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Market Wrap

Profit Taking Today Normal and Expected

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        11-01-2000        High      Low     Volume Advance/Decline
DJIA    10899.50 - 71.60 10993.50 10838.00 1.20 bln   1411/1466
NASDAQ   3333.39 - 36.24  3396.72  3289.46 2.02 bln   1829/2115
S&P 100   748.39 -  2.54   753.46   741.91   totals   3240/3581
S&P 500  1421.22 -  8.18  1429.60  1410.45           47.5%/52.5%
RUS 2000  495.18 -  2.50   497.68   493.20
DJ TRANS 2752.77 +  8.15  2787.73  2727.22
VIX        26.56 +  0.57    27.09    25.89
Put/Call Ratio      0.50

Profit Taking Today Normal and Expected

With all things considered, today wasn't that bad at all. In fact, it was another encouraging day for both the major indices. After such huge gains on Monday, profit taking was bound to happen. Considering today's minimal losses in the INDU versus the previous four days' gains, its chart looks technically sound. Over at the NASDAQ, bad news out of the Telecom and the Semi sector was potentially disastrous but the bleeding was minimal and contained. Today's action, although red, is most encouraging.

The tech index has been the source of pain for most traders and investors, myself included. With the INDU holding its own lately, the concerns are on the NASDAQ's technical health. Is it a bottom? Is it the bottom? Is there a difference? Who knows, but one thing is apparent: today's 36 points of profit taking on lower volume is just another step in the bottoming process, and honestly it is starting to feel like the real deal. For the NASDAQ to shake off a major telecom player's profit warning and Semi downgrades, it makes even a skeptic like myself feel more comfortable with its prospects. My thinking after yesterday's 5.5% rally was that the NASDAQ needs to show that it can take the heat of profit takers by maintaining 3300 and not giving up the ground that it gained. And in doing so on slightly lighter volume, it gives much more merit to yesterday's rally.

In the chart above, you can see that bottoming process continues on. It is likely that the NASDAQ remains somewhat range bound during this process as it builds to break the triple top near 3520. This breakout would effectively take the NASDAQ to a new range. The end all be all pivot point of this recent trendline is 3081. A NASDAQ recovery, which is already underway, is hinged up on this October 26th low, a relatively higher low from the October 18th low at 3026. The next level that the NASDAQ will encounter resistance is 3400, as sellers stepped in at 3396 today.

Yet, this is just the technical aspect of the NASDAQ's recovery. To strengthen these technical developments is the fact that the NASDAQ was able to contain and digest the two following pieces of bad news: WCOM's profit warning and ALTR's lowered revenue guidance. WCOM came out today and warned investors that their 4th quarter earnings would be in the range of 34 to 37 cents versus previous estimates of $0.49. They cited intense pricing pressure, (sound familiar? AT&T), and also an unfavorable exchange rate, in secret analyst code: the Euro. But somewhat surprisingly, WCOM also unveiled a restructuring plan, a la AT&T, in which it would split into two publicly traded tracking stocks, WCOM and MCIT. The latter would reflect the MCI arm of the behemoth. By further separating the two, it is evident that the MCI acquisition of 1998 hasn't been integrated like it was probably envisioned. WCOM lost 20% today, falling to $19 as the Telecom sector continues to slide into the abyss.

The second piece of bad news that the NASDAQ shook off was the profit warning of ALTR. With the Semi sector plagued with earnings and revenue slowdowns recently, it isn't extremely surprising that ALTR sees 4th quarter sequential revenue growth at the low end of its previous guidance. As a result, WR Hambrecht & Co. lowered the stock to a Neutral from a Strong Buy on the grounds that it sees a potential inventory correction for ALTR taking place in the March 2001 quarter. Merrill Lynch decreased its 2000 EPS estimates as they feel ALTR is losing market share to XLNX. The only brokerage firm to defend ALTR was Bear Stearns. The SOX.X index lost almost 4% but it closely mirrors the NASDAQ and looks to be processing a bottom as well. With the worst of the bad news already priced into the market, it is that much more likely that downside is limited in the Semi sector. ALTR fell 20%, or $8.38 to $32.56. The loss for XLNX was less damaging at -7% to $67.44.

In the rocky Fiber Optic sector, NT again played the spoiler less than a week after it was hammered for revenue concerns. Today, the company north of the border said that although it will match expectations in the 4th quarter, its EPS for the 1st quarter 2001 will fall short by a penny. NT was only down $1.50, but that represents over 3%, closing at $44. The company has seen its share price drop 30% in the last week. Fiber Optic stocks, which have been some of the last to fetch sky-high valuations, like JDSU(-2.94), SDLI(-12.75), GLW(-2.88), have all felt NT's pain. But once again, the NASDAQ was able to localize the damage and hang onto the majority of yesterday's gains.

For the INDU, it has remained technically sound and the V bottom since dipping below 10000 is firmly in place. It has been quite impressive. Although its four consecutive days of rallying was broken today, the profit taking was very minimal and expected. The INDU was down 71 points, not even one percent! Consider this: those four days to the upside accounted for 645 points, over 6%! It really looks great. You don't hear anyone questioning that bottom now, do you? With the previous downtrend on broken, the INDU is technically poised to continue higher into the end of the year. The 11000 area will be tough resistance but if the INDU backfills and consolidates these four day gains, it's new trend will be that much stronger.

Looking forward, we can be encouraged by the past two days of trading for both indices. As for the NASDAQ, today was the most convincing day that we are strengthening this base at 3000. Instead of simple profit taking, the NASDAQ very well could have fallen hard and fast today, wiping out yesterday's 178 point gain. Especially given the slew of bad news that the tech index had to digest today. On the brighter side, after the bell, a senior executive at CSCO said that he sees no decrease in demand of Internet products by its Latin American customers. CSCO was up slightly in after hours, and this may be a positive precursor to their earnings due out on Monday, November 6th. There's no doubt that this will set the tone for year-end trading. Tomorrow we have Initial Jobless Claims(expected 305K) and Productivity (expected 3.5%). Ralph Acampora of Prudential Securities said today he believes that the INDU has a rally coming into year-end and that the NASDAQ will likely remain rangebound. He also stated some interesting facts about the markets and elections. I will leave you with them as we quickly approach Election Day. In 23 of the last 33 elections, stocks rallied about 9% prior to the vote, and afterwards, they typically have a honeymoon rally of up to 20%. Take it for what it's worth but things are beginning to feel better everyday as the markets continue their turnarounds. Good luck.

Matt Russ

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