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Market Wrap

Now that is really painful!

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        02-22-2001        High      Low     Volume Advance/Decline
DJIA    10526.80 +  0.23 10566.20 10372.40 1.35 bln   1137/1898
NASDAQ   2244.96 - 23.98  2291.69  2185.91 2.47 bln   1289/2464
S&P 100   647.29 -  0.31   650.96   634.11   totals   2426/4362
S&P 500  1252.82 -  2.45  1259.94  1228.33           35.7%/64.3%
RUS 2000  477.26 -  6.25   483.52   474.62
DJ TRANS 2918.76 - 25.71  2953.02  2900.63 
VIX        29.77 +  0.36    40.07    28.70 
Put/Call Ratio      0.78

The Nasdaq Composite staged a short-lived rally early Thursday but ended lower for the fourth consecutive session as investors unloaded shares of tech stocks on each bounce. The Dow Jones Industrial Average, on the other hand, managed to post a fractional gain.

At its lowest level Thursday, the COMPS fell beneath levels not seen since way back into December of 1998. The COMPX fell right below its Jan. 3 intraday low of 2,251, which came just before the Fed's surprise interest rate cut, with very little opposition from the bulls. The COMPX's counterpart, the Nasdaq 100, which the QQQs mirror, fell below the 2,000 level for the first time since June of 1999.

Virtually all tech sectors were in the red Thursday, with the exception of select pockets of strength in networking, led by shares of Cisco Systems and certain hardware stocks. A host of Internet stocks and software-related shares bore the brunt of selling. What was interesting, however, was that while the tech sector stumbled, the broader market didn't find any bids. There were minor gains in insurance, health care and oil stocks, but there was no pronounced sector rotation or aggressive buying in any stocks.

Professional market participants are still calling for a capitulation event, which may allow for the broader market to discount the deteriorating fundamentals in the tech sector. There is a need for a wash-out of ALL the weak hands, which many expect would allow for the market to stage a significant rally.

Company Specific News

Efficient Networks (NASDAQ:EFNT) gained roughly 86 percent after the company agreed to be acquired by Siemens AG, a German firm. Siemens said it would pay about $1.5 billion for Efficient. The news is somewhat of a bright spot in the tech sector and may spark merger and acquisition activity within the networking sector, which would be a very welcome sign to investors.

BEA Systems (NASDAQ:BEAS) got clobbered in trading today - its shares lost more than 18 percent this ahead of the firm's earnings report after the bell. The business infrastructure software provider's fourth-quarter results beat estimates by 1 penny. First Call's consensus was for BEAS to earn 9 cents per share and the firm actually recorded 10 cents in profits. However, the numbers were not enough to appease Wall Street, and despite company officials providing bullish guidance going forward, shares of BEAS lost an additional $7 in after hours trading. Analysts indicated that although BEAS reported a decent quarter, its shares still trade with a high premium, which is hard to justify in the current market environment.

While Brocade Communications(NASDAQ:BRCD) beat earnings estimates by a penny last night, their downward revision of revenue and earnings growth rates for the 2nd quarter and 2001 dragged the stock lower today. The stock gapped down on the news, however, buyers stepped in immediately and the stock climbed steadily throughout the session on robust volume of 63 mln shares.

Blue-chip storage company EMC shed over 18% after the company was downgraded by Banc of America and Morgan Stanley. The company reaffirmed its fiscal 2001 revenue target of $12 billion before the bell, but also painted a "worst case scenario," rather than a warning. Banc of America said it is concerned with near-term visibility in the next couple of quarters due to the general softness of the U.S. economy. This is just another cautious statement from a blue-chip tech company, following INTC's lowering of discretionary spending and CSCO CEO Chambers' comments about the slowing economy last week. The question is: who are they telling this to? Listen up Mr. Greenspan.

Shares of Sun Microsystems fell 8 percent to $18.81 in after-hours trading Thursday when the company warned of lower 3rd quarter revenue targets to a 10 to 13% year-over-year rate. SUNW also stated that they are unable to comment on 4th quarter visibility. On an upbeat note, the company announced that it will begin a buy-back program in which it plans to purchase $1.5 billion in common stock in the open market.

Economic News

Weekly claims for unemployment benefits rose to 348,000, up 4,000. This increase moves the 4-week moving average to a six-week high of 350,750.

Researched by: Eric Utley, Asst. Editor

Market Outlook

Thanks Eric for covering all the bad news. I was planning on just covering the good news anyway. Unfortunately, there is none! In my opinion, this was a very bad day. Not because the Nasdaq dipped under the sacred 2200 level to 2185, we expected that. We also expected the immediate bounce off those levels as shorts covered and longs jumped on the bargains. Sorry, it did not happen. Yes, there was a bounce, a rather anemic bounce but still a bounce. Unfortunately there was no conviction. Shorts saw the weakness and jumped on the leaders again. Both the Dow and Nasdaq had the same chart, just different numbers.

Was it the overwhelming negative sentiment from the Brocade warning or the warning from EMC this morning? Was it the expected warning from SUNW after the close this afternoon? I think you know the answer. It was all of the above along with the flood of previous warnings. Buyers are simply scared and after getting kicked in the wallet several times recently they are simply waiting for the real bottom, wherever it may be. With the number of pre-announcement warnings running ten times higher than the same period last year, real investors are simply waiting for the damage to be over.

Today the concern was SunMicro and their anticipated warning after the close. They came, they warned, they dropped -2 in after hours. Futures fell off a cliff and then started recovering with the S&P gaining it all back after dropping seven points. The Nasdaq futures dropped -44 but quickly gained it back. That could be a good sign for Friday but also a fragile straw at which to grasp. Did anybody expect SUNW not to warn? Not that I know. Did they expect it to cut estimates by -50%? Not hardly! How much more bad news can appear that is not already priced in at this point? We are in a recession according to everyone but the Fed. Visibility is now zero. The great second half rebound is now feared to be a no show. Expectations are now zero or in some cases less than zero.

Actually I heard a reporter today echo what I said last week. These companies are "over-warning" to ratchet down expectations for the future. When your stock is already down from the $100 range to the $20-$30 range, what can it hurt to hammer the future estimates? Intel, which has cash flow running in the billions made a big deal out of a cost cutting announcement that "may" save 100 million over time. Granted 100 million is not chump change but to Intel it is a drop in the bucket. This was clearly designed to "join the party" and possibly wave a flag in front of Greenspan. Sorry, guys, the jig is up! The consensus of opinion tonight is that the bottom is here. The economy is showing signs of a rebound and the Fed does not have to be as aggressive as previously thought. This is of course a result of the Leading Indicator report from Friday morning. The index came in at +0.8%, twice the expected gain, and a leap up from the last six months of decline. The index pointed to a moderation in the pace of economic activity but not a recession! OOPS!

Now we are back on our own again. Uncle Greenspan is not likely to come riding to our rescue. Actually the two major cuts of -.50% each have not worked for the markets and he is now faced with the "what do I do now question." If he cuts again and the market keeps going down then what? This was the analysis of all the talking heads on the networks today. Greenspan in a catch-22 with no way out. Kings X, he has been in worse positions before and we escaped. There is a strong rumor that he will cut again on Friday. Many have dismissed it as just wishful thinking but again, if you are going to wish for something why not something good? Just because the indicators were positive does not mean the markets are not crashing. A rate cut can't hurt and if you are going to do it in three weeks anyway why not now when it could stop the slide? Remember that consumer confidence thing? It just took another drop with the markets today.

Enough preaching to myself. With both futures positive after the SUNW warning, I think tomorrow may actually be a decent day. With the Nasdaq down 400 points in a week we are still very oversold and due a real bounce. The Dow dropped -530 points from Tuesday's high to today's low. Was the news really that bad or were traders possibly trying to send their own message to Greenspan to cut again? I would vote on the latter and it has not worked, yet. Now, technically speaking I like the fact that traders tried to run the markets back down again in the afternoon and were unsuccessful in hitting the previous lows from the morning. This is very positive. There was huge volume, 1.3b on the NYSE and 2.4b on the Nasdaq. Can you say capitulation? If today was not the magic day, I do not want to be around when it comes! There are the perma-bears calling for 10000/2000 next week. Hopefully they are wrong. I think the possibility of a trading bounce is very strong for Friday and we will look at next week as a separate event once we get past Friday's close. The shorts really did not cover today but a positive gap up at the open could change the sentiment completely. Keep your fingers crossed!

Enter passively, exit aggressively!

Jim Brown
Editor

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