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Market Wrap

What election results?

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        11-08-2000        High      Low     Volume Advance/Decline
DJIA    10907.10 - 45.10 11002.20 10903.30  897 bln   1299/1478
NASDAQ   3231.70 -184.09  3429.12  3231.28 1.68 bln   1310/2512
S&P 100   743.32 - 12.98   760.45   742.98   totals   2609/3990
S&P 500  1409.28 - 22.59  1437.28  1408.78           39.5%/60.5%
RUS 2000  500.68 -  5.33   506.88   500.55
DJ TRANS 2777.07 - 16.15  2793.94  2746.72
VIX        28.28 +  1.47    28.44    27.30
Put/Call Ratio      0.68

When I spoke yesterday about a "buy the rumor, sell the fact" event on Wednesday, I was not expecting it to be so drastic. Of course I was expecting a new president elect by now as well. With the election still in doubt and allegations of fraud, errors and just plain confusion the markets expressed concern that the results could be in doubt for days to come. Investors moved to the sidelines on all but some energy and drug stocks which were still up slightly on the hopes of a Bush victory. The Nasdaq traders wasted no time in running for cover with the index selling off from shortly after the open until closing at the low of the day. The Dow bounced off resistance at 11000 again and traded lower but still in a narrow range.

Instead of an election it looks more like a bloody overthrow if you gauge the election by the market results. Traders are concerned about many different possible outcomes. Tech traders expecting a post election bounce were caught off guard by the possibility of a Gore reversal and further worries that the tech sector growth is slowing. The concern over CSCO comments about order growth slowdown and increased inventory levels took another huge bite out of the chips and networkers. Traders unsure about growth targets and the election results dumped these stocks and moved back into cash. There is nothing investors like less than uncertainty and we had a serious bout of that today.

One analyst estimated that 30% of the market had been trading up based on the expectation of a Bush win. He pointed to the +1000 point gain in the Dow when Bush was pulling away from Gore in the polls and then the flat line since Nov-1st as the DUI news broke. Whether you believe him or not the markets do have more to gain from a Bush win with Drugs, Defense, Energy, Health Maintenance Organizations as well as the infrastructure necessary to support these sectors were expected to do well. These sectors have been strong over the last three weeks and could give back some gains if it appears the recount is going badly.

I kept hearing all day that we were going to have another retest of the 3000 bottom on the Nasdaq. I am having a hard time believing it but I would not complain in the least. I was flat for the CSCO earnings, (glad I was), and I remained flat over the election due to the possibility of a "sell the news" event. If you followed my lead then we are faced with a really good buying opportunity and from the news after the close today it may get better. After the close ICGE announced earnings and warned that future prospects would be grim with a -35% layoff. The stock dropped 35% in after hours trading. Engage Technology (ENGA) also warned that there would be an earnings shortfall going forward and they dropped -1.22 to $2.69 in after hours. 24/7 media also lost more than expected and got a serious haircut after the close. DoubleClick, guilty by association, dropped -$3 in after hours after the negative news from the other Internets. All major Internet stocks are likely to fall at the open as the Internet sector comes under pressure yet again.

Even after saying positive things in their earnings conference call CSCO was dropped by Morgan Stanley from their new Global Cash recommendation list. The continued weakness in long term outlook by investors in CSCO is rippling through the other tech companies that feed off CSCO. The contract manufacturers like FLEX, JBL, SLR and CLS took another hit as well as chip manufacturers BRCM, AMCC, PMCS, AMAT, ATML, IDTI, ALTR and HIFN. This was not a good day to hear Dan Niles say chip inventory was building. With the life cycle of some of these chips measured in 2-3 month periods any inventory oversupply can be critical.

Brokers and financial stocks also took hits on downgrades and uncertainty. Bear Stearns took aim at Morgan Stanley as over valued with mentions about GS and LEH as well. Sector after sector experienced rotation as investors worried that the results could go against them after the recount.

There are so many things I could write about tonight. The number of stories which impacted the market today and will impact the market tomorrow is more than I could write about over two days. The major problems I see are these. The Internet incubator stocks and advertising stocks are getting crushed in after hours trading due to increased losses and earnings warnings. This is sure to stop the Internet rally we have seen over the last week dead in its tracks. Secondly, the chips and networkers have been absolutely killed, over killed in my opinion, and there is a point where no amount of negativity will push them any lower. JNPR for instance has dropped -35 and is close to weak support at $184. Real support is much stronger at $165 and buyers will come off the sidelines in volume should we get anywhere close. This same scenario is true for BRCD, EXTR, PMCS and all of the fast movers mentioned above. There are billions in cash on the sidelines and it is just waiting for the right opportunity.

The election results are being touted as the reason for the drop in the market but we feel it is just an excuse. I agree it is a once in a lifetime event but we will survive. Gridlock is still in force regardless who eventually wins. Some are saying now that it could take days before the recount is over and as many as nine days before the overseas absentee votes are counted. Suits have been filed and will further complicate the process. It is still just an excuse. Regardless of who wins the economy is still in good shape, Greenspan is still in control and money is still piling up on the sidelines. Actually it will start piling up faster the closer we get to year end. Our consensus of opinion tonight is not that there was an over abundance of sellers, there was just no buyers today. The market makers pulled in their bids because they did not know what was happening and when the results would be known. Volume was light with only 897 million on the NYSE and 1.68 billion on the Nasdaq. The NYSE advance decline line was not bad with only a 13:15 ratio in favor of the declines. The Nasdaq was slightly worse at almost 1:2 but we think it was artificial. With the economy slowing the next rate move is likely to be up and that is not a bad environment for the market. Bush is expected to have two major bills on his desk the day he is sworn in and both are tax cut measures. The death tax and the marriage penalty will go the way of the dinosaurs. Some will say that this will cut into the surplus but it will also give voters more money in their pocket to put to work in businesses or spend as they see fit. We could argue over the impact depending on your economic views but consumers with more money in their pocket is not a bad thing in my book.

It is my opinion that we could see some more volatility tomorrow as market makers try to find a bottom and cooler heads prevail in the election result scenario. The drop today was the result of many factors many of which were exaggerated more than usual. I said on Sunday that an election dip would be a buying opportunity and I still believe it. We are only 150 points away from the last bottom test at 3085 on the Nasdaq. This was back on October 26th. We could easily plunge to that level in the morning depending on the overnight news. Futures are actually up as I write this but only slightly. With support at 3100 and even stronger support at 3000 the downside is minimal from here. Those institutional traders who have been short for months will be deciding soon if the next dip is the last one and that could coincide with the PPI in the morning the anticipated 5:PM recount release on Thursday, and Dell's earnings on Thursday night. With this triple threat on Thursday the volatility could be huge but once all three events have passed the glow on the horizon may be a market sunrise not a sunset. I am going to be looking at charts and not redundant election news tonight and I suggest you do the same. There are some real bargains out there today and target shooting these stocks on any further weakness on Thursday is my game plan. I have already planned for our fall rally party on New Years Eve and I am not ready to start changing my plans yet. Get those party hats ready and let's get this market moving in the right direction! As always, wait for the bounce!

Good luck and don't buy too soon.

Jim Brown

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