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Market Wrap

HWP Shines, Dell Struggles, Ciena Implodes!

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       8-16-2001          High      Low     Volume Advance/Decline
DJIA    10392.52 + 46.57 10395.21 10271.57 1.06 bln   1681/1389	
NASDAQ   1930.32 + 11.43  1930.46  1879.07 1.59 bln   1755/1857
S&P 100   605.03 +  2.01   605.31   596.26   Totals   3436/3246
S&P 500  1181.66 +  3.64  1181.80  1166.08             
RUS 2000  481.68 +  2.73   481.68   474.06 
DJ TRANS 2864.22 + 30.56  2868.36  2826.41 
VIX        23.83 +   .06    24.81    23.42 
Put/Call Ratio      0.96

The markets were hit hard before the open with Ciena announcing results that beat the street slightly but warning that they would miss for 2001 and 2002 due to a continued slump in the economy and in their sector. Analysts expected them to meet and warn but the severity of the warning surprised everyone. CIEN dropped -8.50 or -30% on the news and sent the networking index NWX.X to a new 52-week low along with most of their competitors. The Dow fell -76 points by noon and the Nasdaq lost -40 points to a new intraday low of 1879. The day did finally get better!

Investors were bombarded with conflicting economic reports and traders did not know which way to turn. The Philadelphia Fed Survey of general business conditions continued to show contraction with a -23.5% August number compared to -12.2% in July. This was well below consensus expectations and showed a sharp deterioration of manufacturing in the Philadelphia region. Estimates were -10%. New home sales continued to be strong with 1.67 million new starts in July which represented a +13% gain over last July. The lower interest rates continue to spur sales and are strongly influencing consumer sentiment. Jobless claims fell unexpectedly this week by -8,000 claims. Estimates had been for a gain of 15,000 jobs. Could it be that the labor markets are stabilizing? It is too soon to tell and the numbers are still experiencing seasonal volatility. The CPI also fell unexpectedly by -0.3% for July after posting a slight gain for June. It is a chicken/egg problem. Is the CPI falling due to lower energy prices or are the energy prices falling due to the weak economy? Either way the result is a lack of inflation and it is Fed friendly.

While the economic reports did nothing to move the markets the CIEN, BRCD warnings definitely hammered the indexes. The volume was strong for an August Thursday and declines beat advances by better than 2:1 in the morning as investors fled not only the networking stocks but PC stocks as well. CIEN, TLAB, JNPR, PMTC and ITWO all hit new 52-week lows. The Internet economy was called into question yet again and analysts were trading barbs about their outlooks instead of stocks.

Fear of a similar warning by Hewlett Packard or Dell kept traders from buying the dip before lunch. However exactly at 12:00 a buy program kicked in when the Dow was at the low of the day for the second time at 10271 and shorts started covering from oversold conditions. After being down eight of the last nine days the put call ratios were climbing significantly indicating that fear was coming back into the markets.

After the close Hewlett Packard announced earnings that beat the street and actually forecast slightly better times ahead. Revenue was slightly below estimates at $10.1 billion. HWP said they were seeing "higher levels of channel interest" for the current quarter and they forecast sequential growth for the next quarter. A PC maker with a positive outlook? The markets cheered and HWP rose in after hours trading.

Dell did not surprise traders with their earnings which only met estimates and they followed the earnings with a warning that earnings will fall as much as two cents for the 3Q. They said margins were under pressure but they did claim to garner slightly more market share from competitors. Dell fell in after hours after the COO gave cautious comments on CNBC. Analyst Ashok Kumar said he was not as optimistic as others that the sector would rebound with a seasonal trend and he said he could not see any improvement until the first/second quarter.

The common thread tonight was the 1Q/2Q comments. It appears that most analysts and companies are just not seeing any bounce in orders for the last quarter of this year. HWP which said they were expecting sequential 4Q growth, further qualified the statements with "historical and seasonal" adjectives meaning they were hoping more than counting on the rebound.

In the back from the dead category Lucent said they had received permission from their lenders to proceed with a massive restructuring cutting 20,000 jobs in the hopes to return to profitability by 2002. They could take as much as a $9 billion charge in the 4Q for this restructuring. They are going to delay the Agere spin off for 6-9 months as well.

The Nasdaq struggled to hang on to a new five month low of 1879. The sub 1900 number did trigger some bottom fishing as well as several buy programs. However it probably did not cause recent money outflows to reverse. TrimTabs.com said after the close that -$2.6 billion flowed out of mutual funds for the week ended on Wednesday which followed a similar -$2.5 billion outflow the prior week. $2.5B here and $2.5B there and pretty soon you have lost a lot of money. Nothing after the bell had the desired impact of stopping that outflow.

It was encouraging to see the bounce from very oversold conditions and back into positive territory but even though the volume was good it was still just a short covering rally. The advance decline numbers only came back into the 17:16 range which is a basic dead heat. The Vix spiked at the open to near 25 but fell back into the mid 23 range before the close. This is not a buy signal. 1940 was upper resistance on Wednesday for the Nasdaq and now that 1900 has been breached again on the downside it may be easier to move down than up. The Dow is stuck under current resistance at 10400 and leaning toward the bottom of its trading range.

There is still no reason to rush back into stocks before the Fed meeting next Tuesday. Everyone expects a 25 point cut and some analysts are worried that a larger cut now could undermine the markets. Traders are also afraid of a "no change" announcement if the Fed thinks the economy has really bottomed. The Nasdaq rally back to 1929 at the close simply brought it back to bottom support from last week. The warning from Dell may overshadow the cautiously optimistic comments from HWP and we could see another sell off attempt. The down trend from the last nine days is still intact and this oversold bounce may not have any legs. Nothing material has changed and the uncertainty about the Tuesday Fed meeting should keep big money on the sidelines. Should we get a close under 1900 all bets are off and it will become more likely we will see a retest of the April lows. You can see why August is historically the second worst month of the year for the last 30 years. Be patient and be profitable. Nasdaq 2100 is still my entry point benchmark. It will probably be revised down in the next couple weeks if the situation warrants but until then - stay tuned!

Enter passively, exit aggressively!

Jim Brown

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