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Market Wrap

What a difference an inauguration can make?

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         01-25-2001        High      Low     Volume Advance/Decline
DJIA    10729.50 + 82.50 10778.70 10633.40 1.25 bln   1588/1236
NASDAQ   2754.28 -104.87  2849.56  2753.37 2.29 bln   1580/2227
S&P 100   710.81 -  3.52   717.32   709.97   totals   3168/3463
S&P 500  1357.51 -  6.79  1367.35  1354.63           47.8%/52.2%
RUS 2000  499.00 -  3.25   502.25   499.00
DJ TRANS 2980.17 + 37.99  2993.77  2927.56 
VIX        24.98 +  0.42    25.44    24.59
Put/Call Ratio      0.63

Was that a 180 degree reversal of policy we saw today? You bet! The king of green and master of disaster, Alan (no tax cut) Greenspan said a tax cut is warranted and sooner rather than later. What have you been smoking Alan? That choke collar a little tighter since the Jan-20th inauguration? It would appear so since a more open and docile Fed chief did all but say "simon says" in his televised testimony to the senate budget committee. The markets turned mixed as the news was broadcast with the old economy stocks rallying on the possibility of a rate cut and the Nasdaq tech stocks appearing to roll over on a "sell the news" event.

Was that just too much good news for the Nasdaq or did the weight of a +27% gain finally prove too much to bear? According to many traders the Nasdaq is looking tired. After a +27% gain since the January lows, profit taking was due. With earnings hype losing its power as the number of major companies left to report is starting to dwindle the urge to sell becomes stronger. Couple that with the idea that our 50 basis point cut is history and we can only hope for a 25 point cut at best and you get more sellers than buyers.

The overbought Nasdaq also suffered from some negative news from Intel. A rumor making the rounds on Wall Street has Intel cutting prices by more than -40% on its line of Pentium III, Pentium 4 and Celeron chips. The other chip makers will be forced to follow suit and profits will be impacted across the board. This is a regular occurrence but analysts are fearing a virtual price war is forming to capture the few buyers still in the market for a new PC. NASDAQ:INTC lost -$1.75 on the news and the semiconductor index lost -29.

The selling was widespread with all the Nasdaq leaders, NASDAQ:CSCO, NASDAQ:MSFT, NASDAQ:DELL, NASDAQ:WCOM, NASDAQ:ORCL, NASDAQ:SUNW, NASDAQ:JDSU and NASDAQ:QCOM all weaker. The biggest losses came from the fiber sector with SDLI dropping -33 on post earnings depression and frustration that the JDSU merger has been delayed again. Corning, NYSE:GLW, dropped -13 after warning that future earnings could be impacted by slowing telecom spending. NASDAQ:CIEN fell -12 after being painted with the same sector brush. NASDAQ:JDSU announced earnings after the bell that beat the street by two cents but said revenues for the next quarter would be only a little better than this quarter. JDSU was trading down about -3 in after hours.

NASDAQ:QCOM announced earnings after the bell that beat the street by a penny. QCOM said it had written down almost all of the GSTRF investment and they were comfortable with estimates going forward. QCOM was one of the few stocks that traded up in after hours.

The litany of warnings continued with NASDAQ:SAWS beating by two cents but warned of an industry slowdown. NASDAQ:NTRO beat estimates but warned of a revenue decline. NASDAQ:ASYT announced earnings of $.42 vs estimates of $.51 and said a dramatic slowdown in the semiconductor sector had impacted revenues. NASDAQ:BVSN missed estimates by three cents and was knocked down to $12 in after hours. They said higher costs and slowing global sales led to the miss.

Probably the worst announcement after hours today was NASDAQ:PMCS which announced inline with estimates at $.34 but had harsh things to say about the future. PMCS said 8 of their top ten customers were expecting significantly lower revenues and therefore PMCS could see a -26% drop in revenue to $160 million. PMCS dropped from $95 to $65 (-$30) in after hours after being halted for some time. They said CSCO sales were slowing and that brought a drop in CSCO after hours as well. AMCC fell -$10 in sympathy.

The key today was the testimony and even though the Fed chief said some pretty bearish and market friendly things the shock was so bad that traders did not know which way to turn. Just last month Alan took a strong stance against a tax cut, preferring instead to pay down the debt with the surplus. Today, after saying that the economy had suffered a very dramatic slowdown and current growth was near zero, he embraced a tax cut as a way to restart the sagging economy. He did not enforce any specific tax plan but the White House wasted no time in jumping on his bandwagon. In a press conference immediately after the testimony they praised the Greenspan endorsement and added their political spin as well. This was a landmark testimony for Greenspan. This was a marked turn around in posture and he was absolutely bearish on the economy. Analysts were torn between being worried about the new monster in the closet or celebrating the possibility of another rate cut. Greenspan said consumer confidence was only slightly above recession levels and tax cuts alone would be too late to rescue the economy before consumers lost faith. This would seem to insure a rate cut next week but again traders appeared to become more worried about the state of the economy than the possible rate cut. His comments that the current economic weakness could slip even more were not received well.

Ordinarily, the market would be positive with almost a sure rate cut next week. Instead, after the severity of the PMCS warning tonight we could be in for a rocky Friday. Fiber is down, chips down, networkers down, PC makers down. It will take more than a rate cut promise to bring the Nasdaq back to life before the open on Friday. Investors have been buying bad news for the last two weeks with bullish abandon. The double shot of Greenspan bearishness and the flood of bad news led by PMCS tonight could cause a serious problem. Now here is the catch. If the outlook for Friday is looking so severely negative tonight and sentiment turns it around and the Nasdaq trades positive on Friday, then back up the truck. A major warning, coupled with major bearishness and another rebound? This would be a serious sign to me that the bulls were in control. If traders buy this possible dip and push us back over 2800 then the rally is on! Talk about a sign from the heavens that would be it. With the Nasdaq futures down -50 and the S&P futures down -5 we will need a lot of bullish sentiment to appear before morning. Still, Friday is profit taking day and all these events together could provide some interesting volatility. In any case I would buy any rebound after 3:PM if bargain hunters start to appear. Rate cuts are a powerful antibiotic for earnings woes and traders will be lining up to get their shots next Wednesday. That line is likely to start Friday afternoon.

Enter passively, exit aggressively!

Jim Brown

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