The Producer Price Report blew out estimates with a decline of -0.9% compared to estimates of only a -0.3% drop. Suddenly the worry about possible future inflation turned into worry about a possible deflation cycle. The PPI was driven by a -5.8% drop in energy prices which was the largest one month drop since August 1989. The report energized the Dow as traders counted on the Fed to act aggressively on the 21st and cut rates again. Unfortunately the Nasdaq was hit with a downgrade of two software giants and was not able to shake off the curse.
Goldman Sachs downgraded Oracle and Siebel Systems due to a slowdown in enterprise software spending. The downgrade was specific but the ripples were felt throughout the entire software sector as investors fled the other stocks in advance of further warnings. Goldman said the software business is continuing to worsen with estimates dropping daily. They said the street has yet to capture the magnitude of capital spending constraints going into 2002 and also considering the negative data coming out of Europe. Oracle fell to a two month low at $15 and SEBL fell to a five month low of $26.
Other software stocks are rumored to be in trouble as well with BEAS the most mentioned as likely to miss estimates. PSFT would be next on the bubble as a provider of large corporate systems. BEAS fell -1.72 and PSFT dropped -1.87. CHKP lost -1.39 and VRTS -1.59.
If major companies are not buying software then investors reasoned that they might not be buying storage systems either. BRCD, EMLX, EMC and NTAP all fell as investors ran for the sidelines before the NTAP earnings next week.
The Nasdaq just could not get a break with EBAY dropping -1.75 on a false rumor about layoffs. The Wall Street Journal nixed the rumor of impending 15% layoffs after conversations with the company. Amazon dropped another -.51 to break under $10 and hit a five month low on no news other than the $37 million stock sale by CEO Jeff Bezos. QCOM dropped -1.95 on good news that IBM and OmniSky had signed contracts to produce applications using their new BREW software. YHOO dropped again on news that Internet advertising would get worse before it got better. YHOO hit a two month low at $15.30. Just not a fun day on the Nasdaq when stocks fall on good news. The only bright spots were fractional (or should we say decimal now?) INTC +.30, MSFT +.51, DELL +.27 and CSCO +.04. Certainly not market moving numbers.
Speaking of Microsoft, the Justice Dept urged a federal appeals court to reject Microsoft's request to delay the antitrust case. They argued that the case should proceed as quickly as possible and dismissed the idea that it should wait for a decision from the Supreme Court first. The government said Microsoft had "little prospect" of obtaining a Supreme Court review. Rumor has it that Microsoft will release XP early to avoid any chance of a remedy that could impact that product. MSFT dropped to a low of $62.90 at the open but recovered to close positive at 65.51 and was a major factor in bringing the Nasdaq back from the brink of oblivion.
Also helping bring the markets back were comments from Texas Instruments analog head, Syrus Madavi. Merrill Lynch hosted a conference call and reported that Madavi is seeing some stabilization in the analog order backlog, is seeing new order activity and business could be up sequentially in Q4. Merrill Lynch said this was better than expected news and reiterated its BUY rating. Syrus has two decades of experience in this arena and is well respected by the analyst community. TXN hit a low of $32.90 before the news and rebounded to trade at $35.20 in after hours. TXN floated most of the chip sector back into positive territory with the comments. Several chip equipment makers failed to make it completely back however.
The headline economic report today was the Producer Price Index which dropped drastically due to drops in energy prices. The news shocked the markets at first but analysts were quick to point out that with inflation turning into deflation the Fed would be promoted to act even quicker and more aggressively to prevent losing control. While analysts were debating the report the major averages broke recent support levels and triggered program buying which in turn triggered another wave of short covering. The combination powered the Dow back to respectable levels which it held to close over 10400 again.
The Nasdaq never had a chance. With the software downgrades, pressure on Internet stocks, storage stocks tanking and chip stocks gasping for breath, the Nasdaq made it six in a row on the losing side. The Nasdaq dropped -15 points under the July lows before rebounding on the MSFT and TXN news. Still, losing seven points and closing at a four month low on a day that the Dow posted a +117 point gain, is not a good sign. You have to go back to April 17th for a lower close. When tech stocks are so beaten up and un-loved that investors flock to Dow stocks like JNJ, SBC, CAT and AA instead, can the bottom be far away?
For the contrarian readers this could be a sign. I finally could find nothing positive to point to on the Nasdaq and can easily see some new relative lows in the next week or two. This is usually when the index soars to new highs and leaves me standing on the sidelines. If that is our future then I will gladly wave goodbye as the train leaves the station in hopes that our readers bought a ticket. Somebody has to be cannon fodder and I volunteer. It just looks very negative for the Nasdaq. About the only positive sign was a rebound over the 1950 level at the close but that is simply grasping at straws. August is just a bad month for techs even in good times and this is far from good times. Tech earnings next week include HWP, DELL, CIEN and BEAS but investors are more likely to be interested in earnings from the retail sector. Those stocks include HD, FD, PLCE, KSS, GPS and JCP. If the retail sector shows signs of cracking then investors may decide the economy has farther to fall. Equity funds lost -$2.5 billion in deposits last week compared to -$500 million the week before indicating investor disgust. If you are still waiting on the sidelines for my suggested entry point of Nasdaq 2100 then congratulations. Your patience may payoff big over the next couple weeks as we might get a chance to lower that number between now and the FOMC meeting on Aug-21st. I will keep you posted. Until then 2100 is still the target!
I am really excited to announce our biggest Denver Stock and Option Trading Expo ever. Over fifteen speakers from many different trading environments. Jon Najarian, Dr "J" on the CBOE, David Nassar, Tim Truebenbach, Russ Wasendorf, Patrick Lafferty, Don Bright, Joe Lombard, Robin Dayne, Carolyn Boroden, to name just a few. Of course Austin Passamonte, Jeff Bailey, Jon Farnlof, Buzz Lynn, Eric Utley and myself will also take center stage. We have changed the format to a weekday schedule instead of a weekend in order to do real time trades and analysis every day. Bring those laptops as WE WILL ALSO HAVE INTERNET ACCESS AVAILABLE FOR ALL ATTENDEES in the main hall so you can follow our research and trades as well as trade yourselves. This is also EXPIRATION WEEK and we will be taking full advantage of cheap options and expected market swings. In order to move to an open market format we had to change the date to November 12-16th. Make the change on your calendar and plan on being there! Could you actually make enough trading that week to pay for the seminar? That is of course up to you but it will not be due to a lack of opportunity! Seating is limited, sign up now!
Definitely, enter passively, exit aggressively!