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Market Wrap

No Valentine For Greenspan!

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        02-13-2001        High      Low     Volume Advance/Decline
DJIA    10903.30 - 43.50 11012.90 10894.30 1.07 bln   1604/1463
NASDAQ   2427.72 - 61.94  2554.65  2427.47 1.73 bln   1632/2124
S&P 100   684.75 -  7.31   695.96   684.04   totals   3236/3587
S&P 500  1318.80 - 11.51  1336.62  1317.51           47.4%/52.6%
RUS 2000  502.57 -  2.78   510.94   502.15
DJ TRANS 3046.46 +  7.23  3068.29  3036.18 
VIX        24.62 +  0.07    25.09    24.03
Put/Call Ratio      0.74

No Valentine For Greenspan!

After gapping up +60 points at the open the Nasdaq bled points the rest of the day after Greenspan failed to stimulate traders hopes for another rate cut. The Dow failed to hold over 11000 for the 11th time since September. Each time the Dow has broken 11000 it was only able to hold for a few minutes before selling off again. Are we having fun yet?

This was a depressing day in the markets. Actually I was surprised to see the severity of the drops over the last five days. I left for business in London last week with the Nasdaq hovering just under 2700 and I come back to find a -250 point drop. Now, come on guys, I leave you alone for a week and you let Austin's bearish stance erode what was left of our bullish market sentiment. I guess we need to convince Wendy to start editing his articles. Of course I am just kidding but we actually did get some hate mail about his periodic use of her in his articles. Now back to the markets, this was a depressing day. The bear trap rally which started yesterday afternoon brought back nightmarish memories of the dozen or so we suffered in the last three months. Down 3-4 days, up 1, down again.

The major reason for the rally failure was the speech by Greenspan on TV today. Alan was optimistic the economy had bottomed and the worst was behind us. That sounds like good news but for traders it was actually the kiss of death. No "aggressive" Fed, no surprise rate cuts before the end of March meeting. Statements like "not in recession", "economy likely to rise by year end", "2000 year end problems did not continue in 2001" all pointed to a calm Fed chairman with no urgency in his message.

This optimistic speech was like pouring water on a struggling campfire. With no surprise rate cut expected from the Fed there is no catalyst to move the markets. The economy is recovering but very slowly. Earnings are almost over. With the Fed meeting still over a month away there is no reason to rally. Volume is wimpy at only 1.69 billion on the Nasdaq and barely a billion on the NYSE. Declines are beating advances and down volume was accelerating into the close. Buyers are on strike and sellers are increasing.

Part of the afternoon race to the exits was caused by JDSU. The JDSU/SDLI merger was completed today and both had gapped up at the open due to fund managers having to re-balance their portfolios and buy more stock. Late in the afternoon JDSU said they would issue guidance after the close and the short sellers jumped on both stocks. The guidance turned into an earnings warning that reduced expectations for the full year ending in June to $.74 which is less than the $.82 analysts expected. The decrease was blamed on "continued uncertainty in carrier capital spending prospects and customer inventory adjustments as well as a lower level of near-term sales visibility than the company has experienced in recent periods." Read that as sales are slowing and previously packed channel inventories are not going away. Part of the drop was also from the loss of income from the assets sold to Nortel Networks in order to get the deal approved. In after hours trading JDSU stock was slightly lower and holding on decent volume. It remains to be seen what will happen on Wednesday when retail trading on the combined company commences. The buying by index fund managers could offset any negative sentiment.

Adding to the negative sentiment today was a downgrade of INTC, BRCM and TXN by CSFB. Saying that a substantial recovery by INTC in 2001 was not likely they lowered their price target too only $33 and issued a "hold" rating on all three stocks. INTC, at a Robertson Stephens's tech conference maintained its earnings estimates and insisted that chip demand would pickup in the second half of the year.

AMAT announced earnings after the close and beat estimates by four cents but then had a horrible conference call which lowered estimates going forward. The stock rallied +$2 on the initial news but dropped to $40.50 after the call. Citing a book to bill ratio of less than 1 on orders going forward and an increase in cancelled orders to $150 million, the call was anything but positive. KLIC also announced a series of cost cutting measures meant to deal with slowing sales. KLIC dropped to $12.56 in after hours.

SCMR also announced earnings that beat estimates but lost their initial gains after the conference call. See a pattern here? Analysts see increasing competition from CIEN and Alcatel and were surprised the conference call was not more negative. There was doubt about earnings strength going forward. SCMR has been beaten severely recently dropping to $22.50 after a 52-week high of $172. The severity of the beating probably led to the lack of a further sell off.

The pattern we see in the news events above is still a negative forecast in earnings going forward. With earnings trending down and the Fed on the fast track investors were induced to buy stocks. With the Fed now saying "we are expecting 2% growth and 2% is ok" there is no rate cut urgency. With no earnings and no rate cut there is no reason to rally. With Moody's forecasting today that defaults on junk bonds from telecoms are likely to double to an 11% rate there appears to be plenty of weakness left in the economy. These are not little companies. Ratings that were cut due to financial worries include Nextel, Global Crossing, Lucent, AT&T. If these companies can't pay on their bonds how can they buy more telecom equipment? That hits fiber optics, switches, routers, chip makers as well as general equipment manufacturers. This may explain the overall weakness in the markets. There is a pile of money still on the sidelines but it is showing no indications of moving into the markets. The buying urge is over and the selling is showing signs of increasing.

There is a camp that still expects a rally soon. They are pointing to the market's ability to discount future events well in advance of actual results. The series of higher lows on the Dow has been caused by cyclical stocks which are rallying far in advance of the expected rebound. These investors will be looking for evidence of the continued rebound in the Business Inventory report on Wednesday, Import/Export Prices on Thursday and the PPI and Industrial Production reports on Friday. If these reports show a bottoming or even a slight rebound then the Dow could manage a breakout over 11000. Whether that will cause the Nasdaq to rally is uncertain. With tech earnings still trending down, there is no urgency to buy the dip. Commercial traders are still net short at historically high levels. They have been right for months and show no signs of flinching.

What should traders do? For the last two weeks I have suggested that call players stay out of the market under 2700. If you have followed my advice then you are sitting comfortably in cash. If something changes in the market then there is plenty of upside available over 2700. If we continue down then I will revise the number based on what the market gives us. Obviously we are only about +175 points above the 2251 low set on Jan-3rd. There is a possibility of us testing that low again soon. I said possibility! There is a strong sense of denial among traders. CSCO at $28, SUNW $25, DELL $22, GLW $39, CIEN $69, NOK $28. These are prices that the buy and hold community feels cannot go any lower. I caution them to only look at LU, $13.50, when making that decision. My point here is the huge amount of sidelined money is drooling at these prices but still waiting for the starters gun. If something happens to cause the sentiment to swing positive again the money could flow quickly. Until then call players should wait and watch. Put players - you know what to do, just do it carefully!

Enter passively, exit aggressively!

Jim Brown

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