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Market Wrap

Bounce Or A Bottom?

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        10-18-2000        High      Low     Volume Advance/Decline
DJIA     9975.00 -114.70 10086.00  9654.60 1.43 bln    994/1891
NASDAQ   3171.56 - 42.40  3257.81  3026.11 2.51 bln   1451/2572
S&P 100   706.77 -  4.95   714.46   685.55   totals   2445/4463   
S&P 500  1342.13 -  7.84  1356.65  1305.79           35.4%/64.6%
RUS 2000  466.21 -  4.67   470.88   455.63
DJ TRANS 2368.65 - 22.57  2391.22  2348.70
VIX        32.50 -  0.21    36.74    31.42
Put/Call Ratio      1.01

Bounce Or A Bottom?

Today's incredible recovery gave credence to the bulls argument. A combination of poor earnings reports and inflation-ridden economic data caused the Dow Jones Industrial Average (INDU) to fall as low at 9657 this morning - over 400 points lower than yesterday's close. The NASDAQ (COMPX) didn't look any better this morning after the tech-heavy index dipped below its near-term low. But, that was all before the bargain hunters stepped in.

Major market participants stepped into the Financial and Tech sectors early this morning to scoop up bargains in old favorites such as INTC, MSFT, and JPM. The barging buying was induced by two distinct schools of bullish thought. The market technicians argued that many leading stocks are showing improving technicals - i.e. potential bottoms formed. On the other side of the analyst spectrum, many Wall Street fundamental pundits were pounding the table about the attractive valuations of leading Tech stocks. The two ideas were enough to spur a broad bargain buying bounce this morning, but weren't enough to close the major indices in positive territory.

The market's inability to finish in positive territory today stems mostly from the concerns over the future of the US and world economies, and specifically the impact on corporate profits. Macro economic events, among other issues, are threatening the long-term health of the US economy. Wall Street is growing increasingly concerned about the impact of a slowing economy on corporate profits. What's more, the high price of oil, which closed at $33.48 on the NY Merc, continues to pump fear into the market. We certainly can't leave out the fact that the euro fell to an all-time low today.

The ill-effects of the euro could be directly seen in Big Blue's (IBM) third-quarter earnings report after the market close yesterday. The company reported third-quarter revenues that fell short of expectations by $600 million. IBM blamed its revenue shortfall, in part, on a 3 percent drop in sales in Europe. IBM finished at $95.44, down -17.56 today, and obviously weighed very, very heavily on the INDU.

IBM's woes spurred a slide in the INDU this morning that resulted in the blue chip index closing below the critical 10,000 level. Although, it could have been a lot worse! The INDU recaptured over 300 points in early trading to finish the day alive. Contributing to the INDU's slide was the earnings miss by Chase Manhattan Bank (CMB), who is acquiring JP Morgan (JPM), one of the most influential Dow components because of its high price. However, CMB, and subsequently JPM, rebounded after buyers stepped up in a big way to carry the stocks higher throughout the day. The CPI also added to the INDU's misery. Inflation news hit Wall Street this morning after the Labor Department reported consumer prices spiked 0.5 percent during the month of September. The CPI report caught many by surprise, and increased the fear level this morning. The higher-than-expected CPI report could continue to weigh on inflation-sensitive sectors of the market as concerns of higher interest rates add to fears.

The INDU's close below 10,000 today really amplifies the index's current downtrend. It's painfully obvious the INDU has fallen under the control of the bears since early September. Although the INDU's massive rebound was encouraging to witness, the close below 10,000 could prove to be a significant psychological victory for the bears, and detrimental to the INDU's long-term trend. However, the INDU's dip below 10,000 could have trapped bears and ultimately lead to a big rebound should the bulls gain control.

Aside from the slide at the open, the bulls held control of the INDU for the better part of trading. Although, it was somewhat disconcerting to see the INDU rollover and close below 10,000. Nonetheless, the day's trend of relatively higher lows held.

The internals of both the NYSE and NASDAQ finished pretty ugly, despite the rebound in the broader markets. Decliners outpaced advancers by nearly 2-to-1 on the NYSE, while over on the NASDAQ decliners beat advances by a slightly narrower margin. Volume was very robust with 2.49 billion shares trading hands on the NASDAQ. Also worth noting was the spike in the CBOE Market Volatility Index (VIX) above 36, it's highest level since last spring. The level of fear continues to be high in the options market, which is generally conducive to a market bottom.

The b-word is on the tip every traders tongue. The COMPX's bounce off its low at 3026 this morning could have very well been the retest that many market watchers have been calling for. The bears might argue that the COMPX traced a relatively lower low today in an attempt to refute the bulls' talk about a bottom. Nonetheless, the COMPX's rebound off its lows was encouraging.

The 3240 area appears to be the next major level of resistance in the way of the COMPX's attempted rebound. If the COMPX can clear 3240, a quick retest at 3300 is not out of the question.

The mixed earnings reports after the bell today will most likely make for another volatile session tomorrow, especially with October options expiration a day away. It's going to be a case of whether the bullish earnings reports outweigh the bearish reports.

A report that definitely felt bullish after the close was that from Microsoft (MSFT). The software giant reported 46 cents a share in profits; the analysts were expecting a 41 cent profit. The 5 cent better report helped MSFT surge in after hours trading. At time of writing, MSFT was trading at $55.75, up $4 from its regular session close.

Another bullish, but prematurely issued, profit report came in from Sun Microsystems. To make matters more interesting this afternoon, SUNW reported its third-quarter results during midday trading. The hardware giant was scheduled to report earnings after the bell today, but somehow, third-quarter profits were accidentally posted on the company's Web site early this afternoon. Word quickly spread that SUNW earned $510 million, or 30 cents per share. Analysts had forecasted a 26 cent per share profit. SUNW held its official conference call after market close, as previously scheduled before the premature earnings release. The company gave bullish guidance and told analysts to expect high 40 percent revenue growth in its next quarter. The stock added $1 in after hours.

Internet heavyweight America Online (AOL) reported profits that doubled from a year prior. The company recorded earnings of 14 cents per share, beating consensus estimates by one penny. AOL added nearly $3 in the after hours session.

Less than favorable earnings came from Apple Computer (AAPL), who missed already lowered estimates. The company cited slower-than-expected sales of its Mac G4 Cube and soft sales in the education market.

B-2-B giant Ariba (ARBA) surprisingly posted a break-even third quarter; the company was expected to lose 5 cents. Despite the better-than-expected report, ARBA was whacked for $10 in after hours trading.

Texas Instruments (TXN) posted third-quarter earnings in-line with analysts' estimates of 33 cents per share. During its conference call with analysts, TXN said it expected growth in the semiconductor business to continue into the fourth-quarter, but by a lower margin than previously expected.

Among the notable earnings reports expected tomorrow are a host from the drug companies. Pharma heavyweights Bristol Myers (BMY), Eli Lilly (LLY), and American Home Products (AHP), who have been safe havens during the recent market downturn, will all report profits tomorrow. Also worth watching will be the numbers from currency-sensitive companies such as Coca Cola (KO) and McDonalds (MCD). Internet bellwether EBAY will get a chance to defend its stock and the bear attacks surrounding the Net sector resulting from the decline in online advertising spending.

Third-quarter earnings reports, which were hoped to be the bullish catalyst to turn this market around, have thus far proved to be the root of more volatility and not the bulls savior. Furthermore, the weak euro, high energy costs, and threats of a slowing economy have weighed heavily on the broader markets since early September. Let's not forget, though, that we are entering into the eighth week of this shakeout - correction - bear market. There's been serious pain felt by investors and the fear levels are near historic highs, indicated by the VIX above 30. A lot of excessive valuation and exuberance has been removed from the marketplace, which makes it prime for a rebound. As Jim suggested last night, I too agree that we are in a stock picker's market, where quality stocks will make you money. Once the market turns, the companies that are still growing profits will surge higher. Trade smart, and sell too soon!

I look forward to meeting many of our OI readers at the upcoming seminar in Denver and comparing recent battle wounds.

Eric Utley
Research Analyst

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