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Technology Leads Afternoon Rally

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        03-19-2001        High      Low     Volume Advance/Decline
DJIA     9959.11 + 135.70 9992.70  9794.10 1.12 bln   1959/1102	
NASDAQ   1951.10 + 60.28  1953.08  1867.58 1.78	bln   2193/1527
S&P 100   597.67 +  9.68   599.81   585.96   totals   4152/2629
S&P 500  1170.81 + 20.30  1173.50  1147.18           61.2%/38.8%
RUS 2000  451.27 +  9.47   451.27   440.59 
DJ TRANS 2681.66 + 50.29  2682.70  2623.22 
VIX        33.35 -  1.94    35.77    32.93
Put/Call Ratio      0.57

Technology Leads Afternoon Rally

Although a decent afternoon rally pulled the broad market out of its pre-Fed meeting holding pattern, trading volume was lighter than usual. The Nasdaq Stock Market saw 1.77 billion shares trade hands, while the New York Stock Exchange (NYSE) logged 1.12 billion shares. The Dow Jones Industrial Average gained 135.7 points, or 1.4%, to close at 9,959.1, while the Nasdaq Composite added 61.1 points, or 3.2%, to 1,951.2. Market breadth was positive as winners outnumbered losers by 19 to 11 on the NYSE and by 22 to 15 on the Nasdaq. The NYSE listed more new 52-week highs than the Nasdaq once again, at 113, versus 94 new lows. Nasdaq new highs numbered 32 versus 283 new lows. Closing ticks on both exchanges were positive, at 377 on the Nasdaq and 1,026 on the NYSE.

Large cap strength was evident in the 5% rally of the Nasdaq 100 Index (NDX) to 1,730.5. The S&P 500 Index added 1.8% to 1,178.8. Mid caps (MID) and small caps (RUT) both tacked on at least 2%.

Chip company shares did their part in the afternoon rally, as exhibited by the Philadelphia Semiconductor Index (SOX), up 6.7%. Networking stocks looked good too, with the AMEX Networking Index (NWX) adding 6.4%. The most active Nasdaq stocks included Cisco Systems (NASDAQ:CSCO +0.88), up 4.4%, Oracle Corporation (NASDAQ:ORCL +1.38), up 9.8%, and Intel Corporation (NASDAQ:INTC -0.81), down 2.9%. Although Intel rallied with the best of them in the afternoon, it only served as a recovery from an 8.5% morning slide after a cautious note from US Bancorp Piper Jaffray. Analyst Ashok Kumar said that even without the economic downturn, 2001 was shaping up to be a lackluster year for Intel. "During the past year, Advanced Micro Devices has slowly made headway against Intel with its powerful Athlon processor. Athlon caught Intel at a weak point: the tail end of a product cycle," he said. Kumar concluded that Intel's problem will get better over the course of this year but it will be 2002 before the Pentium 4 really hits its stride. He inferred that the stock could retest the lows of 1998 or earlier, possible under $20.

More sobering than specific comments about Intel were Kumar's comments about the entire tech sector. He believes that technology has entered a global recession, resulting in the current weakness in IT spending. Personal computer sales should lead the recovery, but it will not occur in earnest until the second half of 2002. "The first half of 2001 will not be a period of economic recovery but a full-fledged recession, which should result in negative unit growth for the PC market in 2001 -- a first in its history," Kumar said in a note to clients.

Goldman Sachs analyst Laura Conigliaro cut earnings estimates for enterprise server and storage companies for at least the third time in the last few months. The list includes Brocade (NASDAQ:BRCD +2.19), EMC Corporation (NYSE:EMC +1.47), Hewlett-Packard (NYSE:HWP +2.48), IBM (NYSE:IBM +2.50), Network Appliance (NASDAQ:NTAP +1.50) and Sun Microsystems (NASDAQ: SUNW +0.94). "We have gone to the low end of the range of expectations or below it in some instances, and are well below consensus forecasts," Conigliaro told clients. The move was based on continued slowing in the U.S. and her belief that it will spread to Asia and Europe. Despite the comments, all issues ended higher.

Hewlett-Packard announced its fastest notebook computer that will be powered by a 1-gigahertz chip. The company is also broadening its line of products that feature wireless networking capabilities. Hewlett-Packard plans to intensify its partnerships with wireless technology companies, as well. Shares rose 8.9% to $30.50.

Corning (NYSE:GLW +2.02) cited weakness in the telecommunications business when it slashed its profit expectations for 2001 before the bell today. Investors and analysts had already anticipated a business slowdown for the company after their reduction in revenue expectations for its photonic technologies business in February and their job cuts in March. After some pre-market weakness, shares moved strongly upward to gain 8.7% to $25.20.

America Online (NSYE:AOL +0.55) is truly in the entertainment content business now that it has merger with Time Warner. Now we see the name AOL and the words Box Office in the same business news headline. AOL Time Warner's action movie "Exit Wounds," starring Steven Seagal and rap star DMX, topped the box office results in the U.S. and Canada last weekend at $19 million.

Verizon Wireless awarded Lucent Technologies (NYSE:LU +1.98) a major contract to supply network infrastructure for a new system to deliver third-generation (3G) voice and data services. Lucent valued the deal at about $5 billion over three years. Verizon Wireless is a U.S. joint venture of Verizon Communications (NYSE:VZ +1.55) and Vodafone AirTouch (NYSE:VOD +1.14). They expect to begin a phased rollout of 3G services later this year. Lucent said the deal positions it to become the largest supplier of equipment for implementing high-end 3G services on behalf of Verizon Wireless.

If you do not live in California, you may not have realized how bad their energy problem has become. For the first time since January reserves fell to a critical level prompting the state's power grid operator to declare a Stage 3 alert and order rolling blackouts. Shares of PG&E Corporation (NYSE:PCG +0.43) added 3.8% to $11.85. Edison International (NYSE:EIX +0.14) shares are up 1.1% to $12.38.

President George W. Bush and Japanese Prime Minister Yoshiro Mori had a little chat today about their economies. Bush reiterated comments that he is confident about the strength of the U.S. economy and its growth prospects, but said a tax cut is needed to provide a boost. Mori said he hopes the United States would take "appropriate macroeconomic policies to deal with a U.S. economy that is slowing down." Hear! Hear!

After the Bell

Plantronics Inc. (NYSE:PLT +1.00) warned that 4Q earnings would be between 16 cents and 19 cents, compared with the company's previous estimate of 34 cents per share. Sales will be in the range of $88 to $90 million. Analysts had been expecting a profit of 36 cents per share. The company cited slower investment in telecom equipment and general economic conditions.

Air Products and Chemical Inc. (NYSE:APD +1.86) said 2Q earnings will be about 53 cents per share, compared with the consensus estimate of 60 cents. The company cited a sharper than expected drop in the U.S. manufacturing demand for chemicals and, to some extent, industrial gases

Solectron (NYSE:SLR +1.39) reported 2Q net income of 30 cents per share, flat with expectations, on revenue of $5.4 billion. Also, the company said it would take a charge of $300 to $400 million in the to cover a restructuring, which includes the elimination of 8,200 jobs or 10% of the workforce.

Looking Ahead

Elizabeth Mackay and Kurt Walters of Bear, Stearns and Company believe that last week the market may have entered its final phase of a broad decline. They still expect a high-volume reversal day to mark the bottom, such as occurred in 1998. A good catalyst is needed for that kind of volatility, however. It could be the Federal Open Market Committee (FOMC) meeting tomorrow. While analysts are making a case for the need to cut interest rates by 75 basis points, the Federal Reserve will do what they think is best.

Mackay and Walters also noted some examples of good news that could provide the spark, such as "observations from a prominent technology company that business has stabilized (it probably does not even have to improve)." Lower oil prices after the OPEC meeting would help. Regulatory developments in Washington, if not a tax cut package, may be beneficial. Even fewer negative comments about the economy from elected officials could go along way in boosting consumer confidence. From a technical standpoint, they also noted that both the TRIN (Arms trading index) and CBOE volatility index (VIX) are relatively high, indicating that we could be near a market bottom. There is plenty of cash on the sidelines. Contrarian indicators, including many magazine covers, now show more bearishness. Remember though, today's rally was most likely ignited by short covering in case of a 75-basis point cut. A 50-bp cut is already priced into the market, so we might see a "sell on the news" event on an announcement of a 50-bp rate cut. It's best to be flat for the announcement and let the market settle after the news.

Tomorrow is sure to be exciting. After that, a true upturn really cannot occur until investors believe that an economic recovery is in sight. And I have not heard anyone say that the market cannot go lower before it goes higher. Anecdotally, May is usually a weak month for the market. But stay tuned, because things can change fast.

PJ Mitchell
Research Analyst

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