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The Markets Turn Bad News Into Good

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        01-10-2001        High      Low     Volume Advance/Decline
DJIA    10604.30 + 31.80 10611.60 10472.50 1.29 bln   1868/1052
NASDAQ   2524.18 + 82.88  2525.28  2376.49 2.46 bln   2558/1256
S&P 100   684.78 +  5.33   685.13   671.59   totals   4426/2308
S&P 500  1313.27 + 12.48  1313.76  1287.28           65.7%/34.3%
RUS 2000  475.45 + 11.50   475.45   461.54
DJ TRANS 3070.13 +  1.53  3081.34  3050.69 
VIX        30.15 -  0.64    32.09    30.01
Put/Call Ratio      0.57

The Markets Turn Bad News Into Good

Prior to the open this morning, NASDAQ futures were down 40 points on a CIBC World Markets downgrade of tech bellwether CSCO. But this type of scenario set up the perfect opportunity for the market to prove itself. And prove its relative strength it did. The NASDAQ traded at the low of the day right off the open and yesterday's momentum re-emerged, shaking off the bad news. Today's action not only represented the first back-to-back positive days for the NASDAQ this year, but also a glimmer of hope for what appears to be a stealth rally.

As more and more talk circulates about a possible NASDAQ bottom, one thing is certain: the NASDAQ has been attracting buyers even in the face of disconcerting news. While the euphoria over last week's rate cut has subsided, the technical outlook for the NASDAQ continues to improve. It has been lingering in deeply oversold conditions and the initiation of Fed easing policy is the exact catalyst that the market needed. With the economic effects of this recent rate cut six to nine months away, the effect on the market psyche is immediate. Just take a look at the NASDAQ's morning climb to 2521.

This 145 point climb came to a halt when John Chambers, CSCO CEO, essentially warned of a slowdown in revenues going forward. His concern is that revenue visibility will remain tough in the next quarter. The stock and the NASDAQ swiftly sold off on the news of Chambers comments which were disseminated on the Internet. But even this bad news for the market was short-lived as buyers were waiting in the wings to gain entry points. Volume was huge in CSCO today, 211 mln shares, which is the second heaviest volume for a stock in one day in NASDAQ history. CSCO rallied into the close and recaptured most of the morning's gains. Other networking stocks managed similar recoveries: RBAK(+5.44), NT(+0.31), and JNPR(+2.13) which traded in a $19 range today. NASDAQ advancers beat decliners 2-1.

While the markets whipsawed today on every bit of news, YHOO traded up fractionally in anticipation of its earnings report after the bell. The Internet portal announced in-line earnings of 13 cents for the 4th quarter as expected but all eyes were on the revenue guidance for the year 2001. On the conference call, YHOO stated that they foresee 1st quarter revenue to be lower-than-expected at $220 - $240 mln. This will be significantly lower than today's reported $310 mln for the 4th quarter, which was just shy of the expected $315 mln. In addition, YHOO severely cut its EPS for the full year 2001 to $0.33 - $0.43 from previous forecasts of $0.57. They cited slowing Internet advertising as the culprit. As a result of this shift in guidance, YHOO shares plummeted 20% in after-hours trading, finishing at $24.63. This is the first of the high profile NASDAQ stocks to come clean about the upcoming year's projections. MOT also matched its downwardly revised earnings estimates, but saw revenues fall short. Tomorrow's open will reflect the decline with NASDAQ futures currently down 32 points. The NASDAQ will be tested again to prove its resilience. Will buyers take advantage of the dip?

The California energy crisis continued to deteriorate today as PG&E, Pacific Gas & Electric, teeters on the brink of bankruptcy. Unable to obtain cash loans to pay its bills, PG&E took the drastic step to suspend its dividend and without any immediate government relief, the company may be forced into default. They also announced that their 4th quarter earnings will be delayed. This raises the issue of credit risk on the West Coast and a possible recession in California. Richard Berner, chief economic strategist with Morgan Stanley Dean Witter, clearly thinks California is going into recession and that the utility problem could spread outside of the state and beyond the sector.

Yet, the market remained strong. DaimlerChrysler(DCX) warns that it that it is out of cash. And the market remains strong. It is evident that the current economic conditions are beginning to wear on Corporate America. But, with the Fed on our side again, aggressively cutting rates, the market claws from its oversold levels. The INDU even rallied impressively into the close, finishing at 10604. Financials and consumer cyclicals led the rally: JPM(+2.25), C(+1.75), HD(+1.56), and UTX(+1.63). Both INTC(+0.75) and MSFT(+1.06) contributed as well.

The entire market is going to be curiously and nervously watching the earnings announcements as the season begins. We are at a very precarious point for the market. Reiterating what Jim said last night, we could see companies announce in-line earnings like YHOO, but have dismal outlooks for the coming quarters. With the time for pre-earnings warnings past, the market's strength will be tested as it digests Corporate America's 2001 economic outlook. While the NASDAQ has not given any clear signals of a true reversal or bottom, it is technically acting well. How it deals with YHOO's report tomorrow will be very telling. Tomorrow's open certainly will be soft. Look for tests of support on the NASDAQ at 2425 and 2400 where the buyers have been showing up. When initiating any trades, watch these key levels for upside intraday reversals like we saw today at 2425. Friday's PPI and Retail Sales reports will be closely monitored for further economic visibility and foresight into how the Fed will act at the next FOMC meeting. Traders will be positioning themselves tomorrow ahead of Friday's reports. On the earnings slate tomorrow after the close are ARBA, CREE, DCLK, and RMBS. To minimize overnight risk during this earnings season, consider closing positions during the day to avoid opening gaps based on the previous night's reports. Trade smart.

Matt Russ
Editor

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