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Market Wrap

Nasdaq makes it three in a row?

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        01-11-2001        High      Low     Volume Advance/Decline
DJIA    10609.50 +  5.20 10638.00 10552.60 1.36 bln   1640/1255
NASDAQ   2640.57 +116.39  2661.93  2495.01 2.84 bln   2757/1163
S&P 100   693.40 +  8.62   696.47   679.45   totals   4397/2418
S&P 500  1326.82 + 13.55  1332.19  1300.80           64.5%/35.5%
RUS 2000  483.86 +  8.41   484.53   474.45
DJ TRANS 3051.30 - 18.83  3073.72  3045.53 
VIX        28.69 -  1.46    31.98    28.41
Put/Call Ratio      0.48

The Nasdaq finally closed positive three days in a row for the first time since Labor Day. Unfortunately it may be very difficult to make it four. The big news after the close was not earnings but warnings. Hewlett-Packard and Gateway pulled drastic earnings warnings out of their hat to hammer stocks in after hour trading. Other than that it was a great day! Stocks were up across the board with the exception of the Dow until late afternoon when even it rallied to close modestly positive. The fast movers on the Nasdaq were breaking out of resistance and starting to form new up trends.

Not all is rosy unfortunately. HWP announced a huge earnings warning after the close that reverses a earnings affirmation that they gave just two weeks ago. This is almost unheard of in investing circles. The strong language could have caused severe damage to the PC sector and all the sectors that feed of PC equipment. They cited "significant changes in market conditions." "Customers extremely cautious about IT spending" and "no material improvement until at least April." Three weeks ago that would have knocked the Nasdaq back to 1997. HWP stock got positively hammered after the close for a whopping -$2 drop. -$2 ??

Not to be out done Gateway also announced an earnings warning for all of 2001 citing "serious deterioration of PC demand from retail and commercial customers." Wow, a double whammy! GTW and HWP on the same day. GTW dropped -$3 in after hours! Only -$3, boy I bet that hurt!

After the YHOO warning on Wednesday it dropped as expected to a low of $24.12 but bounced off the bottom to close at almost $26 and a loss of only -4.50. On a day you would have expected the Internets to do lousy all the majors rallied. AMZN +.50, EBAY +1.56, CMGI +.50, SFE +.69, SONE +1.35, VRSN +8. B2B, B2C, infrastructure, e-tail all finished higher.

Chip stocks and cell phone makers also rallied. Considering the warnings from Motorola you would have expected them to be down. Instead NOK added +2.44, ERICY +1.63 and I won't even go into the chips stocks but all were up strongly. PMCS, AMCC, AMAT, KLAC, AMAT, NVLS all up strong. Strong on a day that Merrill said INTC and AMD estimates were too high. Do you see a trend forming here?

CSCO was downgraded by several analysts after CEO Chambers said they were not immune to the slowdown and things could be a little rough going forward. Multiple downgrades after a warning from the CEO would normally have investors running for puts. CSCO gained almost +$3 today as investors decided that all the bad news was already priced in. Investor sentiment is obviously changing from the "take them out and shoot them" feelings from the last month.

Nortel announced it was cutting about 4000 jobs after being hit by a slowdown in telecom spending. It gained +2.12 on the news. The fiber optic sector did not crash.

DCLK announced earnings after the close and hit estimates but then warned that the rest of the year would be much worse. It gained +1.50 in after hours trading.

RMBS reported earnings that were a penny light and the stock dropped over -$4 in after hours. SDRAM chip prices are falling and because of how they account for income on a delayed basis they have yet to feel the pain of the slowdown. This led analysts to forecast that the next couple of quarters would be a problem and that is why they fell.

ARBA announced earnings that beat estimates by +150%. OK it was $.05 vs $.02 but that percentage just sounded so good! Even with revenues increasing +625% over the same quarter last year and increased guidance going forward ARBA lost -.31 in after hours trading. It was up over +35% in the last three days so I am sure that was just profit taking. Still ARBA has undoubtedly set the tone for the B2B sector going forward.

The SOX closed over resistance that has held since last November. But PC sales are slowing! Did I miss something? This bullish move on a bearish sector comes even after the Motorola warning. Investor sentiment is changing. Investors have decided that PC sales will be better eventually and are scooping up these stocks at bargain prices.

The NDX closed over 2500 and is poised to challenge the next resistance at 2627. The highs on tech stocks dating back to Dec-20th are falling left and right. Defensive stocks are heading south at a high rate of speed even when new highs are beating new lows by 10:1. Advance declines have been mostly positive for the last two weeks even though the indexes have been showing losses. The term stealth rally has been abused by talking heads on the networks but that is exactly what has been happening.

Have you noticed the new trend of afternoon rallies instead of afternoon selling? Retail traders buy in the morning, institutional traders buy after lunch. Money IS coming into the market. Bulls are coming out of the wood work. Joe Battapaglia said today that he thought the Nasdaq would gain +70% this year. Easy there big fella! Lets don't jinx this three day rally with a Nasdaq 4500 call just yet! To temper this bullishness Phil Roth at Dean Whitter said he expected new lows on the Nasdaq soon. Who do you want to believe?

Volume today was outstanding at 2.8 billion on the Nasdaq and 1.36 bil on the NYSE. Stocks are moving up on bad news. Dare we call it a real rally? If it looks like a duck, walks like a duck and quacks like a duck it must be a duck. The confirmation in my opinion is the futures tonight. Currently both the S&P and the Nasdaq futures are UP! Yes, I said up! HWP and GTW both announced horrible warnings and the futures are up! The Nasdaq is up +17% since last Wednesday's low and the futures are still up after a warning. No signs of profit taking and no terrified rush for the exits. Yes, ladies and gentlemen, sentiment has changed. The historical rally for this week started one day late but has finally surfaced in spite of terrible negative news. Funds are putting money to work in the markets and shorts are running for cover. Has investor nirvana arrived?

Before selling your kids to raise cash be advised there is likely another dip in our future. I would wait for it and I would buy it. I would not rush out in the morning if the futures hold and buy the open. Friday could provide investors with the incentive to take some of those profits and go home for the weekend gloating. That is fine, let them gloat and we can gloat that we picked up some stocks a little cheaper. Did I mention that we have the PPI Report and Retail Sales Report Friday morning? I can't imagine any numbers that could blunt this incredible bullishness but stranger things have happened. It has been my experience that when things look too good too be true, they probably are and something out of the blue drops the market for a loss. Let's hope that this time it really is our turn to make money and laugh at the bears. The Fed is on our side, at least until the PPI in the morning. Consider any dip a buying opportunity but buy selectively! Bargain hunters are likely to come back into the market at the close expecting a continuation rally next week. That would be a signal to buy if you see that starting to happen. With option expiration Friday next week you can probably pick up some January options slightly out of the money and cheap if we get that dip. Aggressive traders could try some lottery plays there. I love expiration week!

Good Luck, Sell too soon!

Jim Brown

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