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Market Wrap

Now That Was Bullish!

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        7-26-2001          High      Low    Volume Advance/Decline
DJIA    10455.63 + 49.96 10459.02 10284.09 1.22 bln   1916/1153	
NASDAQ   2022.96 + 38.64  2025.88  1963.21 1.75 bln   2128/1531
S&P 100   619.14 +  5.19   619.85   608.67   totals   4044/2684
S&P 500  1203.20 + 12.44  1204.18  1182.65             
RUS 2000  484.75 +  8.08   485.07   475.74
DJ TRANS 2929.06 + 64.15  2931.78  2851.23 
VIX        25.15 -  1.55    27.40    25.15 
Put/Call Ratio      0.54

Traders shook off bad news from HWP and CPQ and rallied the major indexes back from severely negative territory into decent gains for the day. The Nasdaq closed over 2000, the S&P over 1200 and the Dow over 10400. All serious resistance points which needed to be broken on decent volume. That all happened today in spite if negative news from the two biggest PC makers.

HWP warned that earnings would be well below expectations and they saw no improvement for the rest of the year. They said they would cut 6000 jobs as the global economic slump hit its consumer business. Their comments that the global demand was getting weaker tanked the market in the morning as investors worried about who would be next. HWP hit a new 126 week low of $24.

Compaq had warned yesterday that earnings would be down for this quarter and said that revenues would continue to slide in the coming months due to an increasing worldwide slump. CPQ fell to a low of $13.50 at the open but rallied to $14.50 by the close. Amazing strength in light of their news and the HWP news this morning.

The warnings from the two computer giants should not have surprised anyone but the severity was greater than expected. So why did the markets rally?

At a Robertson Stephens conference today there were repeated comments that the climate for semiconductors was changing. NSM and Cypress Semiconductor said good things and both led the sector higher. CY gained +3.79 to $26.35 and NSM gained +3.18 to $30.00. Several analyst also said positive things about the communications sector. Nokia is seeing a resurgence of orders and the chips companies that feed that sector have seen the bottom according to analysts. First Union initiated coverage on AMCC, VTSS, PMCS with a Buy and BRCM with a Market Perform. The SOX rallied back up to resistance at 588 with a 35 point gain.

HGSI missed estimates slightly but traders were not especially excited. AMGN announced earnings after the close and said growth next year would still be in the low double digits. AMGN gained almost +5 in after hours trading.

WCOM earnings fell slightly but Bernie Ebbers made some positive comments that juiced the stock and caused a short covering rally all the way back to $14.50 after hitting a 52-week low of $13.20 yesterday. Considering the magnitude of decline in the telecom sector any positive comments were appreciated.

The economic news today was mixed with Durable Goods Orders falling much more than expected at -2.0% vs estimates of -0.9%. Communications orders fell by more than -20% but semiconductor orders advanced strongly for the second month in a row. The book to bill ratio is still well below one but improving. The pricing pressure still exists in semiconductors but any improvement will be seen as evidence of a bottom. The Employment Cost Index was neutral with costs dropping slightly as more workers apply for each job.

While the rally on negative news was deeply appreciated and welcomed we are not out of the woods yet. After the bell JDSU announced earnings that were not earnings and they could be a killer for Friday's market. They were expected to earn three cents but instead posted a -.36 cent loss. They also said they were laying off 16,000 workers world wide due to the global slowdown in their business. This was a very bad report and the magnitude of the loss is nothing short of incredible yet the stock was not punished severely in after hours. After an initial drop to below $8 from a close near $9.50 the stock found buyers and slowly moved off the bottom.

What happens on Friday will be interesting to say the least. Multiple major tech companies making drastic statements about current and future economic conditions but the market appears ready to ignore them. About time! Still traders will want to see what the broader market will do on Friday. After the Corning earnings guidance on Wednesday it was expected that JDSU would struggle to do anything positive. The bad news was definitely priced into the stock since they had already warned twice for this quarter.

The most bullish event in after hours was the QCOM earnings. They beat estimates by a penny and raised guidance slightly. While things are still tough in the telecom sector they see things improving slightly. This is like asking for volunteers for an all expense paid trip to judge the Hawaiian Tropic Bikini Contest. There was no shortage of buyers in after hours with QCOM gaining +2 before the conference call. While a long way from any $1,000 price targets it has held its value remarkably during the recent market sell off. Now with them being the first in their sector to make positive statements their fortunes are likely to get much better quickly.

I like what I saw today. The Dow was negative -115 and rallied to post back to back gains and close over 10400. This was very bullish in light of the CPQ/HWP warnings. The Nasdaq rallied back from 2.5 hours in negative territory to close well above 2000 again. This would appear on the surface to be a successful retest of the 1935 low from July 11th. It is still under the longer term down trend resistance at 2075-2100 but if market sentiment has turned then we could make short work of that level. The S&P-500 closed over 1200 again after several days of decent gains. Wow! Could this be a rally breaking out all over?

Before I turn you completely bullish there are still several key points in our future. 1217-1225 is significant resistance on the S&P and 10600 represents the same level on the Dow. It will take more than a couple days of oversold bounce to penetrate those levels. According to TrimTabs.com $12.5 billion left stock funds in the week ended on Wednesday. Investors are tired of the 100 point swings and having their hopes alternately raised and dashed as each day drags by. There is reportedly well over two trillion in cash on the sidelines in the hands of money managers. They may be a little less emotional in putting money back into the market than retail investors but everyone will be entering slowly. Bottoms can only be picked successfully in retrospect and we do not have the benefit of that yet. It looks like a bottom, sounds like a bottom and we want it to be a bottom but it takes real money going back to work to actually make it a bottom.

Until those levels I mentioned above are broken the majority of money on the sidelines will remain on the sidelines. What we saw on Thursday was yet another short covering rally brought on by the positive semiconductor comments. On Friday the odds are the QCOM news will be the highlight and JDSU is likely to be ignored. This could cause another wave of short covering as well as some retail buying. It is however a summer Friday and we could see some profit taking from the rebound from Tuesday's bottom. Volume on Thursday was decent with the NYSE trading 1.2 billion and the Nasdaq 1.74 billion. After being negative early in the day the advances beat declines substantially on both exchanges. New highs also beat new lows. Sentiment is changing despite being in the dog days of summer. While I am hesitant in actually predicting a real rally before mid-August it does appear the groundwork is being laid. 2100 is still my entry point on the Nasdaq and we are getting close!

Enter passively, exit aggressively!

Jim Brown
Editor

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