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Insatiable Demand Turns To Demise

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        10-24-2000        High      Low     Volume Advance/Decline
DJIA    10393.10 +121.40 10439.30 10273.60 1.16 bln   1562/1279
NASDAQ   3419.79 - 48.90  3526.71  3401.05 1.88 bln   1825/2130
S&P 100   738.42 +  4.07   747.37   731.83   totals   3387/3409   
S&P 500  1398.13 +  2.35  1415.64  1388.13           49.8%/50.2%
RUS 2000  487.85 -  2.11   493.84   487.71
DJ TRANS 2471.09 + 34.23  2475.03  2439.85
VIX        26.22 -  0.76    27.11    25.12
Put/Call Ratio      0.64

Insatiable Demand Turns To Demise

Investors ran for the exits today as the once untouchable fiber optic stocks felt the heat. What catalyzed the selling on the NASDAQ today was Nortel's(NT) seemingly decent earnings report. How does a Canadian company listed at the NYSE affect the mighty tech index? It's that "insatiable demand" for the "red hot fiber optic sector." Remember those sound bites. Well, fiber optic counterparts on the NASDAQ were sold off in sympathy with NT, but the implications are far greater than simply the sector. In what investors considered a do-no-wrong sector, the fiber stocks are starting to fall and raising concerns as this last pocket of strength withers.

First it was the semis, then it was the hardware stocks, and now it is the optical networking stocks. These are the stocks that managed to maintain their most lofty levels even through some of the roughest times recently. Today's market action creates concerns and questions about which sector is going to lead the NASDAQ. It was disastrous and quite frankly, a bit overdone. But, today's panic selling says something about this fickle market. Everything is priced to perfection based upon previous performance. I know it's a mouthful but the point is that anything short of perfect is swiftly and harshly punished. Look at the fallout on the NASDAQ from the NT news: SDLI(-81.81), AMCC(-50.31), PMCS(-37.75), MMCN(-31.38), NEWP(-31.00), CIEN(-27.00), JDSU(-24.06), JNPR(-22.56), and the list goes on. Those are massive losses in market capitalization! A sector wide devaluation as such seriously raises the question of whether the environment will return to its once rosy picture. Regardless, we are continuing to see clues of an economic slowdown that is clearly undeniable.

Those losses above added up on the NASDAQ and the index closed down 190 points at 3228. Yesterday was the technical precursor for today's move when the NASDAQ put in a triple top at 3520 and just gave up into the close. Throw in NT's disappointment and you have a recipe for a huge retracement. The gap up from last Thursday has been covered for the most part, but there is still 51 points to go. Wishful thinking would be that we cover that, bounce back and sail off into the sunset, but it's never that easy. JDSU is scheduled to report earnings after the close tomorrow and this could potentially rock the markets one way or another. Given that NT's revenue numbers weren't up to par and that NT is one of JDSU's larger customers, investors fear the carnage could continue. Then again, JDSU could be the calming effect that this market needs so much. Breadth was decidedly negative on the NASDAQ with decliners crushing advancers by a 2-1 margin. Volume clocked in at 2.1 bln, indicating that there was no doubt about the seriousness of the selling.

One bright spot on the NASDAQ today was from AMZN. What!? Can you believe it, AMZN bucked the trend today! The stock jumped 8% today after reporting a lower-than-expected loss, better-than-expected revenues and a rosy outlook going forward. At one point, AMZN was up 22% but finished higher by $2.31 at $31.88. AFFX also posted earnings Tuesday after the bell and was generously rewarded today. The biotech company was expected to post a loss of 12 cents but surprised the Street by reporting a profit of $295,000 for a breakeven result on a per share basis. Investors loved it and AFFX gained $16 to $68.38, a whopping 30%!

As for the INDU, it fared better than the NASDAQ only losing 66 points to finish the session at 10326. On the first chart below, it looks like a nice day of consolidation after four consecutive days of gains after extremely oversold conditions when it hit 9654. The INDU did, however, break the trendline on which it has diligently traded the past five days. A little consolidation is nothing to complain about, particularly if the INDU manages to hold support at 10300. But when looking at a longer term picture for INDU in the second chart, we can see that the dominant downtrend from September has not been broken yet. The major question is whether this is consolidation for the INDU or the mother of all bull traps. In assessing this, it appears that the INDU capitulated last Wednesday, visiting the 9650 area, and the buyers have been in control of the INDU for the most part. Yet, in this current volatile environment, we must remain skeptical, using the NASDAQ's action as an example. Draining most of the life out of the INDU was HWP(-5.69) and IBM(-3.88).

Also weighing on the INDU was AT&T's(T) stock performance in light of its recent announcement to break up into four separate entities. An uncharacteristically subdued C. Michael Armstrong outlined this morning a complex rescue plan to save the fledging behemoth. This is an obvious response to a sickly stock performance and unsuccessful bet on cable that Armstrong made a couple of years ago. The main culprit for T, however, was the long-distance business which is losing revenues faster than expected, even with its massive customer base. Ma Bell will be broken up into the following firms: Wireless, Business, Broadband, and Consumer. All will bear the AT&T name and are expected to be operational in 2002. T lost $3.50 today to close at $23.38.

After the bell tonight, VRSN reported earnings of 18 cents, beating Street estimates by 12 cents. Revenues were $173 mln for the quarter, a 660% increase year-over-year. Yet, oddly enough, VRSN traded as low as $138.63 in after-hours, nearly $9 lower than the NY close. Someone got a bargain though, realizing the strong earnings report, as VRSN closed the after-hours session at $157. This should bode well for the NASDAQ, which is due for an oversold bounce tomorrow. Let's not forget that the trading day is long and volatile, so watch your positions.

Looking forward, tomorrow morning before the bell will be the ECI report, the Employment Cost Index. The market expects a 1.0% increase. GDP is expected on Friday so traders will be paying close attention to the economic calendar. Dallas Fed President Robert McTeer spoke today and said to expect "a fairly dramatic slowdown in Friday's numbers." We are beginning to see a slowdown in revenue growth for S&P companies so a reflection in our economic numbers wouldn't be a surprise. The Euro is once again at all-time lows and concerns are growing about its future and stability. In trading, all eyes will be on JDSU tomorrow and after the close when they report earnings. This most likely will be a major market mover going into Friday so use caution in positioning tomorrow. Good luck and expect volatility.

Matt Russ

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