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CSCO recession spreads to Intel!

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         02-20-2001        High      Low     Volume Advance/Decline
DJIA    10730.90 - 68.90 10903.20 10727.50 1.11 bln   1321/1755
NASDAQ   2318.35 -107.03  2442.99  2317.77 1.88 bln   1308/2513
S&P 100   661.36 - 14.06   679.08   660.85   totals   2629/4268
S&P 500  1278.94 - 22.57  1307.16  1278.44           38.1%/61.9%
RUS 2000  491.14 -  8.14   500.36   490.44
DJ TRANS 2977.46 - 17.32  3015.44  2972.11 
VIX        27.50 +  2.42    27.82    25.35
Put/Call Ratio      0.70

The recession CSCO CEO John Chambers spoke about over the weekend has now spread to Intel. Nasdaq:INTC said today that they were instituting cost cuts that would save several hundred million dollars this year. They are cutting some costs by as much as 30% due to an increasingly difficult economic environment. The tech sector finally gave in to the continued bad news and the remaining buyers gave up in disgust. Thank you John Chambers!

There was not much to brag about in the markets today. Bulls were constantly bombarded by downgrades on any sector that was showing signs of life. The fiber-optic community led the hit parade as they got hammered again with a round of negative news.

Nasdaq:JDSU hit a low of $32 after UBS Warburg cut them to a neutral from a strong buy. A Lehman analyst cut revenue targets for JDSU on the basis of slowing sales and rising inventory. Corning, Nyse:GLW, dropped another -10% to $30 and Nasdaq:CIEN lost -$5 to $77.50.

The Lehman analyst also cut all the communication chip stocks and the resulting losses were serious. He said visibility going forward was poor and he expected all three of the majors to warn. He cut estimates by about -18% on all three. Nasdaq:BRCM lost -9.75, Nasdaq:AMCC -5.50, Nasdaq:PMCS -7.88. PMCS was stated to be the least likely to warn. CSFB analyst Charlie Glavin, also downgraded PMCS to a hold and AMCC to a buy due to soft March orders.

The selling was not limited to tech stocks. Brokerage stocks took a hit after comments about slowing volume and general economic uncertainty. Keefe Bruyette & Woods issued rating changes and cautions on the major brokers saying account growth was slowing and trade volume was anemic. Nyse:LEH took a huge hit dropping -$7 and Nyse:GS was only slightly better at -$5.50. Schwab was the least impacted with only a -$1.14 loss. Schwab was hit last week after saying they would have trouble meeting estimates.

Financial stocks in general were sold on fear of a recession. Banks were dropped on fears of loan losses and weak loan demand. Citigroup, JPM and BAC all fell on a downgrade to Bank One by a Goldman Sachs analyst. Goldman said consumer loan portfolios would be the next area to watch in the banking community.

Airline stocks also suffered after Merrill Lynch cut earnings projections for six carriers. UAL, AMR, ALK, CAL, NWAC and DAL, all are victims of deteriorating consumer sentiment and could see lower demands for air travel if the economy continued slowing. Flat corporate profits and continued layoffs would slow demand for air travel.

About the only sector making progress today was the retailers. After earnings from Wal-Mart and Home Depot the sector was energized on hopes of strong results from other companies announcing this week. Wal-Mart beat the street by a penny and logged its first $2 billion profit quarter. They called it challenging but still beat the street. Home Depot announced earnings in line with estimates but then warned that next quarter profits may slip. ANF announced after the close and beat estimates by two cents. Historically retailers do well in late February and March and even in this bear market they appear to be holding their own.

Agilent, Nyse:A, announced earnings after the close and followed the scripted program perfectly warning that sales would be substantially lower and growth would be only 10%-15% for the full year. Analysts had expected $29 billion in revenues and the company guided them lower to only $12 billion. A serious shortfall! The same reasons were given, over capacity, excess inventory and no sales. They did not actually say "no sales" but read between the lines and that is what you get. The stock was hammered in after hours trading and fell to a low near $41 after closing at $44.26.

The Nasdaq closed at its low of the day and only +67 points over the intraday low for the year of 2251. Support at 2400 failed shortly after the open and the index suffered all day. The negative sentiment was so thick it could have been smog. Up volume on the Nasdaq was only 277 million and down volume was 1.5 billion. With today being a continuation of last Friday the 5:1 ratio of down to up volume is getting very close to a capitulation event. The only holdup was the volume. At only 1.8 billion for the Nasdaq it was not a blowout event. Without a blowout there will only be a weak bottom. There was no bargain hunting at the close and it was the lowest close since Jan-2nd at 2291. There were just no buyers to offset the few sellers.

If we are going to bounce then Wednesday may be the day. The Agilent earnings tonight sounded just like the others in the past weeks and may not impact the market as much as some new unexpected disclosure. We are very close to important support at 2300 and again at the year low of 2251. This support along with the serious oversold conditions could trigger the bounce. The keyword here is "could."

The economic report to watch tomorrow will be the CPI and most analysts are not expecting a blowout like the PPI last week. The expected number is +0.3% with the core rate at +0.2% The problems brought about by the PPI last week include the possibility of stagflation and a calming of Fed aggressiveness. A benign CPI could re-ignite the Fed and increase odds of a larger rate cut at the March-20th meeting. A blowout CPI could cause some serious problems as it would be seen as confirmation of the PPI and a Fed on hold again. I can't imagine the Fed staying on the sidelines with every earnings report chock full of problems but then again I am not Greenspan.

As traders we need to be wary of this market. While it is totally rational to expect a bounce any day, what we expect is immaterial. As long as everybody is sitting on the sidelines waiting for the bounce, it will not happen. Until traders decide stocks are too cheap and start spending money again then we should wait. Remember, we are not trying to pick a bottom. We want to buy the bounce not the drop. While I feel that technically we are due a bounce anywhere between here and 2250 there are serious challenges to this thought process. With two of the biggest companies on the Nasdaq, CSCO and INTC, making horribly negative comments, there is no reason for traders to buy stocks. SUNW has an analysts meeting on Thursday and many expect them to warn. The sentiment is very negative and can get worse. Until something changes this sentiment there is not going to be a rally. It could be a benign CPI tomorrow or another surprise rate cut. We do not know what the catalyst will be but we have to have it to stop the current down trend. Either way I do expect a trading rally soon. Now repeat after me, Low CPI, Low CPI, Low CPI.....

Enter passively, exit aggressively!

Jim Brown

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