Option Investor
Market Wrap

Cisco Shrugged - Almost!

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        05-09-2001        High      Low     Volume Advance/Decline
DJIA    10866.50 - 17.00 10914.00 10800.90 1.04 bln   1610/1413	
NASDAQ   2156.26 - 42.51  2189.03  2141.43 1.78 bln   1709/2120
S&P 100   652.08 -  4.31   656.39   647.97   totals   3319/3533
S&P 500  1255.48 -  5.72  1261.65  1247.83           48.4%/51.6%
RUS 2000  490.18 -  1.59   492.29   488.69 
DJ TRANS 2865.73 +  0.19  2871.09  2849.18 
VIX        27.83 +  0.29    28.90    27.49
Put/Call Ratio      0.67

The day after CSCO posted its first lost ever the markets were torn with indecision. After opening significantly lower, as hedge funds attempted to cause a break below current support levels, both the Nasdaq and the Dow rallied back at midday. Another round of selling finally swamped buyers and both indexes fell back to near session lows. Not willing to give up without a fight the bulls attempted to buy the dip again at the close but without much support.

The big news for Wednesday was in the bond markets not the stock markets. WCOM launched a $12.2 billion debt offering. This was the largest investment grade non-convertible U.S. corporate bond issue ever priced. The markets also had to deal with a 9.75-year Treasury note auction as well. Demand was good and the markets absorbed them without any problems. What does that say for stocks if over $12 billion in bonds were just a hiccup in the cash supply? Do those buyers think the stock market may not be the place to park money right now?

Gold continued its eight week run closing up +4.90 an ounce at $270.40. Considering the Bank of England is going to auction 20 metric tons next Tuesday this strong rally is somewhat unusual. These auctions tend to depress the prices not increase them. There has been more demand than supply for some time but enough to cause a huge spike in prices just before 20 metric tons go up for auction? Many analysts were speculating several weeks ago that an impending recession or inflation was not likely because gold had not appreciated in price. Does the recent strong rally now say that a recession/inflation is imminent? This kind of stuff gives me a headache trying to think of all the ramifications the gold bugs use as rationalizations for their positions. The real answer may be simply the end of the short squeeze that has been predicted for many months. But that would be too simple, right?

CSCO fell -1.29 the day after posting its first loss ever. The volume was only average and traders were mixed as to future prospects for this stock. Many analysts say CSCO will never get back to 30% to 50% growth rates and anything over $20 is too much and the current PE of 47 is probably too high. Companies that depend on CSCO for much of their sales were also down on the dreary outlook.

Much of the midday rally was credited to a non-tech stock. GE announced today that they were upgrading their earnings guidance. They had initially been guiding analysts to between $1.40 and $1.50 for the year. They announced that they would post profits "solidly above" $1.45. This energized the markets that GE, a huge conglomerate with business in almost every sector, would weather the economic downturn and post better than expected numbers. GE surged from the upper $48 range to over $50 on the news before analysts pointed out that the consensus before the announcement was $1.47 and "solidly above" $1.45 could be construed as $1.47. The release was a non-event and the stock fell back to hit $49 again before the close.

Speaking of non-event announcements, MSFT announced that the new Windows-XP product would go on sale October 25th. Yawn! With much fanfare and hype the company said the new product would be the best Windows product ever released. They are going to put "hundreds of millions" of dollars into a huge marketing campaign that will be double the size of the Windows-95 launch in the first four months alone. They declined to say how much XP would cost. Remember the lines to buy Win-95 at midnight at the major computer stores? I doubt we will see the same results even for twice the marketing effort. Still the release has received great reviews from third party testers. They claim this release is much more stable than any prior Windows release and the code has been cleaned up substantially. The biggest drawback is the memory required to run it. Makes you wonder if Micron and MSFT joined forces. The warnings with the product say it will not run on any PC bought before 1999 due to insufficient resources and old technology. Gosh, maybe Dell and HWP got in on the act too and conspired with MSFT to sell another generation of PC equipment to replace all those pre-Y2K boxes that are aging....

MSFT is also going to be releasing the new Xbox game system this fall as well. Claiming computers and game systems were different enough to keep consumers from having to choose one over another, they were going to "blow out the holiday season" and "this holiday season is going to be great for the PC industry." Sounds good for me. I will not be buying either one but I would love to invest in a PC revival this fall.

Investors Intelligence reported Wednesday that 47.9% of investment advisors surveyed last week were bullish, up from 45.7% the previous week. Bears fell to 37.2% from 40.2%. Those expecting a correction climbed to 14.9% from 14.1% the prior week. These numbers are commonly seen as contrarian indicators. The bigger the bullish numbers the more likely the market will fall. Bullish percents under 50% however are not seen as a material sign of a problem.

Intel helped drag investor sentiment lower today after they announced they would be cutting -10% of their global work force. INTC fell -1.63 for the day and helped sink the Philadelphia Semiconductor Index along with other chip stocks which had been trying to forge a recovery. PMCS -4, AMCC -2.24, AMAT -1.56, BRCM -4.29.

The broader market pulled back further than the Dow would have indicated. The S&P-500 pulled back to 1255 which is just under the 10DMA which is the first close under that average since April-24th. The 30DMA is currently at 1200 and the 200DMA is way above us at 1342. For the first time in seven sessions the index failed to test upper resistance at 1267 and gave up ground that it fought to gain during that period. The Dow tried hard to hold over 10900 again but MSFT and INTC held it back. The Nasdaq simply never had a chance with the dreary CSCO warning.

Thursday is a new day but we start that day with Jobless Claims again as well as Import/Export prices. If the Jobless Claims increased over last weeks record numbers the worry about a recession will increase. The Fed can't cut rates any faster and the next cut is already priced in with a 90% chance of a 50 point cut as indicated by the Fed fund futures. We need a spark here to rally the markets in front of the FOMC meeting and it needs to be a really big spark. Even though the markets really held up well under the attack by hedge fund selling today it is only a matter of time before traders decide to see where support really is. That support could be all the way back to 10500 on the Dow and 2000 on the Nasdaq. As I said yesterday, why buy? There is no compelling reason and I think some of the current weakness is a realization of that fact by traders. I heard Art Cashin say the same thing today, why buy. Traders are looking for a reason and that reason has not appeared. For me it would be a close on strong volume over 11000 and 2250. What is it for you?

Enter passively, exit aggressively!

Jim Brown

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