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Market Wrap

Not over until it is over!

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        12-13-2000        High      Low     Volume Advance/Decline
DJIA    10794.40 + 26.10 10915.40 10772.50 1.19 bln   1374/1499
NASDAQ   2822.77 -109.00  3001.72  2814.13 2.04 bln   1599/2327
S&P 100   720.59 -  8.32   737.24   719.34   totals   2973/3826
S&P 500  1359.99 - 11.19  1385.82  1358.48           43.7%/56.3%
RUS 2000  469.91 -  7.85   480.91   469.29
DJ TRANS 2847.41 - 57.86  2918.81  2842.45 
VIX        26.87 -  1.41    27.77    25.90
Put/Call Ratio      0.71

The long awaited Supreme Court decision that provided the final conclusion to the Florida results came after hours on Tuesday. However there was no rush to the microphones by the candidates and tersely worded statements like "we are examining the decision in its entirety" provided a cautious backdrop to Wednesday's trading. Traders ready to buy any good news rushed into the market at the open but with the cautious comments from the pundits about "wiggle room" and "withdraw not concede" the hope for a conclusion is still just that, hope. Until Gore makes it official and hopefully chooses the right words to avoid any further doubt about direction, traders are still waiting to exhale. Rumors of defecting electors and pressure being applied to cause two of them to switch sides has caused yet another day of uncertainty. The specter of even further and more divisive electioneering coupled with yet another round of earnings warnings and downgrades just proved too much for the fragile markets. The Nasdaq gapped up to hit resistance at 3000 for the third time in three days only to sell off on the earnings warnings -179 points to close near the low of the day at 2822. Not a pretty picture! The Dow gapped up +140 points at the open to break 10900 for the second time this month only to fall back on the weak earnings, lingering election uncertainty and repeated mention of "recession" through out the day. The Dow closed just under the stiff 10800 resistance again but maintained the two week up trend with a positive close.

The expected Bush bounce was bushwhacked as investors who raced into the market at the open on what they thought was the final conclusion found themselves surrounded by sellers as those who were reacting to the qualifications in the press releases and continued earnings warnings ran for safety. The big rumors today continued to be impending tech warnings, real warnings and chip/ tech stock downgrades. Some of the big caps that analysts feel are left to warn include Dell, IBM, SUNW, VRTS and even CSCO. The continuing confession session may be turning into a recession watch according to many analysts. First Call said today that the long term profit growth for the S&P has been around +7% but the current estimates are now only +6% and under several scenarios the second or third quarter of next year could actually have negative growth. So far this quarter there have been around 310 earnings warnings on the S&P compared with only 204 for the same quarter of last year. Of these around 50 have been tech stocks. If the big caps mentioned above warn then it is very likely the final numbers will be close to 400 warnings for the quarter. This is a major change in direction from last year and even from just last summer.

The market had been trying to shake off the flood of warnings as already priced into the market but the sheer numbers of warnings and the breadth of sectors has pushed investors onto the ropes like a punch drunk Rocky Balboa. Beaten but not out but with little signs of any chance of recovery. Investors who had been hoping to hang onto shares of companies decimated by this bear market were encouraged by the last two weeks apparent bottom. Those hopes of a rebound by year end and possibly holding onto the stock instead of settling for a tax loss are fading fast. With every failed Nasdaq rally the possibility of heavier tax selling increases. With every -100 point drop investors already sitting on cash are counting themselves lucky but they are losing confidence in a possible Santa Claus rally. The January effect, which could have been partly responsible for the bounce last week is fading fast.

Much of this is complicated by the unknowns of Reg. FD or the Full Disclosure law that was recently enacted. Under this law companies must tell all investors at the same time of any change in the financial picture. Before this they could guide analysts lower privately without the embarrassing public disclosure. Now companies must make all news available to everyone at the same time. Companies appear to be taking this seriously and in the world of increased shareholder lawsuits they are disclosing more info than less and erring on the side of too much caution. The impact of too much information is investors being flooded with even minor changes that appear as warnings. The economy is of course amplifying the problem.

The economic reports began in earnest this morning with a Fed friendly drop in Retail Sales. They dropped -.4% for November when analysts were expecting a slight gain of +.1% instead. This was the first drop since April and a key indicator in the state of the economy. The wealth effect is dead. It has now become a negative as consumers bitten by the worst bear market in recent memory nurse their broken and bleeding retirement accounts.

Enter stage left the man in the super Santa suit. Superman and Santa Claus all wrapped up in one personality. Greenspan and his herd of Fed reindeer can only paint one picture at their meeting next week. Not a hard landing but a crash in progress. But, remember his speech from last week? Not on my watch, will the economy crash. Especially not with an incoming republican president. (he did not say that but you can bet it is on his mind) With the PPI tomorrow and the CPI on Friday anything short of a miraculous recovery in those numbers will result in at least a change in bias on Tuesday and many now believe even a rate cut. While that may be optimistic and unrealistic without knowing the PPI/CPI it is still a serious possibility.

Assuming the election fight does come to a complete and final close tonight when both candidates appear on prime time TV, the market may breathe a new sigh of real relief on Thursday. With that five week problem finally out of the way the market will finally be free to focus entirely on earnings and future growth. In a previous paragraph I mentioned that we could actually have negative growth in 2001 which sounds bad for the market. Actually as everyone knows the market tends to discount future events way before they occur. The 2001 growth estimates are already priced into this market. The Nasdaq dropped -50% from the years highs. Many individual stocks have lost -60%, -70% even -80% in just a period of months. This is the discounting of the 2001 earnings. The only question is when it will stop.

I speak with investors constantly and the trend has turned from complaining about how far the market has fallen to a general feeling of "what a great buying opportunity." People who have not been generally interested in the daily market are now quoting stock prices and saying "I can't believe XYZ stock is only $$$." I think I am going to buy some along with ABC, EFG. This same thought process is going through the fund managers minds and they have cash to spend. Once the Fed direction is clear on Tuesday I think we will see a significant change in sentiment. Bad news is priced in but rate cuts are not. A rate cut will turn the market on a dime. The old adage about buying stocks when nobody else wants them could not be truer than today. Nobody wanted tech stocks today. But in reality the market moving earnings warnings today were actually Compaq related from last night. The few that warned today, SEM, ACTL, SCH, WHR, CLE, SING, BBBY, CCDl, ODGC, PZZA and others were not market movers. They just added to the general sentiment. The Compaq warning put pressure on the remaining big cap techs who have not warned and that pushed the techs lower. It was a sentiment decrease based on the lingering election uncertainty and lingering warning uncertainty. The stocks I pointed to last night as only dropping a little got whacked today just like everybody else. Investors threw out the good with the bad. I mentioned that if we could not break 3000 this week we would probably retest 2700 again. The Nasdaq tried valiantly and to rally and hold it but it was not in the cards.

Still there was no conviction. Volume failed to break 2 billion shares on the Nasdaq and barely 1.1 billion on the NYSE. New highs beat new lows 2:1 on the NYSE 110:64. That is not a sign of a beaten market. The Nasdaq however was broadly negative on the aforementioned pending warning expectations. The good news that the election is almost history but the credits still have to play AFTER the speeches tonight. Then we can get back to the more important business at hand. I am still bullish but I am not stupid. I said last night I would buy the dip based on a concluding verdict from the court. We got the verdict but the delay in acting on it prevented a bottom from forming pending the wording of the anticipated concession speech. Several times in the middle of the day I wanted to pull the trigger in the 2860 range which was the bottom of the ascending Nasdaq trendline but I saw no strength. When buying a dip you want to buy the rebound not the drop. It never happened. Now tomorrow I get another chance to play again. The options I want are now cheaper (calls) and the puts I want to sell are worth more. This is my kind of Christmas shopping! Several companies announced stock buy backs after the close and that tends to occur around market bottoms. (wishful thinking?) Now that the Nasdaq has failed at 3000 three days in a row and broke the 2860 support line at the close I think we need to be more careful. Yes, I know that is a sentiment change for me from Sunday but we always need to be reactive to what the market gives us instead of trying to force our bias onto the market. I am still an aggressive buyer of any bounce from here. I can also see a possible 2700 retest on more negative earnings news. Does that make me bipolar, or just realistic? This is simply not a stable environment with hourly news that is playing the market like a puppet. Patience is a highly valued attribute that we need to practice until a clear market direction is found.

One of the stocks I wanted to play all day was BRCM. After a +$60 gain over the last two weeks it has consolidated for two days and only gave back -2.81 today. Whether you like BRCM or not this is the type of strength you should be looking for when the market finally rallies, and it will finally rally. Stocks that bend less when the market and sectors are going against them are the stocks that rebound the strongest when good times come again.

BRCM could get hammered tomorrow just like BRCD and JNPR did today but that would simply be a better entry point in the master game plan. I still think BRCD and JNPR are excellent plays even though they had a tough day. Those with high trading profits (BRCD +$85, JNPR +$66) but weak conviction sell off more on bad days. These can run again when the tide turns but without strong buyers holding them up they are just as likely to fall quicker on the next wave of selling. Just a quick reminder that you want to trade these stocks not marry them.

I waited until after the Gore speech before posting this article just to make sure there were no qualifications or word bombs that would change the tone. There were none. I am not a Democrat which should surprise no one who has read my material in the past. The VP did an admirable job and this was one of his best speeches ever. I truly believe the contest is over and even the "I don't agree with the court decision but I accept it" comments were made with graciousness. Even the veiled "I will be back" comments were made in good taste. I salute him for doing the right thing in the best manner possible. I salute him and my impression of him rose several points. Good job, Mr. Gore! Your service to your country is far from over. Gore running again in 2004 is a given. Wish I could buy leaps on that! The futures spiked during the speech. Hopefully they will hold. Now let's go make some money!

Good luck and don't buy too soon.

Jim Brown
Editor

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