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Market Wrap

Techs Buck The Trend

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         WE 1-4         WE 12-28         WE 12-21         WE 12-14
DOW    10259.74 +122.75 10136.99 +101.65 10035.34 +224.19  -238.31
Nasdaq  2059.38 + 72.12  1987.26 + 41.92  1945.83 -  7.34  - 68.09
S&P-100  598.61 +  6.86   591.75 +  5.34   586.41 + 14.03  - 19.40 
S&P-500 1172.51 + 11.49  1161.02 + 16.13  1144.89 + 21.82  - 35.24 
W5000  10932.32 +113.75 10818.57 +173.64 10644.93 +201.37  -301.81 
RUT      499.30 +  5.68   493.62 +  9.60   484.02 + 12.73  -  9.92 
TRAN    2830.20 +187.15  2643.05 + 37.82  2605.23 + 28.13  - 51.16 
VIX       22.02 -   .31    22.33 -   .96    23.29 -  2.68  +  1.08 
VXN       46.86 +   .92    45.94 -  5.02    50.96 -  1.83  +  2.61 
TRIN        .94              .73             1.08             1.06 
TICK       +996            +1098            +1184             +388 
Put/Call    .67              .69              .69              .72  

Tech stocks recovered from the post holiday profit taking and struggled to buck the down trend on the Dow and S&P. Positive guidance from several companies overcame warnings from others. Volume was weak however as the mixed markets produced no conviction from traders. Semiconductors struggled to remain positive after mixed messages from Altera. They said 4Q sales were worse than expected but felt the bottom had passed. What was that? Increasing orders and growth expected for the first quarter? Did Santa really come to the tech sector?

That small statement from Altera was enough to give tech investors that glimmer of hope and the Nasdaq, after opening down, managed to stay positive and close right at resistance again. The SOX led the charge at midday but weakened near the close as several analysts made negative comments about stock prices still too high for the expected returns over the next year. The present from Santa may have been a lump of coal.

The fiber sector gained slightly earlier in the day as several articles about a cautiously optimistic outlook at Corning made the news. Corning said they were going to reopen two plants last week but made a point of saying it was not because of increasing demand. I questioned this contradiction in statement and actions last week and several brokers also questioned it today. Low and behold, Corning said this afternoon that they expected to see business recover in the second half. They said telcos and cable operators would likely take this lull as an opportunity to upgrade their networks. Sounds to me like they were under pressure about the plant openings and had to smooth over the contradiction. Interestingly Corning fell after the announcement. A case of "tell me what I want to hear" not "what you want me to think." Investors did not want to hear that companies "might" upgrade later in the year. Also impacting the sector was a call out of CIEN confirming that there were no clears signs of a recovery in the telecom equipment market.

Still techs forged ahead in front of a presentation by Cisco CEO, John Chambers, after the close. Chambers touted the "dramatic market share gains" that Cisco was making BUT said visibility was still severely limited going forward. That comment knocked a few cents off CSCO in after hours but nothing serious.

Helping put pressure on the tech sector was a warning from Gateway saying sales lagged behind expectations in the 4Q when Compaq reported better than expected results. Moody's jumped on the Gateway bandwagon and cut their debt status to junk. GTW lost -25% for the day and closed at $7.66.

The Dow suffered from a drop in Alcoa, which announced earnings that were only one fourth the same period last year. They said earnings were impacted by depressed demand, low prices and bankruptcies of buyers. Citigroup also fell after being downgraded because of lingering Argentina problems as well as expected credit losses due to the current recession. AXP and JPM also fell on the downgrade. Caterpillar also fell on worries that new EPA standards would cause problems for their heavy equipment business. UTX fell on worries about a lingering recovery and credit risks in the industry. Weighted down by these heavyweights the Dow dropped -46.50 and came to rest at 10150. Next support is 10100 and then 10000. Now where did that bull market go?

Contrary to today's warnings the number of negative announcements has decreased since the 3Q and positive guidance has gone up. Thirty companies have preannounced better than expected results for this quarter compared to 17 last quarter. Only 49 companies have warned compared to 63 in the 3Q. While this may be encouraging it confirms my previous claims that companies threw everything but the president's mistress into their last warning to make comparisons of future quarters easier. There are strong rumors that some companies held sales out of the 4Q to make 2002 comparisons easier. Everyone already expects the worst for last quarter so they have nothing to lose.

With the earnings trickle this week turning to a flood next week we are likely to get a lot of mixed signals. The Cisco news tonight and the Gateway warning will not build a lot of confidence in the investor community. The Nasdaq came to rest right under strong resistance at 2060 and has a better chance of slipping than rising. The biotech sector took another bullet after the close with a warning from DNA and is not likely to help the Nasdaq on Wednesday.

The Dow was not looking healthy at the close even though the advances were beating the decliners slightly on the NYSE. There is just no confidence among investors and the "new bull rally" is having a tough time finding a red flag to chase after. The broader S&P has failed again at the 1175 level and closed below the 200 DMA of 1166 again. Not a very positive signal. Even though the S&P has traded above the 200 DMA for two days there was no breakout rally and no short covering. Some analysts claim that everyone who wanted to buy stocks has already done so. On Monday $1.7 billion came into stock funds but the $2.3 billion in new offerings created -$528 million of negative liquidity. The rush of cash into stock funds has not yet happened and without the cash the outlook is bleak. One noted economist who researches fund trends said hedge funds had done the majority of buying in the last month hoping to resell those stocks to funds and retail investors in January for a profit. If the liquidity wave turns into a ripple those same hedge funds will be dumping that same stock to switch sides in the market. All this prologue was to set the background for the rest of the week. Warnings may be more prevalent then earnings and the possibility for a down market exceeds the chances for a rally. I would be very cautious opening any new positions until more favorable conditions exist. IF we saw positive movement from here, I would want to see the S&P over 1175. (twice bitten, thrice shy) I would want the Dow over 10200 and the Nasdaq over 2075. These may be lofty goals but it is real money we play with. After several failed attempts at these levels we really need to see the market confirm a rally by trading over them before we risk any new money. If we trade down from here I would be leery about buying the dip. Support levels are 10000, 2020 and 1140 for the S&P. A bounce FROM those levels would be buyable BUT only as a trading bounce. Do not attempt to catch a falling knife. Wait for the bounce.

Enter very passively, exit aggressively!

Jim Brown
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