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Difficult Times Ahead?

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       1-17-2002           High     Low     Volume Advance/Decline
DJIA     9850.04 +137.77  9857.79  9712.21  1.3 bln   1958/1179
NASDAQ   1985.82 + 41.38  1985.83  1954.06  1.8 bln   2167/1414
S&P 100   581.63 +  6.64   581.97   574.99   Totals   4125/2593
S&P 500  1138.88 + 11.31  1139.27  1127.57
RUS 2000  482.39 +  5.97   482.40   475.71
DJ TRANS 2674.89 + 38.55  2674.89  2627.68
VIX        23.74 -  1.52    25.21    23.72
VXN        47.03 -  2.40    50.23    46.92
TRIN        1.18
Put/Call Ratio       .79

Difficult Times Ahead?

The markets were finally attempting to climb out of the Intel bomb crater from Tuesday night when two more high profile tech stocks repeated the event. Microsoft and IBM went on record with cautious comments and decreased guidance and promptly got whacked in after hours trading. This news was contrary to better than expected results from Citigroup and another affirmation of earnings for GE. The Enron disaster drones on and talking heads are trying to make Kmart the next news event. Bored yet?

IBM announced earnings after the bell and it was not pretty. IBM beat the street by a penny but missed their revenue numbers by a cool billion dollars. The attempt by IBM to continually manage their earnings by buying back shares fell short yet again. IBM said that there are difficult times ahead and while they expect to continue to maintain their earnings it will come from cost savings instead of robust growth. Part of the reason they beat estimates this quarter was a reduction in expenses of $1 billion. That is a huge amount and investors should be impressed but you don't grow businesses by reducing expenses. They said in order to maintain this earnings level for 2002 they were relying on their services division and plan to cut another $2 billion in expenses. Billion here, billion there but they can't keep it up forever. The negative comments pushed IBM to $114.65 in after hours after closing near $120. This will impact the Dow significantly at the open IF the sentiment carries through. Several analysts affirmed their positive views on IBM, which will earn $10 billion in 2002 regardless of current economic problems. They have well over $100 billion in backlogged services contracts to work and more coming in every day. Could be a buying opportunity according to Lehman Brothers which affirmed their price target of $140 today. While IBM said it saw difficult economic times ahead it did say they thought the bottom in the chip sector had passed.

Microsoft beat the street by six cents or so, depending on who you listen to and beat revenue estimates by almost $700 million. They boasted that 17 million windows XP systems had been sold and that XBox sales had come in at the high end of estimates. While their guidance for the full year increased slightly MSFT said that they had yet to see a rebound. "While we are pleased with our results this quarter, we are concerned about the health of the global economy and have yet to see a recovery in many of the worlds largest markets," CFO John Connors said in a statement. He also said they were more pessimistic about PC sales than in the recent past. The negative comments pushed MSFT down to trade at $67.15 after closing near $70.00 during regular trading. This would be another negative to the Dow at the open if the trend continued.

Confusing the negative profit/outlook picture above, Larry Ellison, ORCL CEO said that the bottom was behind us and business was good. Compaq beat estimates by a penny and made some positive comments. APPL met earnings estimates and said it should beat estimates in the future.

The networking/telecom sector took another hit in after hours when Nortel met lowered estimates but warned again for the next quarter. The long awaited bottom in the telecom sector collapse was expected to have occurred in the 4Q. Nortel said they were expecting sales for 1Q to be -10% lower than the 4Q. They said visibility was still limited and while they expect growth to begin in the 2Q they still had no evidence of that fact. They did say sales from 4Q to 1Q were flat and the lack of further declines in orders gave them a little confidence in the future. NT, already beaten up, fell only slightly in after hours to $7.36.

The economic reports were encouraging with jobless claims falling for the second week in a row and even the spike in California claims due to the higher benefit failed to move the numbers. Continuing claims also fell slightly indicating a possible turn in the job situation. Still to early to tell but analysts were pleasantly surprised. Even better numbers came from the Philly Fed Survey. For the first time in more than a year manufacturing company responses indicated an increase in activity. New orders jumped from a -3.8 in December to +12.6% in January. This is huge in terms of economic news. It only represents one geographical area of the country but any good news is welcomed. This was the main catalyst in powering the markets on Thursday. The University of Michigan consumer sentiment is due out again on Friday and a slight increase is expected. That would help sentiment but hurt chances for another Fed rate cut in two weeks.

The outlook for Friday's open does not look good. S&P futures are down -7 but appear to have bottomed and are rising again slightly now that traders have had time to digest the IBM/MSFT news. Since both companies expected to do well despite "difficult times ahead" it is entirely possible the knee jerk reaction to the earnings announcements could already be over done. On Friday SUNW, MMM and VC lead the list of earnings warners, oops, announcers! The IBM comments about a bottom in the chip sector being behind us could lead to nibbling in the chip sector but I would not count on it. Investors have been burned so many times in the last two years that skepticism is deeply imbedded in any positive comment.

My worst case support level from Tuesday of 9725 for the Dow was hit at the close on Wednesday and broken by 14 points. The Dow rebounded off that level Thursday morning for a +137 point gain. I missed the Nasdaq support level of 1950 by six points as it hit 1944 at the close on Wednesday to rebound +41 on Thursday. Personally I will take that as a win but there is a good chance we will get to test those levels again on Friday IF MSFT and IBM hold their losses at the open. If SUNW and/or MMM make any negative comments with their earnings before the open then a retest of those levels may be assured. I will repeat my suggestion from Tuesday, if you have to buy the dip those levels would be my choices. (9725/1950) The market is still doing its imitation of Jekel and Hyde and the only real trend is still down. For that reason I have no upside entry targets at this time. The rally on Thursday was simply an oversold bounce after dropping from a high of 10300 on the 7th to a low of 9711 on the 16th in only seven sessions. That is -589 points which put us in severely oversold territory which reacted to the Fed Survey news. The bounce today corrected that oversold and Friday will now be totally earnings guidance driven.

Enter very passively, exit aggressively!

Jim Brown
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