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Market Wrap

Not Another Earnings Shortfall!

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        11-13-2000        High      Low     Volume Advance/Decline
DJIA    10517.30 - 85.60 10595.70 10369.70 1.12 bln   1184/1660
NASDAQ   2966.72 - 62.27  3063.31  2859.39 2.05 bln   1393/2564
S&P 100   712.16 -  6.95   719.13   698.77   totals   2577/4224
S&P 500  1351.26 - 14.72  1365.98  1328.62           37.9%/62.1%
RUS 2000  476.55 -  4.35   480.92   463.44
DJ TRANS 2773.21 + 68.99  2775.79  2703.15
VIX        31.89 -  0.61    34.30    30.83
Put/Call Ratio      0.92

Not Another Earnings Shortfall!

The last thing the market needed was another profit miss and more words from Secretary Christopher. Amid continued election uncertainty, the market was rocked by yet another earnings shortfall. This time, the culprit was Hewlett-Packard (HWP). The bearish details are discussed below. Thanks, in part, to the HWP warning the NASDAQ Composite (COMPX) closed in negative territory for the sixth consecutive session. The Dow Jones Industrial Average (INDU) didn't fare any better.

Early this morning, Hewlett-Packard reported fiscal fourth- quarter results that missed Wall Street's consensus estimates by a full dime. Analysts had expected the company to report 51 cents per share in profits - the 41 cent per share number didn't cut it! The company blamed its shortfall on a variety of factors, which included pricing pressures, higher-than- expected operating costs, and, of course, unfavorable currency exposure (the euro). The shortfall from HWP was unexpected by many analysts because the company had reassured its numbers as recently as two weeks ago. The bad surprise resulted in shares of Hewlett shedding nearly 13%. The stock closed at $34.13, down -$5.00.

Despite the Hewlett warning and weak overall tech sector, the beaten down semiconductor sector sparked buying interest. The Philadelphia Semiconductor Index ($SOX) finished the day with a solid 4.3% gain. Although the gains in the SOX were relatively impressive, many traders shrugged off the action as mere short covering. Two big chip companies are slated to report numbers in the coming days, which some believed induced a short covering rally today. The two chip companies expected to report this week are Analog Devices (ADI) tomorrow, and Applied Materials (AMAT) on Wednesday. A surprise from either of the aforementioned could light a rally in chips, which could have been a reason for today's rally in the SOX. Nonetheless, the action in chips was welcome. Today's notable winners in the chip sector included Plexus (PLXS) +4.00 Xilinx (XLNX) +3.69, Analog Devices (ADI) +3.69, Texas Instruments (TXN) +3.56, and Vitesse (VTSS) +3.00.

Away from the chip sector, the recent weakness in the broader markets caught up with the biotech sector. Add to that bearish comments about the biotech bubble ready to burst reported over the weekend and traders were ready to sell. A few of those traders blamed the weakness in the biotech sector on the uncertainty surrounding the election, but what's new? Many analysts have been calling for a sharp sell-off in the biotech sector as it has remained well intact during the recent weakness in the broader markets. As such, the weakness was not unexpected. However, the damage was detrimental to many issues. Today's big losers in the sector included, IDEC Pharmaceuticals (IDPH) -$30.19, Protein Design Labs (PDLI) -$30.13, Myriad Genetics (MYGN) -$25.63, and Pe Biosystems (PEB) -$17.31. Those losses weighed heavily on the COMPX and might have prevented the index from finishing in positive territory today.

Despite the heavy weight of the biotech sector, the COMPX staged an impressive rebound this afternoon. The afternoon bounce began around the time a federal judge in Florida turned down the Bush campaign's request to halt the vote recount. The prospects of a conclusion to the election deadlock spurred some buying interest in leadership tech stocks this afternoon, which was a welcome sign for many traders. Along with the above mentioned chip sector, the rebound in the COMPX was led by the generals including Intel, Cisco, and Dell.

But, what seemed like an incredible reversal for the COMPX was soon shot down by ominous words from the Gore campaign. One of Gore's advisors, Secretary Christopher, appeared before cameras near market close and stopped the prospects for a rally. In fact, the sellers returned as soon as Secretary Christopher's face appeared on CNBC. After peaking above the 3050 level, the COMPX rolled over to settle below the 3000 level for the first time since last November. The COMPX is sitting at a new 52-week low!

With the 3000 level now precariously positioned above the COMPX, the only major support below is located near the 2850 level, which happens to be approximately four standard deviations below its 200-dma. The COMPX's bounce off its intraday low at 2859 could have been a test of that significant level. However, many market watchers were calling for the COMPX to fall as low as the 2500 level, and even lower around 2300. The pessimism was thick today! Also worth nothing was the fact declining issues outpaced advancing issues by a 5 to 1 margin at one time this morning. A 5 to 1 ratio of decliners to advancers is viewed as capitulation selling by many market participants. Whether that heavy selling this morning marked a bottom remains to be seen.

The INDU's support levels are disappearing as rapidly as the COMPX's are. The Hewlett-Packard warning combined with continued political rhetoric dragged the Dow down for the fifth consecutive day. It's hard to believe the INDU was flirting with the 11,000 level just five short days ago. Along with HWP, the finance and drug components weighed heavily on the INDU. Also in the losers column were shares of Phillip Morris (MO), which finished at $34.63, down -$2.25. The tobacco giant's shares have been rallying recently, which many viewed as a sign Bush would win the election. MO's sell-off today reflects the uncertainty surrounding the election and investors nervousness. In that same camp, shares of Microsoft pressured the INDU by shedding -$0.94, after recently running up.

As mentioned above, the INDU has fallen well off its near-term highs around the 11,000 level. Though, the blue chip index did manage to rebound well off its intraday low at 10,369. After the INDU's massive rebound this afternoon support is now located just below near the 10,500 level and lower around 10,400. If the INDU is going to stage a rebound into tomorrow's trading, it will need to get through resistance 10,600.

Along with the political uncertainty, the price of energy rose higher on the back on continued clashes in the Middle East and an OPEC meeting. In Vienna, Austria, OPEC ministers decided not to raise production. OPEC said it has already boosted production enough. The price of crude oil rose 81 cents to $33.76.

Despite the volatility in the broader markets, capital continues to flow into equity mutual funds. In fact, funds took in approximately $1.3 billion last week. Although investors have been taking more money out of funds in light of the election uncertainty, the fact remains money managers are sitting on a pile of cash that needs to be invested before the end of the year. Once the election nervousness is resolved, that capital will be put back into the market with great velocity, which presents a compelling case for a quick snap-back rally in major indices once a president is chosen.

Along with the continued election uncertainty, investors will receive a host of economic reports in the coming week. Most notably will be numbers in the form of the consumer price index and retail sales. Also on the economic tap is industrial production and capacity utilization.

And let us not forget the Federal Reserve meets on Wednesday. While Wall Street almost unanimously agrees the Fed will sit tight with interest rates, some nice comments from Mr. Greenspan might help to stabilize the broader markets.

With continued election uncertainty, the markets are sure to hinge on every word coming from the Bush and Gore camps. Although the recent market volatility presents many opportunities for day traders to capitalize upon, it makes it extremely hard to decipher a discernible trend. Because of that volatility, we are not adding any new plays to tonight's newsletter. Make sure to set tight stops in this tumultuous market and wait for the trend to show itself. Trade smart!

Eric Utley
Assistant Editor

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