX's five-week slide has become progressively steeper in the past week, which might portend capitulation in the tech-laden index. Again, we must wait for the return of volume before speculating on market direction.

Early morning speculators bid the DOW higher in an attempt to escape the steep sell-off in the NASDAQ. However, solace was not found in the blue chip index today. In a divergent fashion, the INDU gave back its gains and more in midday trading after the NASDAQ staged its comeback. Rising energy prices and fears stemming from last Friday's economic data pressured select components in the DOW. The non-farm payrolls number and unemployment rate reported last Friday continued to weigh on the Financial components of the INDU, which included: AXP (-1.31), C (-0.88), and JPM (-1.13). The rising oil prices, which I'll detail below, pressured energy-sensitive segments of the DOW, including: BA (-1.56) and MMM (-0.44).

Although the INDU held its ground for the most part today, the blue chip index's current technical position is not pretty. In the last three trading days, the INDU has fallen further away from its ascending support line, although the sell-off has come on very light volume. The failure of support around the 10,650 level could spell trouble for the DOW into the end of the year. However, we may be witnessing a big bear trap in the DOW, which could induce a massive short covering rally into the end of the year. A clearer picture of interest rates, a stable euro, and stable or declining oil prices will most likely help the DOW get back into its diamond and ultimately breakout. But, until we get a move backed with volume, it's difficult to discern which way the DOW wants to move.

We do know, however, that the Internet sector is sure to be on the move tomorrow. As previously mentioned, Internet issues were acting up today ahead of Yahoo's third-quarter earnings report tomorrow. The Internet giant has been hit in recent weeks over concerns of an extended slowdown in online ad spending, which has also plagued the likes of CMGI and DCLK. The bulls want YHOO to beat expectations by its historically wide margins as well as give upbeat guidance for its business going into the end of the year. In an attempt to attack the stock's valuation, the bears will dissect YHOO's third-quarter revenues and EPS, which are expected to come in at $280 million and 12 cents, respectively, The market's reception of YHOO's earnings report will most likely set the tone for the rest of the Internet sector throughout third-quarter earnings season.

The other major earnings report to watch tomorrow will be that from Motorola. The stock traced a new 52-week low at $26.50 today, which epitomizes the current bearish sentiment surrounding the stock. MOT guided analysts to lower estimates for unit shipments several months ago, which has plagued the stock ever since. The company has faced troubles in the form of increased competition and declining margins in the handset business. MOT's report could influence major players in the Semi sector and also fellow handset makers including NOK and ERICY.

With the anticipation and actual reports of third-quarter earnings coming in, we can expect to see more volatility in the broader markets. The volatility crept into the market today, evident in the spike in the CBOE Volatility Index (VIX). The VIX spiked as high as 27.40 this morning, its highest level since late last May. What's more, the CBOE equity put/call ratio rose to 0.77 today. Since the VIX rose today we know the demand for options rose, i.e. more buyers than sellers in the options market. A rise in the VIX in conjunction with a rise in the put/call ratio reveals the put buyers were operating more heavily than any other options market participants today. The VIX and put/call ratio are approaching extreme levels but are not quite there yet. With that said, both of the sentiment indicators are worth monitoring in the coming weeks.

While volatility was rising in Chicago, oil prices were doing the same thing in New York trading. Cool weather in the Northeastern United States combined with escalating tensions in the Middle East pushed energy prices higher today. Crude oil futures rose well above $31 a barrel, although prices are off nearly 16% since September's highs. The recent decline in oil prices in conjunction with a stable euro had given relief to several sectors of the market including Transportation, Capital Goods, and Basic Materials. However, increased fears of unrest in the Middle East could push oil prices higher, which would erase recent gains in the aforementioned sectors.

Several low-profile earnings warnings combined to pressure select pockets of the market. Compuware (CPWR), a developer of testing software, warned of a weak market for mainframe software for the rest of the year. Compuware's competitors ORCL, MSFT, and BMCS all finished the day lower. Williams Sonoma (WSM) caused weakness in select Retail issues after the home goods retailer said its third-quarter earnings would fall well below expectations due to a shortfall in sales from its fall and early holiday catalog business. WSM's warning clipped other retailers including BBBY, LIN, and PIR. In the Insurance sector, Safeco (SAFC) warned of lower third-quarter profits due to losses in its commercial and homeowner lines. As a result of SAFC's warning the bears got their paws around recent leaders in the Insurance sector, including PIR, CB, and ALL.

In the coming weeks, Wall Street will turn its attention to actual earnings reports and away from the pessimistic warnings that have plagued the broader markets for the past month. The poor performance in the major indices is indicative of low expectations for third-quarter earnings reports. And, the bearish speculation has been fueled by the warnings from Tech bellwethers such as INTC and DELL. However, there are sectors of the market that have not been littered with earnings warnings, especially specific areas of Technology. As such, upward earnings surprises should not be unexpected, which could act as the catalyst to carry the market higher.

As we enter third-quarter earnings season remember to block out the noise and remain objective in your decision making, and always trade in the path of least resistance. Good luck!

Eric Utley
Research Analyst

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