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Market Wrap

Is There Light at the End of This Tunnel?

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       7-24-2001          High      Low     Volume Advance/Decline
DJIA    10241.10 -183.30 10423.80 10203.70 1.19 bln    975/2137	
NASDAQ   1959.20 - 29.30  1994.03  1939.28 1.59 bln   1300/2410
S&P 100   603.88 - 10.25   614.41   600.44   Totals   2275/4547
S&P 500  1171.25 - 19.38  1191.03  1165.54             
RUS 2000  474.14 -  8.44   482.70   472.53 
DJ TRANS 2862.52 - 98.36  2961.81  2839.35 
VIX        27.62 +  1.50    28.83    26.39 
Put/Call Ratio      0.75

That is the $64,000 question that nobody wants to answer today. The companies that announced earnings today avoided any discussion of recovery and simply said it will come someday, we hope. To the 20,000 new layoffs at Lucent the answer did not come soon enough.

Leading the loser list today was a very widely held telecom and networking stock that nobody expected to hit estimates. They were right! Lucent missed estimates by mile with a 35 cent loss instead of the 21 cents analysts expected. While not a surprise that they would miss, the magnitude of the miss was huge. Had the outlook been decent the loss would probably not been so bad. Unfortunately they declined to outline any guidance for the future and said they would cut 20,000 more jobs and bring the total to almost 50,000 since this time last year. After the current cuts they will only have half of their prior workforce. When asked directly in a TV interview about economic conditions the CEO said there was "no economic turnaround in sight." Thank you for that insightful info and for being a ray of hope in the current market! Lucent said they would take up to a $9 billion charge in the fourth quarter for discontinued operations and layoffs. Ouch! Lucent lost -1.47 to $6.43. JNPR, CIEN and CSCO all finished the day higher. Ciena was probably up on relief that they are not going to buy the Lucent fiber unit.

Amazon posted a smaller than expected loss but got hammered to the tune of -3.97 to $12.06 after lowering guidance going forward. The long awaited "profitable quarter" is still a distant goal even after a strong efficiency drive to cut costs in the last quarter. Seems sales are not growing as fast as the economy weakens. Does that surprise anyone? They only missed their revenue goals by $10 million but would need a $1.4 billion fourth quarter to meet prior estimates for the year. It is not going to happen and AMZN said 4Q sales would only grow between 10% and 20% this year. EBAY took a beating by association and lost -3.27 even when they had no trouble in the current Internet environment.

We can always rely on the semiconductor sector to lead us out of the bear market when Internet stocks don't, right? Not a giant in the sector but Microsemi, MSCC, announced earnings after the close and promptly lost -$15 from its $67 closing price. In an often repeated scenario they beat the street by a penny but warned that sales would be flat in this quarter. Ironically they only said they were cautiously optimistic about the near term and the flat sales were not that bad relatively speaking. The magnitude of the drop just shows how scared investors are and how little loyalty remains. Of course it did not hurt that MSCC was near $70 after a low of less than $20 only four months ago. A little profit taking? LRCX also posted earnings and said revenue is likely to decline another 7-12% this quarter. They said visibility is awful and no recovery in sight but they lost only 25 cents in after hours. Go figure!

Titan Pharma, TTP, was the really bad news of the day dropping -56% or -15.30 to $12.00 after Novartis said they were going to run more tests on the drug Zomaril before seeking FDA approval. They said the new trials would delay marketing until late 2002.

Not all news was bad today with PSFT beating estimates and RAISING guidance. They had their best quarter ever and CFO Kevin Parker said Q4 would be slightly ahead of their 35% annual growth rate and the annual earnings would be at the high end of estimates. What vitamins are their sales people taking and can we have some? PSFT jumped about $2.50 in after hours. PRGN also announced earnings that met estimates and reaffirmed guidance and growth targets of 30-40%. Remedy, RMDY, missed estimates slightly but was up on the PRGN news. RMDY is being acquired by PRGN.

Greenspan had no positive news for the markets Tuesday and many analysts think the cuts, in hindsight, were too little too late. He will eventually prevail but there is still more pain ahead. Senators pounded on him from every angle and he was forced to change his testimony from last week to protect himself from their charges. He had said they saw the slowdown 6-9 months ago and one senator asked why they waited three months to start cutting rates. Alan asked to modify his testimony to six months from 6-9 months because he did not "do the math in calendar terms" before making the comment. I wonder what else he didn't do the math on? Still it appears the Fed is ready to continue cutting until signs of a recovery appear and as yet there are no signs. He is trapped now in a 25 point mode because a 50 point cut in August would signal that they were scared and maybe they had underestimated the severity of the problem. They could still cut 25 points inter-meeting but many analysts doubt it will happen.

Market technicals are approaching very bearish levels. The Nasdaq hit a low of 1939 on Tuesday which was only five points above the July 11th low. Many analysts have said 1935 was the line in the sand and a close below that would setup a retest of the 1638 low from April. A close below 1935 would be the third lower low since the mid-May highs. The only positive news to hang out hat on is the PeopleSoft earnings and higher guidance. A small glimmer of light in the blackness. Still the futures are up slightly in after hours.

The Dow has completely broken down and is in danger of breaking the 10120 low from July 11th as well. We closed only +35 points above the low for the day and without any new news the only hope traders have is an oversold bounce.

Even after yesterdays losses I was still encouraged about the minimal losses on the Nasdaq until the drop accelerated after lunch. I was still grasping at straws that the normal July sell off I wrote about a week ago would not happen but it looks like it is right on schedule.

The positive futures are the result of hope by traders that PSFT will provide a psychological boost as well as short covering by the bears in fear that a bounce might actually happen. For whatever reason the markets are extremely oversold and the 1935 Nasdaq level is likely to provide a bounce due to program buying and bottom fishing. The odds of a bounce holding at this point are slim. There are no buyers and no reason to be a buyer. Even though earnings are actually coming in better than the same quarter last year the guidance is coming in worse. It is all about the guidance. Once companies start saying positive things you will not be able to hold the market back but until then traders are simply waiting. The interest rate cuts will have an impact but we are not close yet. Consumer sentiment has got to be falling with layoffs increasing and the retail sector could be in for a serious problem. If sales of big ticket items like computers, TV equipment and electronics fall any more after the huge price cuts we have seen recently, then stores may start canceling holiday orders due to leftovers. That would only create yet another problem for this economic cycle.

In short, we are extremely oversold but I would not bet on the staying power of any bounce. The dog days of summer are here to stay and the low volume is liberally spiced with short sellers. As one commentator said today, "there were 10 sell orders for every buy order." The down volume is not that drastic, people are not bailing out of stocks at any price, but this is July and there are just no buyers. 1935 on the Nasdaq and 10120 on the Dow could provide bounces due to program buying. Should those levels fail all bets are off!

Enter passively, exit aggressively!

Jim Brown

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