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Market Wrap

The Power of One!

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        05-23-2001        High      Low     Volume Advance/Decline
DJIA    11105.50 -151.70 11262.30 11101.20 1.14 bln   1041/2022	
NASDAQ   2243.46 - 70.39  2299.75  2243.46 1.88 bln   1460/2409
S&P 100   665.19 - 10.87   675.47   664.90   totals   2501/4431
S&P 500  1289.05 - 20.33  1308.36  1288.70           36.1%/63.9%
RUS 2000  507.36 -  9.87   516.74   507.36 
DJ TRANS 2969.16 - 21.81  2992.92  2954.32 
VIX        24.65 +  1.16    25.11    24.00
Put/Call Ratio      0.73

The Dow continued the slide it started on Tuesday and the Nasdaq finally broke its six day winning streak. The two biggest reasons for the sell off were the crash in the chip sector and the change in the Senate. Totally unrelated events but both ganged up on traders with negative results. Was this simply an excuse to take profits or a sign of things to come?

The worst ever book to build number of $42 of new orders for every $100 shipped was viewed differently by many analysts but the result was a semiconductor sell off. Many analysts said the number was so bad that it had to be a bottom and things could only get better. Others said the worst was not yet felt and the current month would be below $40. They can argue all the want but the votes that count were the dollars entering and leaving chip stocks. On balance the money flow out of chip stocks was substantially higher. If you are supposed to buy stocks when nobody else wants them then the chip sector on Wednesday was your playground of choice. AMAT -3.65, NVLS -4.16, TQNT -3.13, KLAC -3.58. Intel was impacted the least on the surface with only a -.73 loss but it was moving down sharply in the afternoon. I am surprised at the severity of the reaction since the futures were positive after the announcement. But, as I said yesterday this would be the challenge for today.

The chip disaster continued after the bell with TQNT warning that it was cutting its revenue and earnings estimates for the next three quarters based on sustained weakness in bookings and customer order delays. They are now expecting earnings of three cents compared with analyst estimates of eleven cents. Sawtek, SAWS, also warned that earnings would fall to around seven cents from estimates of eighteen cents. Just another average day in the chip sector. We all know that the chip stocks are the leading indicator for the tech portion of the Nasdaq and today they were leading down quickly.

Other tech problems included manufacturers like FLEX, CLS, SLR which were downgraded as having hit their price targets. Morgan Stanley said things were not picking up for these companies as quick as expected and some had already risen dramatically. FLEX is up +100% from the April lows. All of these stocks took serious losses on Wednesday. FLEX -3.12, SLR -1.97, CLS -4.71.

The biggest news to provide an excuse for profit taking was the potential shift in power in the Senate. Senator James Jeffords has told friends that he will leave the republican party and become an independent and he will align himself with the democratic party for control purposes. The possibilities here are enormous. With the current 50/50 split control goes to republicans by default. With a change to 51/49 in favor of the democrats the swing of control is huge. Not just because they will gain a vote and republicans lose a vote. That is trivial compared to the real problems. Every current committee chairman will change. They will actually be forced to lay down their gavel and vacate their chair for a democrat replacement. The impact is huge. Tax changes, energy projects, health care changes, defense spending, tobacco legislation. Every single facet of business conducted through the Senate will be subject to change and the republican agenda will be seriously compromised. The stock market has been moving higher on the prospects of the Bush presidency. Whether you are a republican or a democrat you have to realize that the economy runs on the politics of the government. Phillip Morris for instance has been up +150% since the election was decided. +150%, from $20 to $50. This is just an example but carry that across health care stocks, defense, oil, energy, etc and you can see the potential stock market problems. Boeing was at a 52-week high last week and is now heading south. Health care stocks dropped -10% or more on the news after it was made known that Ted Kennedy may now chair the committee controlling their fate. I am not going to ramble on about the varied impacts but the ripples could be felt for a long time.

Our only hope for a continued rebound is the five rate cuts we already have under our belt. Once the smoke screen from the Senate problem clears, the bottom line is still five cuts and history shows us that markets recover strongly whenever this occurs. Having a business friendly administration helps but the American entrepreneur is still alive and well and business will find a way to succeed. There is a strong bullish sentiment still underlying this market and many analysts are expecting investors to aggressively buy the dip. Fund managers who were hoping for a pull back to take some of the froth out of the last three weeks should be very happy. Retail investors who missed the train on specific stocks were hoping to get a second chance. Well boys and girls, here it is but where will it stop? We fell back under 2250 on the Nasdaq which was my exit point as well as under 11300 on the Dow which was the exit point there also. So you should be flat and waiting. Support on the Nasdaq is 2000 and 11000 on the Dow. Aggressive traders could buy any bounce near those levels. Conservative investors should simply wait for 2250 and 11300 to be broken again. We are not far enough below those numbers to worry about it yet. Should we break lower support again I will move those entry numbers down but not until then. Patience will save you a lot of money and more important the brain damage associated with those losses. Be patient!

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Enter passively, exit aggressively!

Jim Brown

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