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Market Wrap

Testing Conviction

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        04-16-2001        High      Low     Volume Advance/Decline
DJIA    10158.60 + 31.70 10184.60 10046.50 0.90 bln   1297/1743	
NASDAQ   1909.50 - 51.86  1946.92  1891.88 1.57 bln   1589/2269
S&P 100   605.99 -  2.26   608.54   598.91   totals   2886/4012
S&P 500  1179.68 -  3.82  1184.64  1167.38           41.8%/58.2%
RUS 2000  450.90 -  4.12   453.97   450.66 
DJ TRANS 2737.04 - 29.55  2774.37  2726.64 
VIX        30.04 -  0.24    32.07    29.98
Put/Call Ratio      0.77

Testing Conviction

A fresh round of cautious comments and lowered expectations within the tech sector weighed on the broader market averages Monday. The bearish tones this morning came with little surprise as the topic of deteriorating fundamentals will move to the forefront this week as we enter the heart of earnings season.

The return of disconcert over the fundamentals in the tech space could have merely served as the catalyst to take profits after last week's encouraging rally. After all, the Nasdaq Composite (COMPX) rallied some 14 percent in the four trading days prior to Monday's session. That type of advance needs to be consolidated. As such, the bulls amongst us might argue that Monday's action served as a constructive consolidation day, noting the light volume on which stocks pulled back. Trading activity on the NYSE totaled only 900 million shares, and a mere 1.5 billion shares traded on the Nasdaq.

Nevertheless, cautious comments were bestowed upon the tech sector Monday morning which did bring back the bears. Lehman Brothers (NYSE:LEH) cast a shadow of doubt on Intel's (NASDAQ:INTC) earnings for fiscal 2001 after the chip giant said it would cut the price of its Pentium 4 in an attempt to stimulate demand. In addition, Morgan Stanley Dean Witter (NYSE:MWD) cut its earnings estimates for Intel, reflecting concerns over the continued loss of pricing power. Morgan Stanley also cut its estimates for Lattice Semiconductor (NASDAQ:LSCC) and Xilinx (NASDAQ:XLNX).

The cautious comments concerning the chip sector weighed heavily on the Philadelphia Semiconductor Index (SOX.X). The SOX finished lower by roughly 3.5 percent in the wake of the aforementioned analyst comments. Although, buyers did step in at the 560 level early Monday morning, so we'll want to watch that level as the week progresses.

To digress, we must recall that the SOX did rally roughly 30 percent from its lows last week, so a pullback today is not all that surprising. The SOX did advance up to the 600 level last week, which is a pivotal point for the index. As such, traders operating in the tech sector will want to pay close attention to the SOX as it approaches 600. Obviously, the action in the SOX this week will be predicated upon earnings reports so make sure to stay tuned in!

The reason I revisit the SOX again this evening is to reinforce, in my opinion, that it's crucial in determining the direction of the COMPX. For its part, the COMPX did follow the path of the SOX lower. But, the buyers re-emerged near the 1900 level and propped the tech index off its lows. If the COMPX trades below the 1900 level early Tuesday, we'll look for support near 1850 and again near 1800.

Meanwhile, the Dow Jones Industrial Average (INDU) bounced around the flat line for the majority of trading. The INDU did spike higher into the close of trading to close off about 30 points from its intraday high. The leading issues within the INDU were scattered across several sectors, but there were several standouts, including ExxonMobil (NYSE:XOM), Johnson & Johnson (NYSE:JNJ) and 3M (NYSE:MMM).

Concerning the advance in shares of ExxonMobil, the broader energy sector displayed impressive relative strength in Monday's session. News regarding a refinery accident in the United Kingdom sent the price of oil higher, which, in turn, set the energy sector a light with bids. I'm not sure if Monday's advance in energy issues marks the beginning of a new upward trend. But, I do know that we have had success with several energy plays on our call list recently, which tells me that sector is working. Take a look at Equitable Resources (NYSE:EQT) and Calpine (NYSE:CPN), which are both currently on our call play list.

Back to the tech sector, Cisco Systems (NASDAQ:CSCO) warned of lower-than-expected fiscal third-quarter earnings after the bell this afternoon. Cisco officials said fiscal third-quarter revenues would fall about 30 percent below its prior quarter revenues to about $4.69 billion. The previous estimates called for the networking giant to earn $5.95 billion in sales and 8 cents per share in earnings. In addition, Cisco said it would write-off $2.5 billion in excess inventory and layoff 8,500 workers.

The Cisco miss is obviously a BIG warning, and the fact that the company is laying off 8,500 employees does not sit well with me. However, John Chambers, CEO of Cisco, has been "talking down" his guidance since the firm's first warning earlier this year. In short, while Cisco's miss is disconcerting, it was highly forecasted by Chambers. So the question at this point is whether this bad news was already discounted into the stock price? Shares of Cisco fell about $1.20 in the after hours session on heavy trading. Keep in mind that Cisco's 52-week low sits at $13.19. Also watch the price action in Cisco-related issues Tuesday morning, such as Applied Micro Circuits (NASDAQ:AMCC), CIENA (NASDAQ:CIEN), PMC Sierra (NASDAQ:PMCS) and Juniper Networks (NASDAQ:JNPR). All of the aforementioned issues were trading lower in the after hours session.

In other earnings news, Vitesse Semiconductor (NASDAQ:VTSS) reported results that met previously lowered estimates. But the firm's sales fell more than anticipated. It's worth noting that Vitesse's fiscal second-quarter report tonight marked the first time in eight years that the company reported a sequential drop in revenues.

On a positive note in the tech sector, Computer Associates (NYSE:CA) announced that it would beat fourth-quarter estimates. Although the company didn't officially announce its earnings, which are scheduled for release on May 22nd, its news may help to lend a bid to competitors within the software sector, including BMC Software (NASDAQ:BMC), I2 (NASDAQ:ITWO) and Commerce One (NASDAQ:CMRC).

Away from tech earnings, several large banks announced quarterly profits this morning, which were met with a lukewarm reception. Among the big banks that announced this morning included Citigroup (NYSE:C), Bank of America (NYSE:BAC) and Bank of New York (NYSE:BK). For the most part, these banks either met or slightly exceeded consensus estimates, but failed to induce the real buyers into stepping in. The KBW Bank Sector Index (BKX.X) finished fractionally lower.

The earnings list tomorrow is slated with plenty of heavy hitters. Here's a short list of some of the companies worth watching Tuesday: Bank One (NYSE:ONE), Caterpillar (NYSE:CAT), Enron (NYSE:ENE), Intel (Big One), Johnson & Johnson, Phillip Morris (NYSE:MO), Sprint (NYSE:FON), Texas Instruments (NYSE:TXN) and Veritas Software (NASDAQ:VRTS).

Along with the myriad metrics in the form earnings reports tomorrow, several key economic indicators are set for release. The Consumer Price Index (CPI) will be released in conjunction with Housing Starts for March at 8:30 EST. Later in the morning, Industrial Production for March will be announced. Obviously, the market wants to see a benign CPI similar to the PPI last week so that the Fed can continue focusing its monetary policy on stimulating growth.

Getting back to the Cisco warning, the market knew that it was coming and now it becomes a question of whether this announcement was already priced in. There were real buyers that stepped up to the plate last week, who carried the COMPX to its second-best week in terms of percentage gain. And the Cisco warning will very much test the conviction of those buyers last week. If the Nasdaq can shrug off the Cisco warning and not come completely undone, I'll get very bullish on this market. Conversely, if the COMPX breaks down early Tuesday, I think it would be prudent to revisit the short side in the tech sector. Just keep in mind that there are a plethora of earnings announcements tomorrow morning that could change the dynamic dramatically over night. Good luck!

Eric Utley
Assistant Editor
www.OptionInvestor.com

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