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Market Wrap

The Sun Setting Overseas

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        05-30-2001        High      Low     Volume Advance/Decline
DJIA    10872.64 -166.50 11042.13 10864.83 1.15 bln   1093/1965	
NASDAQ   2084.50 - 91.04  2137.67  2077.98 1.93 bln   1095/2759
S&P 100   642.82 -  9.94   652.90   641.82   totals   2188/4724
S&P 500  1248.08 - 19.85  1267.93  1245.96           31.6%/68.3%
RUS 2000  493.96 -  8.41   493.96   502.37
DJ TRANS 2901.61 - 19.66  2922.39  2893.53
VIX        25.79 +  1.11    26.19    24.74
Put/Call Ratio      0.74

The Sun Setting Overseas

It was another rough day for tech stocks, as one of their former leaders admitted to troubling trends in Europe and Asia. Tech in general had been sprinting higher since April on the premise that things couldn't get much worse and that a tech recovery would materialize in the second half of the year. In addition, stoking the recent euphoria for tech were the analysts that suggested investors get in ahead of any recovery.

Well, the only unspoken "given" behind all the optimism was that Europe and Asia had yet to experience the IT boom like the U.S. already has and that they were due to start spending money on things like routers and storage soon. As it turns out, the pie charts lied. Europe and Asia are stuck in a full-blown information technology recession that doesn't appear to be ending soon.

This fact was brought to the forefront last night when Sun Microsystems (NASDAQ:SUNW) declared itself unfit to meet its fourth quarter earnings estimates of $0.06/share. Instead it expects earnings to come in closer to $0.02-$0.04/share, largely due to a lack of orders out of Europe and Asia (the wildcards to drag us out of this thing).

It was not surprising, therefore, that tech stocks opened lower out of the gate and headed lower all day. SUNW finished down $2.42, or 12.96%, to $16.25. Other networking stocks followed suit with Compaq (NYSE:CPQ) loosing $0.76 to $15.70, IBM (NYSE:IBM) down $2.62 to $112.65 and Hewlett-Packard (NYSE:HWP) off $1.38 to $28.83.

Today's Markets

It was all about tech today, although traders didn't seem too picky about what they sold. The moves on the indices weren't quite elevator shaft material, but they did manage to do significant technical damage to the recent run up nonetheless.

The NASDAQ (COMPX) lost 91.04, or 4.18% to 2084.50 on volume of 1.9 billion shares traded. Today's move just about wipes out all of May's gains and puts us in a perilous technical position. If support at 2000 is broken then it's back to the April lows. As a chartist, I can see this happening but as a trader I can't. I just don't get the feeling that we will retrace all the way back to 1619 on the NASDAQ. To this end, two things that the bulls still have going for them is the fact that the Fed has more bullets in its holster and the consumer is still strong.

The DOW (INDU) gave up 166.50, or 1.51% to close at 10,872.64 on volume of 1.1 billion shares. This close is technically significant since we broke the psychologically important 11,000 support level. Provided that investors regain their cool, there is a lot of congestion on the DOW chart around the 10,500-level that should hold up as support through the summer doldrums.

Turning to the broader market, the S&P 500 (SPX.X) lost 19.85, or 1.57%, to 1248.08. The fact that this market barometer also lost a key support level is confirmation that the sell off has been far reaching.

Stocks and Sectors on the Move

Along with SUNW and the networking stocks, the telecom equipment makers headed south today thanks to a Morgan Stanley Dean Witter downgrade of four key players within the group. JDS Uniphase (NASDAQ:JDSU), Tellabs (NAASDAQ:TLAB), Sycamore Networks (NASDAQ:SCMR) and Nortel Networks (NYSE:NT) were all cut from an "outperform" to a "neutral" on the basis of a slower than expected recovery. The stocks finished down $2.23, $3.45, $1.24 and $1.27 respectively.

Morgan did not stop there, however. The brokerage firm put the semiconductor stocks back in their place by lowering estimates on six chip stocks, citing the old high inventory excuse. Morgan also reiterated that they feel the chips will come under continued selling pressures due to the upcoming pre-announcement season. The PHLX Semiconductor Index (SOX.X) lost 37.64 to close at 585.61.

Investors couldn't even feel safe hiding in defensive healthcare issues today. During regular hours shares of Pacificare Health Systems (NASDAQ:PHSY) were halted on news. After the bell the healthcare services company announced that full-year earnings would be between $1.65 and $1.75/share instead of expected profits of $2.45/share. The company blamed higher than expected costs from its California operations for the shortfall. PHSY closed down $0.51 to $18.50 and was trading around $16.50 in the after hours session.

Looking Forward, Always Forward

We get our weekly read on the employment situation when the initial jobless claims report comes out tomorrow morning before the bell. Analysts are expecting a slight rise to 408,000. This report will likely take a backseat to the hullabaloo that is currently shaking up the tech sector, but an out of whack reading could make for a choppy morning.

Turning to a chart of the NASDAQ, it is easy to see that the current uptrend is in danger of seriously falling apart.

I think that after we get more preannouncements out of the way that we will trade sideways for a while (maybe a few months) until the analysts come out of the woodwork with upgrades a blazing. Remember that companies are still in simmer mode after all the rate cuts and won't come to a full boil until the cuts have a chance to take hold (probably after this summer). So choppy trading on lighter volume will probably be the theme of the next few months, as traders head on vacations and economic data, news and preannouncements serve to exaggerate intraday moves. This can be a trying time for traders, but it can also be a profitable time, provided you are patient and stick to your own trading rules.

Craig Seidler
Contributing Editor

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