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Market Wrap

Welcome Back To Earnings Warning Season

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        10-10-2000        High      Low     Volume Advance/Decline
DJIA    10524.40 - 44.00 10623.50 10488.90 1.05 bln   1140/1680
NASDAQ   3240.54 -115.02  3383.40  3229.01 1.89 bln   1319/2626
S&P 100   737.68 -  6.55   748.66   735.41   totals   2459/4306   
S&P 500  1385.94 - 16.09  1408.83  1383.85           36.3%/63.7%
RUS 2000  481.63 -  7.90   490.84   481.09
DJ TRANS 2497.23 +  6.60  2526.22  2479.04
VIX        27.44 +  1.11    27.89    25.89
Put/Call Ratio       .82

Welcome Back To Earnings Warning Season

October has a way of twisting things around and sending the markets reeling and today was no exception. Are you having any fun yet with this year's shakeout? Today was no exception as stocks took it on the chin once again. The downtrend lasting nearly six weeks remains in tact. If anything we have seen a sharp increase in volatility as the VIX made its way up to 27.50. This has helped liven up the options market relative to a dull summer, but the bulls remain in hiding. At least the smart bulls anyway.

Today was just brutal as any remaining buyers were tough to find. It shows in the numbers too. The Dow Industrials pierced 10,500 intraday, before managing a small rebound to close at 10,524.40, down 44.03. Volume was average at 1.04 million. Advancers lost to decliners 17-11 and 116 new lows were printed versus 37 new highs. The S&P 500 couldn't hold 1400 and settled down at 1385.94. The Russell 2000 also gave up ground by losing 7.90 to finish at 481.60, below technical support. The chart of the Dow 30 below shows the peril the index is facing. A close below 10,500 will not be well received by Wall Street, making the current support at 10,500 critical.

The Nasdaq didn't have any better luck today. The close was at 3240.53, down 115.02. Volume was heavy at 1.83 million. Decliners were ahead of advancers 2-1 while new lows seriously dwarfed new highs 282-16. The downward pattern is clearly in tact as sellers pressure any rally. In fact, the selling has now accelerated as the Nasdaq broke down below that channel we had been watching for the past two weeks. Hopefully this is a good sign that a final capitulation is around the corner. The markets are oversold and will eventually bounce, but that is not to say it can't get more oversold first.

The story of the day though was related to earnings, both announcements and warnings. And all came after the close this afternoon. Let's start with the losers.

Lucent announced today after-hours that, based on preliminary estimates, it expects earnings for Q4 to be lower than the company's previously announced guidance. LU was supposed to post a profit of $0.27 next Thursday, but instead will only turn in about $0.17-0.18 cents per share. The insanity of this warning is that it is the third time this year and second time this quarter that Lucent has warned of a shortfall. The company said the lower-than-expected earnings for the quarter could be almost equally attributed to three factors: less than expected revenues and gross margins in the company's optical systems business, credit concerns in the emerging service provider market that led to increasing reserves for bad debt, and greater than anticipated decline in circuit switching sales and margins. So while the company continues to warn, investors continue to sell. LU closed the day at $31.38, but is trading around $24 in after-market action.

Also, PacifiCare Health Systems announced that it expects to report results ranging from a loss of up to $0.10 per share to break-even for the quarter ended Sep 30th, based on preliminary data showing higher-than-anticipated commercial and Medicare health care costs. These costs reflect the impact of providers operating under non-capitated agreements, and amounts incurred to improve network stability and maintain member continuity of care. As a result, earnings per share for 2000 will not meet the company's expectations. PHSY traded to $32.63, down $0.88 during regular trading, but was around $20 after-hours.

And now to earnings. Yahoo started the Internet earnings parade like always this afternoon. They said they earned $81.1 million or 13 cents per diluted share on a pro forma basis in the third quarter, compared with $38.5 million or 6 cents per share in the year-ago period. The pro forma earnings compared with the consensus analyst estimate for earnings of 12 cents per share, according to First Call and were right in line with whisper numbers. The company said revenue rose 90% to $295.5 million from $155.9 million. Analysts were expecting revenue of about $281-$295 million. Yahoo, which relies heavily on adverting sales to generate revenue, said Web site traffic increased worldwide to 780 million page views per day on average during September, compared to an average of 680 million page views per day during the last month of its second quarter. Slowing ad revenue was a concern in the past weeks. All in all, the report was right in the middle of expectations, but the phrase "difficult environment" was mentioned eight times on the conference call. Eight times! It appears that Internet arena will continue to see rough times ahead, at least for the next couple of quarters. The stock initially traded higher on the news, but has pulled back to close after-hours around $76. This is the kind of report that may take a few days for investors and analysts to decide if Yahoo deserves the lofty valuation that it still carries despite the recent sell-off.

Biotechnology firm Biogen on Tuesday reported a 10% gain in third-quarter income, beating Wall Street estimates by a penny. The maker of the multiple sclerosis drug Avonex said its net income rose to $68.4 million, or 44 cents per diluted share, up from the year ago period when it reported $62 million in net income or 39 cents a diluted share. James C. Mullen, Biogen's President and Chief Executive Officer, said, "With its proven results and broad-based efficacy, AVONEX remains the worldwide drug of choice among people with multiple sclerosis (MS) and their physicians. This quarter, we saw global product revenue growth of 18 percent year-over-year." BGEN was trading higher after-hours to $53.50 from the regular close of $51.50. News on the conference call revealed that three clinical trials will begin on anticipated drugs in the year 2001.

And finally, Motorola released earnings as well. MOT said that its profit from operations before special items was $598 million, or 26 cents per share, an increase of 66 percent from $361 million, or 16 cents per share a year ago. Robert L. Growney, president and chief operating officer, said, "Motorola continued to make solid progress on improving its financial performance. Significant contributions to the company's growth in sales and operating profits came from the Semiconductor Products, Broadband Communications and Global Telecom Solutions segments." The much anticipated cell phone margins were in line at 6%. MOT was trading about even with the regular session close.

While not the story of the day, Semiconductors definitely came in a close second. The SOX.X got hammered again and broke more support levels. I had to insert a chart so you could see the degree of carnage that the SOX has suffered. The thing about Semiconductors (that anyone who trades them could tell you) is they are very jumpy, like most commodity based sectors. Just when it looks the darkest, it will turn on a dime and trap you into a losing trade so be careful. The one thing you can expect is more volatility for this bunch. This sector loves to bounce around in October.

So the first big day of earnings numbers has come and gone and the markets don't look to be better off because of it. The QQQs are trading in the mid-77 range after-hours as Yahoo is selling off. The Lucent warning will do little to help sentiment. Anytime you see Drugs, Oil, and Utilities rising, you know that we are in some degree of trouble. I put a strangle on the QQQs this morning which should be pay off nicely tomorrow. I am hoping for a nice gap down to take my profits on the puts in the morning. From there, it is still tough to call a bottom in such an extreme market. But if it gets extreme enough, there should be opportunities to buy calls. In fact, I am just now watching CSCO trade $49, below the critical $50 level and well below the $51.25 close. Maybe we will get that final crack in the buyers and see the rapid spike down that some bulls are waiting for before entering the market. A more safe play if you are looking for an entry in such a spike down would be November contracts. Leave the OCTs for the gun-slingers at this point.

No nothing new to report from Switzerland where Jim is attending a conference. He will be back in the States this week though, so look for his market commentary beginning again on Sunday.

Ryan Nelson

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