Confusing At Best
What's a trader to think? So many pieces of the economic puzzle were revealed on Friday, some contradicting others, yet we're no closer to clearer visibility. Corporate America is saying one thing while economic data tells us another with Non-Farm Payrolls coming in stronger-than-expected. Even as Cisco (NASDAQ:CSCO) and Intel (NASDAQ:INTC) portend a gloomier outlook for 2001, the 135,000 net new jobs in February puts to rest any ideas that the economy is down for the count. It's enough to drive a trader crazy! Regardless, the markets sold-off strongly fueled by INTC's third warning in a row, leaving a cloud of confusion in its wake.
The INTC effect predictably dragged both the NASDAQ and the Dow (INDU) to triple digit losses. While the warning wasn't entirely unexpected, the magnitude of the revenue reduction was what frightened the markets. 25% lower than originally expected! Then early Friday, a report hit the wires that networking giant CSCO would be cutting 5% of its workforce, or 2400 jobs. As the stock traded to new 52-week lows, the company denied that there would be any "major lay-offs," citing a typical reduction in seasonal and temporary employees. It wasn't long until the company came out after the bell to give the full story. Indeed, they would plan to cut temporary workers as well as 3000 to 5000 regular employees, bringing the total reduction near 11% of its workforce over the year. Furthermore, CSCO said it would take a fiscal 4th quarter charge of $300 mln to $400 mln. CSCO CEO John Chambers, who has been quite vocal about the slowing economy and the FOMC's monetary policy decisions, said that he sees "early signs" that the slowdown is spreading globally and that "visibility is very limited."
Clearly, with tech bellwethers continuing to warn about a slowing economic environment and former high-fliers withering toward delisting, monetary easing is the relief for which everyone is calling. The confusion comes from today's job report that indicates that the economy is still moving ahead, which some suggest means less of a need for interest rate cuts. It was reported today that Former Fed Governor Lyle Gramley disagrees. Today he stated that he sees a 50 bp rate cut at the FOMC meeting on March 20th. While I believe that we can be confident the Fed will cut rates on the 20th and a short-term relief rally will ensue, we need to prepare ourselves for similar comments that we heard last week from these tech bellwethers. When Chambers has difficulty gauging his business, we must take heed.
The NASDAQ traded to two-year lows again today, slipping 115.95 points to finish at 2052. Of course, weakness in the Semiconductor sector(SOX.X) led the decline as I mentioned in Thursday's Wrap. The key support level for that sector was 600, which was violated with a close of 592 on Friday. Renewed fear about where the bottom may lie for the SOX.X created panic selling in many semi names: INTC(-3.81), Applied Materials(NASDAQ:AMAT) (-3.56), Novellus(NASDAQ:NVLS) (-3.56), and KLA-Tencor(NASDAQ:KLAC) (-3.69). The Intel news was quite a blow to the NASDAQ because of the integral role which the SOX.X plays in leading the tech index.
Looking at the NASDAQ chart above, you can see that March has been an extremely difficult month to trade thus far. It came in like a lion, only to gap down the following day. These opening gaps can be very dangerous if you are on the wrong side of the market, and this kind of choppy trading carries much overnight risk. After Friday mornings gap lower, the NASDAQ found some short-lived bid support as traders covered their shorts. However, no one wanted to be long going into the weekend and the bids disappeared. It would seem likely that the NASDAQ goes for a test of 2000 next week. It is difficult to say if Monday will be the day, as the above chart suggests erratic trading. My gut feeling is lower, given the troubling economic outlook for both INTC and CSCO. Right now there is no fundamental reason to be buying tech stocks. On the flipside, the shorts must assess the reward of shorting stocks that have been badly battered versus the risk of getting squeezed in a relief rally. We must stick with what works and put trading has been providing profits. Newport (NASDAQ:NEWP) and Broadcom (NASDAQ:BRCM) currently highlight our put list, down $13.38 and $9.25, respectively, since picked. Put players should be extra careful, though, in an oversold market.
It was interesting to see an IPO venture into the choppy water of the NASDAQ on Friday. Following Seattle Genetics' (NASDAQ:SGEN) debut earlier in the week, which is partially backed by Bill Gates, Loudcloud (NASDAQ:LDCL) was closely watched by Silicon Valley venture capitalists. LDCL, the Internet infrastructure services IPO is the work of Netscape co-founder Mark Andreessen. It priced 25 mln shares at $6 to raise a cool $150 mln. LDCL finished up a mere three cents in its lackluster debut. Wall Street certainly hopes for the best in the IPO market as investment banking deals and revenues have grinded to a halt in the past year. Much of the current lay-offs occurring at big brokerage houses are coming from the investment banking arms.
The INDU's five day winning streak came to an end on Friday as the index retraced some of its recent gains. Even though it lost 213 points on Friday, or 2%, the INDU was up 178 points on the week. It would have been normal to see profit taking in the INDU after its recent performance, especially before the weekend, yet INTC's negative comments exaggerated the decline. Those same comments caused weakness in the PC sector, namely IBM (NYSE:IBM) which lost $7.18. The tech selling caught up with Dow component Microsoft (NASDAQ:MSFT) as well for a $2.56 loss. As mentioned on Thursday, weakness in the Financials continues to make it difficult for the broader market to advance. The Securities Broker/Dealer Index (XBD.X) lost 5% on Friday, breaking through key support at 500. With an anticipated rate cut on the 20th, we would expect to see some nibbling in the Financial names next week, especially as the index approaches longer term support.
Looking forward to this Expiration Week, we certainly can expect volatility. Friday is triple-witching, so traders will be rolling positions forward and squaring up before the following Tuesday's FOMC meeting. Furthermore, Friday brings the PPI which both traders and the Fed will be fixated on. It is likely that we will see a test of 2000 on the NASDAQ next week. As I said above, playing the downside has proved to be working and it would seem from Friday's negative tone that the tech index does indeed go lower on Monday. With that said, be on the look out for the bulls and an oversold relief rally. Put trades should be accompanied by stop loss orders. We have all witnessed the power of these types of relief rallies, further perpetuated by short covering. But until the market tells us different, we will continue to short weak tech issues and seek out low volatility call plays. With resistance at 2250 on the NASDAQ, the short-term trend will remain down until that level is broken. I spoke with Jim on Friday and he feels that an oversold rally will set-up some Lottery call plays for March contracts(see Editor's Plays). Knowing how choppy the market has been, heed Jim's words and enter passively, exit aggressively. This type of market requires discipline and stop losses. Trade smart.
***Editor's Note: The LEAP section is undergoing some exciting changes so that we can be ready to capture entry opportunities once the market recovers. Today's section explains our plans.***