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Another Warning Digested

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        01-22-2001        High      Low     Volume Advance/Decline
DJIA    10578.20 -  9.35 10634.40 10509.90 1.13 bln   1610/1241
NASDAQ   2757.91 - 12.47  2789.63  2722.96 2.04 bln   1992/1813
S&P 100   703.17 -  2.06   710.35   698.39   totals   3602/3054
S&P 500  1342.90 +  0.35  1353.59  1333.84           54.1%/45.9%
RUS 2000  490.15 +  2.06   490.69   485.99
DJ TRANS 2969.85 + 16.56  2983.01  2933.37 
VIX        25.94 -  0.35    27.38    25.83
Put/Call Ratio      0.46

Another Warning Digested

The broader market averages spent the day in consolidation mode despite another earnings warning from the tech sector. The action felt as if the majority of market participants were on the sidelines, waiting for this week's round of earnings reports and guidance from Mr. Greenspan.

Dell Computer (NASDAQ:DELL) warned this morning that its fourth quarter profits would miss estimates by as much as 30 percent. The direct seller of PCs blamed its shortfall on the economic slowdown and the company's strategy to cut prices in an attempt to gain market share. The news from Dell was not all that surprising, and many market participants had already discounted the earnings miss into Dell's share price. We can conclude this much because Dell's stock didn't blowup this morning in the wake of the warning. In fact, shares of Dell finished just -0.13 cents lower at $25.50. Over the last several weeks, it's been interesting to witness the market's reception to earnings warnings and the distinct shift in sentiment. It was not too long ago that the Intels (NASDAQ:INTC) and Dells of the world would blowup after warning of lower profits. However, the shift in market psychology, thanks in part to the Fed's cut earlier this month, has allowed for the market to digest bad news fairly regularly and easily.

Nevertheless, Dell's earnings miss does reinforce the fact that risk remains in certain areas of the tech sector. Although its stock didn't get taken apart by the bears, Dell's warning can serve traders as a reference point when forming their top-down or macro views and opinions.

Although Dell's warning didn't inflict widespread damage in the tech sector, it did help to spur a rotation back into the defensive sectors of the market including drug, insurance and energy names. That rotation back into the blue chip, defensive names helped to support the Dow Jones Industrial Average (INDU) despite a poor forecast from American Express (NYSE:AXP). The financial services firm met Wall Street's consensus estimates when it announced profits this afternoon, during normal trading hours, but guided analysts to expect earnings growth at the lower end of its estimates for 2001. As a component of the INDU, AXP did add extra volatility to the blue chip index this afternoon, but its losses were offset by gains in energy and cyclical components.

The near-term resistance level to be cognizant of for the INDU is 10,800. Bullish earnings reports from the drug companies and energy firms would help drive the INDU past that level this week. If the INDU does break above 10,800, we're likely to see an advance to 11,000. On the flip side, if the INDU sags, we're likely to see a retest of support near the 10,300 - 10,400 range. The buyers have been showing up around those levels, and barring any major blowup, should continue to do so. If the buying-near- support-levels pattern continues, traders can use any pullbacks in their favorite INDU components to add bullish exposure.

The ongoing rotation in the broader market is causing the INDU to churn, and churn. The blue chip index continues to find its way back to the 10,500 level, which is becoming an extremely efficient area. What that means is it's difficult for traders to game the INDU's direction because of all the time and volume that has been working around the 10,500 level. Think about this: the INDU has been rotating around 10,500 for almost two years. That's a very, very long time to spend consolidating. One might speculate that once the INDU is ready to breakout it's going to BIG! But the question remains when exactly that breakout finally materializes.

As I previously wrote, Dell's warning did cause a bit of trepidation among tech investors and traders. However, the Nasdaq Composite (COMPX) finished lower by only -12.47 points on very light volume. The bulls will argue that today's session served the purpose of consolidation. After all, the COMPX has rallied over 10% thus far in 2001. And as every steer knows, pullbacks on light volume are a natural part of every bull market. The bears, on the other hand, will continue to point to the deteriorating fundamentals in the tech sector as seen in none other than Dell. However, the Fed is on the side of the bulls, which is why I feel the path of least resistance for the COMPX is to the upside. And if the COMPX can close above the 2,800 level in the coming days, then I feel 3,000 will be reached in short order.

The Conference Board, a business research network, released its Leading Economic Indicators for the month of December. The leading indicators are designed to forecast economic activity about six months out. The index of leading indicators fell by 0.6 percent during December, while estimates called for a lower 0.3 percent decline. Yet another data point for the Fed to examine at its meeting next week. Before the Fed decides on the size of its rate cut, it will need to digest the Employment Cost Index (ECI) report scheduled for release Thursday morning. The estimates call for a 1.1 percent rise. Remember, the Fed's reason for raising interest rates last year was to prevent inflation, and the ECI is the best measurement of inflation in the labor market. A stronger-than-expected ECI number could lead to the Fed dropping rates by only 25 basis points, instead of the full 50 basis point cut which has already been factored into the Fed Funds Futures.

Greenspan will be testifying to the House Budget Committee this Thursday but is unlikely to hint ahead of next week's meeting. Nonetheless, traders should be aware of the Doc's testimony Thursday and its implications on Bush's proposed tax cut along with future Fed policy.

To come full circle, it seems appropriate to end with dismal earnings news, but not from Dell. After the bell, Texas Instruments (NYSE:TXN) reported fourth-quarter profits that missed estimates by two pennies and the chip maker warned of lower revenues in the first quarter of 2001. Shares of Texas Instrument dipped almost three dollars in the after hours session and weighed on the Nasdaq futures, which were down -23 points at time of writing. However, many analysts felt estimates for the chip maker were too high and expected Texas to report near the low-end of the range. That said, tomorrow morning's open in Texas, the broader chip sector and the Nasdaq will depend upon how much discounting the market had already done. The way we filter out the noise is to pay heed to price action, regardless of the news.

Trade smart and manage risk!

Eric Utley
Assistant Editor

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