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Market Wrap

Score one market drop for Robertson Stephens

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        01-02-2001        High      Low     Volume Advance/Decline
DJIA    10646.10 -140.70 10797.00 10585.40 1.10 bln   1348/1714
NASDAQ   2291.86 -178.66  2474.16  2273.07 1.91 bln   1645/2337
S&P 100   667.13 - 19.32   686.45   662.56   totals   2993/4051
S&P 500  1283.27 - 37.01  1320.28  1276.05           42.5%/57.5%
RUS 2000  462.49 - 21.04   483.55   461.38
DJ TRANS 2874.11 - 72.49  2950.11  2869.56 
VIX        34.20 +  3.97    34.39    31.47
Put/Call Ratio      0.79

Analyst Dane Lewis from Robertson Stephens probably stayed awake all weekend planning his interviews after putting his finishing touches on his tech sector downgrade. After the announcement this morning he was in great demand by all the major networks. He was probably on the top of most investors hate mail list as well. He said a "significant slowdown" in information technology spending will crimp average selling prices and total sales for a number of high profile tech companies. Declines in IT spending by corporate buyers as well as a slow down in spending by dot coms led to the change in the brokerage's previous view. The resulting carnage in the tech sector coupled with continued tax selling was not pretty.

Some of the stocks downgraded included VRTS -21, EMC -12, NTAP -13, CFLO -3, NTIQ -22, NETE -13, ISSX -13, VRSN -13. With data storage requirements slowing and the need for security software seen as less critical for the contracting Internet sector the outlook is seen as lasting several quarters. Slowing spending due to smaller budgets will lengthen the sales cycles and shrink margins due to more competition for the same dollar. As if to punctuate this concept AAPL announced a massive price cut after the close on all its business systems. Some of the cuts were more than -$1,000 and according to Apple were designed to clear the more than 11 weeks of inventory currently sitting on dealers shelves. That is a quarters worth of sales which does not bode well for the next round of earnings from Apple. I am sure Mr. Lewis could have been influenced as well by the massive discounts and sale prices in all the post holiday sale flyers. Many offered almost free computers after rebates that approached 75% of the sales price. About the only shoe left to drop here is an earnings warning from CSCO which would go along with this sector downgrade. This fact was not lost on investors as they fled CSCO in droves with over 122 million shares traded. CSCO lost -$5 to close at a new 52-week low of 33.25.

After the close there was another flurry of earnings warnings as expected. EVOL, EFNT, IMSC, JDAS and TSTN were the headliners. I have been telling you for several weeks that historically 43% of warnings occur in the first two weeks of January. In reality I don't think there are that many stocks left that have not already warned but we still need to be aware that all the bad news has not been announced yet. IBM, CSCO, SUNW, JDSU are the big caps that could create another disaster should they decide to confess. It is not that everyone does not already know the news, it is just the act that burns it into our collective consciousness.

Tech stocks were not the only losers on Tuesday. The biggest Dow stock GE dropped over -$4 to $43 after a WSJ article concerning the safety of some of its jet engines. By itself this probably would not have been a major event but coupled with the NAPM number this morning the health of the GE manufacturing complex as a whole was questioned. The NAPM index fell to 43.7 which was more than expected and the lowest level since the 1991 recession. This level is consistent with zero growth in the economy. The employment index fell to 42.8% its lowest level since 1998 and suggests the Jobs Report on Friday will be weaker than expected. The NAPM numbers solidified the need for prompt and aggressive Fed action which could come as soon as Friday. The Jobs Report could be the trigger for an inter-meeting rate cut as it did four times in 1991.

The tax selling today was very strong. Up volume on the Nasdaq was beaten by down volume over 4:1. The stocks that suffered most were the ones up the most from January of last year. Yes, there were some stocks still up for the year. JNPR, which I speculated on Sunday would be a major target, dropped -23. I am sure the Robertson Stephens tech downgrade did not help but across the board the biggest 2000 gainers were the biggest Tuesday losers. This selling shifts capital gains into this year and frees up cash to invest in some of the current bargains. It normally only lasts for one week after which that same cash is put back into the market. Analysts estimate that cash, now on the sidelines and waiting for this last selling flurry to be over, is at two year highs. Another example of tax selling would be Laboratory Corp which dropped -$28 on no news after moving up from $35 on 1/1/2000 to $183 last Thursday.

Ironically the lower the Nasdaq goes the easier to have big days make it into the history books. Today the Nasdaq posted its 7th largest percentage loss of -7.23% which percentage wise was more than the Dow lost in all of 2000. Technically it sounds huge but realistically it was a normal day. 15% of the Nasdaq set new 52-week lows and only 10 of the Nasdaq 100 finished positive.

The value investing funds which were considering closing last year are probably dusting off their prospectus as investors become more interested in slow growth value stocks instead of the daily heartbreak of continued tech wrecks. Many are deciding that +18% to +25% annual returns would be very nice considering the current state of their accounts. This return to value investing will prevent GE and companies like that from dropping much farther. Companies with earnings and companies with tangible assets will be money magnets when the pile of cash on the sidelines spills over into the markets. GE was up +.75 in after hours trading after coming within $1 of its 52-week low set last February.

Waiting to exhale? With the Jobs Report on Friday and all eyes on the Fed there is not likely to be a rush to buy the current dip. Even with the almost -300 point drop from Friday's high the Nasdaq showed no signs of a bargain hunter bounce at the close. Experienced traders are waiting patiently for the index to find a bottom and the new 52-week low of 2273 from today may not be it. Volume on both exchanges was good with 1.9 billion on the Nasdaq and 1.1 billion on the NYSE but declines obviously overwhelmed advances. The VIX spiked to close at the high of the day at 34.39 and very close to the numbers posted when the Dow and Nasdaq hit their previous bottoms on Dec-21st. The Dow gained +600 points and the Nasdaq +300 points starting the very next day. Nobody can guarantee that will happen again tomorrow since we have a completely different set of circumstances governing our current market sentiment. With capital gains tax selling limited to those stocks with gains from last year that does limit the extent of that selling. If any Wednesday bounce holds, then traders could start taking positions in front of the Jobs Report in hopes of a favorable outcome. As I said on Sunday, we should be watching the stocks we want to buy this week and looking for bottoms. With only two trading days left before the Jobs Report the possibility of a bottom Wednesday is about 75%. Futures are up +4.40 already and hopefully that is a leading indicator of tomorrows direction. Still, be patient and make sure the market, sector and stock are all positive and moving up as well as advances beating declines before opening a new long position. If any of these are negative then wait. We have all year, one day will not make a difference.

We had a huge response to our annual renewal offer and I would like to thank everyone who chose OptionInvestor as their source for investment ideas in 2001. We will work very hard to maintain your confidence. We have some outstanding new features we will be announcing next week and we are sure you will be excited as well!

Good Luck, Don't buy too soon!

Jim Brown

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