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Market Wrap

Waiting For A Reason

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        11-06-2000        High      Low     Volume Advance/Decline
DJIA    10977.20 +159.30 11006.50 10810.00  927 bln   1419/1384
NASDAQ   6416.21 - 35.37  3480.01  3412.98 1.61 bln   1803/2140
S&P 100   755.44 +  3.74   759.14   752.77   totals   3222/3524
S&P 500  1432.19 +  5.50  1438.46  1427.72           47.8%/52.2%
RUS 2000  503.96 -  3.79   508.86   503.49
DJ TRANS 2793.22 + 31.47  2807.89  2754.62
VIX        27.03 +  0.72    31.04    26.35
Put/Call Ratio      0.66 

Waiting For A Reason

The bulls ran rampant in the Dow while others waited for guidance from Cisco and results from the election. The Dow Jones Industrial Average ($INDU) staged yet another impressive rally today ahead of Cisco's earnings and election results. The decline in oil prices over the weekend induced a broad rally in cyclicals, transportation, retail, and financial shares as inflation concerns eased. Meanwhile in the drug sector, shares of pharmaceutical makers surged higher on the prospects of a Bush victory, which added to the INDU's rally.

Despite the triple digit gains in the INDU, the index failed to close above the 11,000 level. The INDU has attempted to eclipse the key resistance level on three occasions in the last five trading sessions with little success. However, the fact that the INDU at least peaked its nose over 11,000 had many traders cheering. The keys for the INDU going forward will be a continued ease in energy prices, a strength in the euro, and an ease by the Fed. Of course, the aforementioned events are all closely tied to one another. Nonetheless, the INDU's recent advance has many on Wall Street feeling upbeat. At least a lot more than was the case in mid-October.

The obvious resistance level for the INDU is 11,000. And, if the INDU can settle above that level, it could very well retest its early September highs near the 11,400 area. But, a pullback is not out of the question with the election upon us. If Bush is elected, we may experience a pullback in shares that have rallied ahead of the actual election results, such as pharmaceuticals. If a pullback is, in fact, in order, the INDU is likely to retest the 10,800 support level.

The tech-heavy NASDAQ took the opposite path ahead of Cisco's earnings report as traders remained uncommitted. However, while hardware and network-related shares struggled, the chip sector rallied for the third consecutive day, which buoyed the NASDAQ. The Philly Semiconductor Index ($SOX) finished modestly higher with a 0.7% gain. Although the gains were small today, the SOX's string of rallies signals movement back into the chip sector, which is definitely adding to the bulls case.

The key level for the NASDAQ Composite (COMPX) is the 3,500 resistance area. The COMPX attempted to settle above 3,500 on three consecutive occasions in mid-October with no success. The COMPX is once again approaching the key 3,500 resistance level, with many market participants looking, and even hoping, for a breakout.

The much awaited third-quarter earnings report from Cisco Systems was next to pristine. The company reported its usual penny better than estimates with a profit of 18 cents per share. The company also recorded an amazing $6.52 billion in revenues - well above the high-end of estimates. Shares of Cisco were all over the map in after hours trading as the company's conference call played on. John Chambers, CEO of Cisco, guided analysts to even higher estimates for next year, which boosted the stock from its after hours lows. The market's reception of Cisco's report and Chambers' guidance will set the tone for trading in the tech sector tomorrow. Of course, a few upgrades and upbeat analyst comments wouldn't hurt! At the time of writing, shares of Cisco traded around $54.50 in after hours.

The previous mentioned rally in the INDU was, in part, induced by a retreat in energy prices. The price of crude oil continued lower today as recent production hikes and uncertainty over the upcoming OPEC meeting were factored into the market. Commodities traders will key in on the OPEC meeting scheduled for November 12th for signs of continued production hikes, along with the American Petroleum Institute's report on refinery supplies scheduled to be released tomorrow. The relief in the price of oil was clearly evident in the Dow Jones Transportation Average ($TRAN) today, with major airlines benefiting. A continued decline in the cost of energy will aid the equity markets into the end of the year.

The other "e" word, which has plagued the market, went the opposite way of the bulls' wishes today. The European Central Bank (ECB) intervened in the slumping euro currency for the second time in as many trading sessions today. Despite the ECB's purchasing of euros in the open market last Friday and again today, the currency slid lower indicating the ineffectiveness of the bank's attempts to boost its sagging currency. Because of the euro's decline, exports into the region remain costly for local businesses. The effects of the slumping euro have been felt by huge multinationals such as Dell Computer, among many others. Once the euro stabilizes, in conjunction with continued relief in energy costs, the bears will be out of reasons to sell this market.

And what would be a Monday without an earnings warning in some shape or form? The unlucky company was VA Linux (LNUX), who warned that its third-quarter loss would be greater than previously anticipated. The company told analysts this morning it would lose between 14 to 16 cents per share, a far wider loss than First Call's previous 9 cent loss estimate. VA Linux blamed its shortfall on a slowdown in spending from its dot com customers. The company's warning deflated the recent rally in Linux-related stocks as Red Hat (RHAT) fell in sympathy. Coincidentally, I reviewed VA Linux's prospects in my Ask The Analyst column over the weekend. I had suggested the company's prospects were turning more bullish with the recent IBM contract to supply software services. Well, I was wrong! But, I also suggested to listen closely to the company's guidance during its upcoming earnings release. And, that guidance came ahead of schedule in the form of a warning this morning. Shares of VA Linux finished down 42% to $17.38.

In other earnings-related news, there are still a small number of S&P 500 companies that have not reported third-quarter results. Among the remaining companies scheduled to report this week include include Dell Computer, Protein Design Labs, Walt Disney, and The Gap. A positive surprise from any of the aforementioned could give an added boost to their respective sectors.

On to more positive news, it would appear the return of the IPO is upon us. Although the equity markets have not been the most favorable over the past two months, several high-profile public offerings are expected to go off this week. The most highly watched debut will be that from the Silicon Valley-based Transmeta (TMTA). The investment bankers bringing Transmeta public raised the offering price last Friday as an indication interest in the IPO is on the rise. The consortium of bankers bringing Transmeta public raised the initial offering price from the $11 to $13 range up to the $16 and $19 area. It's bullish to see Wall Street return to the IPO market with interest and may confirm the prospects for a year-end rally.

After the election and reception of the Cisco earnings tomorrow, Wall Street will turn its attention to the PPI report scheduled to be released on Thursday (the same day of Dell's earnings report). The Fed will continue to monitor for signs of wholesale inflation in the form of the PPI report. The report is expected to reveal a pullback in energy prices and confirm the threat of inflation remains in check. After the surge in energy prices in September which lead to a spike in the PPI, analysts are expecting prices to rise by a benign 0.2% during the month of October. Nonetheless, Wall Street will want confirmation that inflation remains subdued.

The reasons to buy into the market may soon become compelling enough for the institutional money mangers to put the hoard of capital to work they have been sitting on. According to Trim Tabs, a mutual fund monitoring group, the inflow of capital into equity funds reached $11 billion in the five days ended November 3rd. To put it into perspective, only $1 billion of capital flowed into equity funds during the entire month of October. We may have seen some of that capital already put to work last week, but there's still some money on the sidelines waiting to buy into the market. The trading should be exciting tomorrow as the election results filter out and into the market. Once the election is behind and the new president elected, the reasons to buy may begin to outweigh the reasons not to buy.

Make sure to look for the new additions to OptionInvestor.com today. We've included a new play in today's newsletter, along with updates on selected plays. As the week progresses, we'll be introducing the new and exciting features that Jim detailed in his Sunday Market Wrap.

Eric Utley
Assistant Editor

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