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Market Wrap

Blame it on CSCO!

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        02-01-2001        High      Low     Volume Advance/Decline
DJIA    10983.60 + 96.20 10983.80 10864.20 1.09 bln   1718/1375
NASDAQ   2782.79 + 10.06  2796.89  2742.44 1.78 bln   1820/1969
S&P 100   719.70 +  4.50   719.70   711.25   totals   3538/3344
S&P 500  1373.47 +  7.46  1373.50  1359.34           51.4%/48.6%
RUS 2000  508.94 +  0.60   508.94   505.23
DJ TRANS 3127.82 + 20.06  3129.01  3091.99 
VIX        23.99 -  0.30    25.69    23.90
Put/Call Ratio      0.53

That was not much of a dip this morning and if you missed the first one there was a second chance around 2:PM. Still the trading range on the Nasdaq was only 54 points on the lightest volume day of the year. The Dow fell at the open as well after the NAPM report caused worries that the economy was in worse shape than previously thought. After wandering aimlessly for most of the day the Dow headed for 11000 around 2:PM and came very close.

The NAPM this morning was as close as you can get to a smoking gun on the theory that we are already in a recession. At 41.2 the index is only +1.2 over the commonly agreed recession level of 40. This is the lowest level in a decade. Below 50 is considered a contraction and below 40 a recession. The new orders component is definitely at recession levels at 37.8, this is even lower than the 38.1 we hit during the 1991 recession. The prior low was in the 33 range during the 1982 recession. 26% of the 350 firms polled in this survey said inventory levels were too high and orders were still slowing. The "it can't get any worse" crowd is seeing the light that maybe it really can get worse.

This severely depressed NAPM index put the dampers on the market until traders decided that the worst case was more rate cuts and a tax cut. Once the smoke cleared the bargain hunting began. It did not hurt to find out from the Dec-19th FOMC minutes that the "surprise" rate cut was not really a surprise. They planned it at the December meeting. If you remember they shifted their bias to a weakening economy but did not cut rates. The minutes said "The committee should be prepared to respond promptly to indications of further weakness in the economy." The evidence of weakness came less than two weeks later when the NAPM report for December reported a large decline in activity. This is the same report that came in even weaker today. The next day the Fed head convened a conference call of the committee and approved unanimously a 50 basis point cut. Some members argued during the December meeting that "enough evidence of further weakness already existed to warrant immediate action." They agreed to hold off as long as the committee agreed to act promptly in the coming weeks should any further weakness appear. This unanimous agreement that the economy is rapidly decelerating should keep the Fed on the rate cut program for several months in the future. Many analysts expect another surprise rate cut before March. That would be a great day to be long!

Another high profile layoff is looming from GE. Business Week said today that GE will layoff 75,000 employees in an effort to trim costs resulting from the economic slowdown. GE dropped at the open on the news but then issued a press release saying that, yes, they were planning some layoffs but the 75K number was wrong. They did not say what the number was but in corporate speak it simply means that they will not layoff EXACTLY 75,000, maybe 74,999 or lower or even 75,001 or higher. Just not exactly.

Even with the manufacturing meltdown today most traders said they were more concerned about the CSCO earnings on Tuesday. After CEO John Chambers made increasingly bearish comments twice in the last month, there is some serious dread about the CSCO guidance going forward. Nobody is actually whispering that CSCO will miss estimates but there is rampant speculation that the guidance going forward could be bleak. With CSCO being the proxy for the entire tech sector any serious change in guidance will not be appreciated. Still, everyone knows there is a slowdown and as long as there is not a disaster investors will breathe a sigh of relief and start buying techs again.

The Nasdaq did finish positive with 105 new highs and only 17 new lows but there was no widespread buying binge. Nasdaq:NTAP soured the mood of the tech market this morning when CSFB downgraded them citing stronger competition from multiple companies starting with EMC. NTAP dropped over -$7 on the news. Chip stocks also weakened with Nasdaq:AMCC, Nasdaq:PMCS, Nasdaq:BRCM, Nasdaq:NVLS falling ahead of the Nyse:NSM warning after the close. National Semi said excess inventory at customer locations and slowing consumer sales would take about -33% off their earnings.

After the close CMTN also warned that they would suffer a substantial sequential decline in revenue for the next quarter. CMTN, a DSL equipment maker, said they expect challenges to increase in 2001 and future buying patterns were providing limited visibility at this time. Translation, "we don't know what the heck is happening but nobody is buying anything!"

APCC missed estimates after the close by three cents and then said they were rescinding all guidance going forward. They said the forecast was pretty bleak and analysts could forget any prior estimates. See translation in previous paragraph.

Is the recession still in front of us or are we already bottoming out? With home sales and consumer sales rising slightly many analysts feel the worst is over. They are still in the minority however and that is causing many investors to wait on the sidelines. With the non-farm payrolls on Friday morning many appear to be sitting on their cash and waiting for a sign.

As I said on Wednesday, I expected a dip on Thursday and possibly Friday morning but be ready to buy the dip or a breakout above 2870. The Dow is only 27 points away from 11,000 and serious resistance. The VIX is only .22 off a four month low which is a bad sign. It is signaling that there may still a dip to come. Most serious market drops come when the indexes are testing old highs and 11000 has held every time since September.

There is no reason for the markets to fall other than a disaster from CSCO or a Jobs Report tomorrow showing several hundred thousand more jobs than the 90,000 expected. If the Dow does break 11,000 and hold it would be a major buy signal, as if an aggressive Fed and tax cuts were not enough. Friday should be real interesting with the next milestone CSCO earnings on Tuesday. I am still in "buy the rebound" mode but we have not really seen a dip yet. This is a really dull market and dull markets tend to end abruptly one way or the other. Look for a possible spike at the open followed by profit taking. If bargain hunters appear in the last hour I would consider joining them. According to Austin at IndexSkybox.com the commercial traders are still shorting at historical levels. If the Dow breaks out it could cause a huge short covering rally.

Enter passively, exit aggressively!

Jim Brown

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