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Market Wrap

On the eighth day...

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        12-21-2000        High      Low     Volume Advance/Decline
DJIA    10487.30 +168.40 10520.50 10299.20 1.42 bln   1680/1234
NASDAQ   2340.12 +  7.34  2423.71  2288.16 2.69 bln   1799/2240
S&P 100   668.58 +  7.08   674.71   656.68   totals   3479/3474
S&P 500  1274.86 + 10.12  1285.31  1254.07           50.0%/50.0%
RUS 2000  447.03 +  3.23   450.31   440.78
DJ TRANS 2789.82 + 60.05  2810.63  2728.58 
VIX        34.42 -  1.28    37.72    33.41
Put/Call Ratio      0.72

Finally a positive close on the Nasdaq. Unfortunately about the only positive thing was the closing number. After a rocky start with a dip below 2300 to 2288 the Nasdaq did manage a rally which held over 2400 for over two hours. Many stocks rallied back to yesterdays highs only to be hit by waves of selling again before the close. The Nasdaq rally failed on heavy volume of 2.6 billion shares as persistent tax selling kept the pressure on techs. The Dow rallied on the back of financials and the hope of an inter- meeting rate cut to gain +168 points. Warnings by tech stocks, telecoms and even paper stocks kept investors guessing about who would be the next big cap to fall.

Lucent made it four in a row today with their fourth earnings warning in four quarters. While nobody was surprised the warning knocked the stock back to $12.19 and a new 52-week low. The CEO was on CNBC this afternoon and of course was saying the worst is over. Analysts called it the kitchen sink warning since they cut estimates to as much as a -.30 loss instead of the breakeven quarter analysts had expected. Lucent said they were going to reduce costs by over $1 billion by aggressive cost cutting and forced reductions in staff. They also estimated that revenues would drop about -20%. How much lower can it go?

IBM dropped another -4.44 to $81.44 on worries that an earnings warning was imminent. As one of the few remaining big caps still mum on results they are number one on the guess parade. After affirming earnings estimates yesterday HWP fell another -1.06 proving that investors have no confidence even in positive press.

CSCO rallied back +2.38 to $38.88 after being decimated by the Foundry warning on Wednesday. Volume was huge at 121 million shares. They are still rumored to be a warning candidate so the bounce today was probably fueled by investors in denial that CSCO could actually trade at $37. Since they announce earnings a month later than the rest of the pack any warning could come in late January so there may still be some weakness ahead. Don't get me wrong I was glad to see any bounce in CSCO since it is the current Nasdaq leader much like GE is the proxy for the Dow. CSCO has lost -$313 billion in market cap or almost half its total capitalization since March. For comparison INTC has lost -$282 billion and ORCL -$97 billion.

3Com announced earnings after the bell today that beat the lowered street estimates by a nickel. COMS had already warned for all the standard reasons. Since spinning off the PALM IPO earlier in the year COMS has dropped to $7.19 today, a new 52-week low. Speaking of PALM the weak revenue numbers in their earnings report yesterday short circuited the entire PDA sector today. PALM lost -12.38, HAND -10.19, RIMM -9.06. Fears of slow post holiday sales was causing the problems.

Harmonic Lightwave warned after the close that they would miss earnings due to slowing purchases by telecom companies. That is not new news but they did make a statement that could ripple through the sector again tomorrow. They said AT&T was not accepting any deliveries for this quarter which carried across the sector could cause even more earnings problems. Many of these companies try to fill the pipe at the end of the quarter and the inability to deliver product keeps revenue from being recognized.

After the close Ford warned that slowing sales...fill in the blanks.

Northrup Gruman (NOC) announced after the close that they were buying Litton Industries for about $4 billion in cash. LIT shares closed at $62 and the purchase price is $80 or about a 30% premium.

There were several Fed friendly economic reports today starting with the Philadelphia Fed Survey dropping significantly. The report came in at a -6.1 which was far below the 3.8 consensus estimate. The decline in manufacturing activity indicates the Fed's work is done and the economy it slowing. Would somebody tell Grinchspan please! Weekly jobless claims resumed their upward climb with news of layoffs in the news daily. The number for the week rose +34,000 to 354,000. The 3Q GDP final revision came in at only +2.2% which was the weakest gain since 1996. Consensus estimates were for +2.4%. This was far less than the +5% rate from earlier this year.

The volume on the Nasdaq was the fifth largest ever at 2.6 billion shares. This was due to traders closing trades and going flat before the long holiday weekend. With sellers in control there is no burning desire to be long. The typical bullish holiday sentiment was scarce with caution being the predominant emotion. I spoke with Dick Arms today and he indicated that according to his indicators the Nasdaq was the most oversold it had been since he had been keeping records. Still nothing prevents it from going even deeper on the next round of warnings. The remaining high dollar stocks were being sold at any price at the close with BRCM -13, PMCS -14, SDLI -11, BRCD -9 as prime examples of the tax selling rush. Until these previous leaders find a bottom much like CSCO and SUNW did today, the Nasdaq will continue lower.

Volume on Friday, the last trading day before Christmas, is typically light even in bullish years. About the only thing you can take for granted is the expected volatility. The VIX spiked to almost 38 this morning for only the second time this year. The other day was the April 14th bottom. On a side note there was a mass sell off of defensive drug stocks at the close. PFE, MRK, SGP and BMY, all of which had seen decent gains while the Nasdaq was crashing, saw huge "sell on close" orders. Without any significant drug news after the bell analysts were guessing that maybe the tide is about to turn from defensive stocks and back to tech stocks. It is just a guess but without any negative news it sounds good to me.

The trading strategy for Friday is "enter at your own risk." There has not been a trend change yet. The failed rally on the Nasdaq looked like business as usual and could accelerate if more traders decide to go flat over the weekend. Should we get another downdraft in the morning there is likely to be some bargain hunting Christmas shoppers as well as another round of short covering. Next week is going to be a toss up with a probable bullish bias as the tax selling comes to a close. Still when trading a trend it is always a good idea to actually wait for a trend to appear. Friday's intraday trading could be the turning point but consider your entry points carefully!

Good luck and don't buy too soon.

Jim Brown

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