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Market Wrap

"Risks Still Weighted To the Downside"

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       8-21-2001          High      Low     Volume Advance/Decline
DJIA    10174.14 -145.93 10378.75 10156.02 1.03 bln   1345/1744	
NASDAQ   1831.30 - 50.05  1893.39  1831.28 1.30 bln   1303/2348
S&P 100   590.27 -  8.73   602.95   589.75   Totals   2648/4090
S&P 500  1157.26 - 14.15  1179.85  1156.56             
RUS 2000  472.24 -  6.63   479.65   472.24 
DJ TRANS 2780.51 - 59.91  2841.79  2778.95 
VIX        25.80 +   .66    26.42    24.00 
VXN        52.54 +   .90    52.54    50.43
Put/Call Ratio      0.68

This was not what investors wanted to hear. The complete statement went something like this, "continuing weak profits and corporate spending along with slowing growth overseas". Ouch! In English it meant to traders that more job cuts could be ahead along with more profit warnings and no recovery this year. With the possibility of more layoffs ahead analysts worried that the consumer might start leaving their credit cards at home and instead payoff bills instead of add to them with more purchases. The Fed maintained its easing bias and will look at the picture again in about six weeks.

The Fed kept alive the largest series of rate cuts since the nine cuts over eighteen months during the 1991 recession. The current seven cuts have knocked the Fed funds rate in half from the 6.50% rate last December. The drop is the most aggressive since the early 1980s. While the Fed calmly cut by 25 points for the second time in a row the world economy continued to spiral downward at an increasing rate. With core inflation in the U.S. at 2.5% there is no reason for the Fed to worry about over easing anytime soon. After raising rates to the point where the economy literally choked to death, they now appear to be perplexed over why it has not just jumped out of the grave to lead the world back down the yellow brick road to prosperity.

Fears of further layoffs started coming true after the close as AOL announced that 1200 employees would lose their jobs and take a third quarter charge up to $125 million. Another 500 jobs will be cut from the prior alliance of SUNW and Netscape. This is the third series of layoffs since the AOL/Time Warner merger. The Washington Post had speculated last week that layoffs would be announced in the 1100 range soon. Inside information anyone?

Signs of a consumer boycott may be appearing with the earnings warning from American Eagle. AEOS traded over 20 times its average daily volume and lost -$9.06 after telling analysts that inventories were up +14.5% which was much more than analysts expected. It appears that fashion conscious teenagers have turned fickle with so many choices available from discount retailers. Analysts fear that the company will have to dump its high priced inventory at deep discounts in order to move the product. Could it be that allowances are becoming tighter and that extra birthday card cash is turning into cheaper McDonalds gift certificates?

At least Abbey Joseph Cohen is still bullish! Well sort of... Abbey choked down her pride and started shaving her estimates for the S&P at year end. She cut her target to 1500 from 1550 which is still a +28% gain should it come to pass. The question here is not the 50 point drop but is it the first in a series of target cuts to avoid the tar and feathers. "Oh gosh guys, I changed my mind to 1200 for my year end target because I wanted something that was easily attainable." Thanks Abbey! Everyone who bought stocks over the last 60 days on your suggestion while the market was tanking are not happy you are now listening to a different drummer. You know I am just poking fun at Abbey but I would not be surprised to see her lower the estimate again a few weeks from now.

Not all companies are warning. TriQuint Semiconductor may be the hero of the day after affirming their earnings targets for the third quarter. "From almost every customer, we are seeing a pickup and resumption of shipments," CEO Steven Sharp said. Gross margins will remain at 35% and we have enough bookings already to hit our revenue targets. Good job! Any ray of hope is greatly appreciated. Now go on CNBC every hour and repeat your comments! The semiconductor book to bill number was also released after the close and came in at .67 which means $67 of new orders were processed for every $100 of product shipped. This marks the third month in a row that the ratio has risen from the .44 April low. This is bullish and could power the semiconductor sector on Wednesday.

General Motors also affirmed its earnings outlook for the third quarter and its production targets for the rest of 2001. After falling for the last two days on the Ford warning, GM said sales were supporting production thanks to new truck models. It also said it was going to layoff more than the previously announced layoffs of 5700 workers. GM rose in after hours and should be a positive impact on the markets tomorrow.

Negative sentiment was so bad at the close that no bulls were visible and everyone was predicting Nasdaq 1638 this week. Not! In fact the sentiment was so bad that it could almost be construed as a contrarian indicator and a buy signal. After a little research I was not very convinced. The VIX closed at only 25.80 which is not a buy signal. The VXN was only 52.54. The put/call ratio was only .68 which was significantly less than it has been averaging on other down days lately. Advances were less than decliners by only a 2:3 margin. New lows on the Nasdaq barely beat new highs at 136/159. While things looked very bad on the surface the internals were not painting the same picture.

The mixed messages are very confusing for traders. Do we buy the dip or wait for another opportunity? The Nasdaq is well below prior support and the afternoon chart looked like pure free fall. The Dow bounced off upper resistance at 10400 once again and then broke through 10200 convincingly. Now, on the surface it looks bad. It looks like we are on track to retest the April lows. However if you look at the after hours action you will see a rebound in semiconductor stocks. We all know that semis lead any Nasdaq rally. Now, I will be the first to tell you that I am not bullish but the markets are very oversold. The Nasdaq has fallen from 2100 to 1831 since August 2nd with only a handful of positive days in the middle. Nothing prevents it from falling further but there is a trading rally around here somewhere. The problem we are still facing is the lack of volume due to August. There is still no reason to own stocks, especially after the Fed said there were still risks to the downside. If we have a dead cat bounce on Wednesday it is likely to eventually fail. The economy may have bottomed but until traders know for sure we are stuck in the current trend. Dead cat bounce on Wednesday? Maybe. Fall rally starting tomorrow? I doubt it!

Enter passively, exit aggressively!

Jim Brown

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