Option Investor
Market Wrap

New Quarter, Old Story

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        04-02-2001        High      Low     Volume Advance/Decline
DJIA     9777.90 -100.90  9992.50  9705.10 1.21 bln   1182/1861 
NASDAQ   1782.97 - 57.29  1852.49  1769.66 1.85 bln   1022/2724
S&P 100   584.40 -  7.23   597.18   579.47   totals   2204/4585
S&P 500  1145.87 - 14.46  1169.51  1137.51           32.5%/67.5%
RUS 2000  439.76 - 10.77   450.53   439.51
DJ TRANS 2745.02 - 26.34  2791.87  2739.23
VIX        34.75 +  0.93    35.85    32.41
Put/Call Ratio      0.75

New Quarter, Old Story

Spring is here. Birds are chirping and the boys of summer took the field today. However, the spring promise of beautiful days to come was put on hold as the winter doldrums extended into the second quarter today. Clearly, there remains a decided lack of confidence in the stock market as we head into the next earnings season.

The positive momentum that carried us through the end of last week was severely damaged today by bad news from the pharmaceutical sector. Schering-Plough (NYSE:SGP) and generic drug companies American Home Products (NYSE:AHP) and Upsher-Smith Laboratories were sued by the Federal Trade Commission today, which charged that the drug companies violated Anti-trust laws by conspiring to keep generic drugs off the market.

The drug sector had been a relative safe harbor for investors but if these accusations have merit, more drug companies could be scrutinized for similar violations. The Pharmaceutical Index (DRG.X) dropped 10.24 points to 374.87. SGP lost $1.07 to $35.46 and AHP lost $2.25 to $56.50.

Meanwhile, American Express (NYSE:AXP) lost $1.59 to $39.71 following a warning that first quarter profits should be about 39 cents. Previous estimates were calling for profits of 51 cents. The company cited diminishing revenues from its Financial Advisors Group as well as a deteriorating economy for the shortfall.

Honestly, though, the Dow Jones Industrials (INDU) actually held up pretty well considering all of the bad news. For the day, the INDU lost 100.75 and closed at 9778.03. The INDU had traded as low as 9,705.

The broader NYSE saw decent volume of 1.2 billion shares. Decliners trumped advancers by 19 to 12.

The NASDAQ (COMPX) dove to a new 29-month low following another ugly day for technology stocks. Weakness was pronounced in the semiconductor sector, as the (SOX.X) fell 41.90 points to 503.15. For the record, the NASDAQ lost 57.29 points and closed at 1782.97. Volume was pretty solid for a Monday, coming in at 1.83 billion shares. Losers crushed winners by a 27 to 10 ratio.

The NASDAQ's most active list saw declines from Dell Computer (NASDAQ:DELL), Applied Materials (NASDAQ:AMAT), JDS Uniphase, (NASDQAQ:JDSU) and Qualcomm (NASDAQ:QCOM).

Software company Acxiom (NASDAQ:ACXM) was the disaster du jour, as it fell $9.38 to $11.50 following an earnings warning. The company said that fourth-quarter earnings are likely to fall into the 10 to 12 cent range while previous estimates were calling for profits of 36 cents a share.

As for the broader and smaller markets, the S&P 500 (SPX) dropped 14.50 to 1145.85 while the Russell 2000 (RUT), which had been somewhat stronger than the big stock indices, collapsed 10.77 to 439.76.

As for the bond arena, Treasury prices did not respond favorably to today's economic news. The National Association of Purchasing Management Index rose to 43.1% in March. Estimates were calling for a level of 42.5%. The numbers indicate the beginnings of an economic recovery, which may hamper the Fed's inclination to continue easing. The 10-year Treasury note dropped 14/32 to a yield of 4.97% and the 30-year government bond fell 17/32 to a yield of 5.48%.

There appears to be no rest for the weary in the after hours, especially among NASDAQ traders. Software firm Ariba (NASDAQ:ARBA) released disturbing news that its second quarter earnings will be well below expectations and as a result the Company will slash a third of its workforce, or 700 jobs. ARBA is pre-releasing losses of about 20 cents while previous estimates were looking for a loss of about 5 cents. ARBA finished the regular trading session down $1.41 to $6.50 and is down more in after hours trading. This former high-flyer has a 52-week high of $173.50.

Another former high-flyer of the software world, Inktomi (NASDAQ:INKT), also announced that it will slash 25% of its workforce as its business continues to crumble. The company expects a loss of 23 to 25 cents and analysts had been expecting a loss of 4 cents. INKT closed at $6.22 during regular trading hours but is trading as low as $4.60 in after hours. Inktomi has a 52-week high of $195.12.

There are obviously continuing problems in the networking and fiber-optic equipment world, as Redback Networks (NASDAQ:RBAK) also decided to cut its workforce. Redback will eliminate 150 jobs, or 12 percent of its workforce. The company will have to take a restructuring charge of $27 million over the next couple of quarters. Redback closed the day at $11.70 and is trading down to $10.15 in after hours trading.

With so many former high-flyers now approaching zero, one has to ask the question, when will it all end? It is important to point out that when the Internet high-flyers starting falling into single digits many people started trying to pick a bottom. Most of them are very sorry, as many of these Internet stocks are either in bankruptcy or close to it.

If you have to bottom fish in the technology sector it would behoove you to stick with the big boys that are extremely unlikely to go belly up. Dell Computer (NASDAQ:DELL), IBM (NYSE:IBM), Sun Microsystems (NASDAQ;SUNW), Microsoft (NASDAQ:MSFT), Cisco Systems (NASDAQ:CSCO), Oracle (NASDAQ:ORCL), Corning (NYSE:GLW), Intel (NASDAQ:INTC) and EMC Corp (NYSE:EMC) all come to mind.

It would also probably be a good idea to avoid buying the shares of any company that is still not profitable. It is becoming increasingly unlikely that these companies will ever show a profit. If they cannot make money when the economy is flying, how are they going to make money in a slowdown? At some point these companies will likely go broke, especially since there is clearly no money available in the secondary market to keep them afloat.

Until the longer term trend improves for the Nasdaq, traders will simply have to take quick profits. The short term technical picture for the NASDAQ is suggesting that we are near a bottom. The RSI is indicating a very oversold condition and the MACD is trying to put in a bottom. However, momentum is a powerful force, and we could see a quick drop to 1,500 if we get some more bad news. If this occurs, it would likely present an excellent buying opportunity. Otherwise, be cautious about getting caught up in bear market rallies.

The technical picture for the Dow Jones Industrials looks to be improving a bit. Some money seems to sloshing back and forth between drugs, cyclicals and some financials. There generally has not been much progress, but we could see a decent rally if the Dow can climb back over the 10,000 resistance. Be careful with long Dow positions if the average drops back below 9550 because it could spark a quick retest of 9000.

If you have not reserved your seat at the Spring Trading Expo here in Denver on April 5th-9th then you are missing the best seminar we have ever held. This power packed four-day event is structured to fully educate you not only on advanced option strategies but stock analysis as well. This will make you a better and more profitable trader.

Good luck and may all of trades be winning ones!

Jim Booth
Research Analyst

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