Option Investor
Market Wrap

Running in Quicksand?

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        WE 1-25          WE 1-18          WE 1-11           WE 1-4
DOW     9840.08 + 68.23  9771.85 -215.68  9987.53 -272.21  +122.75
Nasdaq  1937.70 +  7.36  1930.34 - 92.12  2022.46 - 36.92  + 72.12
S&P-100  575.14 -   .10   575.24 -  8.96   584.20 - 14.41  +  6.86
S&P-500 1133.28 +  5.70  1127.58 - 18.02  1145.60 - 26.91  + 11.49
W5000  10576.52 + 67.16 10509.36 -188.86 10698.22 -234.10  +113.75
RUT      479.35 +  4.98   474.37 - 15.57   489.94 -  9.36  +  5.68
TRAN    2779.92 +112.67  2667.25 - 39.52  2706.77 -123.43  +187.15
VIX       21.93 -  2.41    24.34 +   .36    23.98 +  1.96  -   .31
VXN       45.67 -  3.22    48.89 +   .52    48.37 +  1.51  +   .92
TRIN        .82             1.13             1.44              .94  
TICK       +885             +522             +290             +996 
Put/Call    .68              .85              .68              .67    

The market action on Friday was like a marathon runner nearing the end of the race and being forced to run through knee deep mud. Every step was still forward but each was becoming slower and harder to make. The energy required to simply maintain the day's gains was growing as the close neared. Fortunately time expired before the Dow fell back into negative territory and the week went into the books as a win. A slim win for the Dow with only a +68 point gain for the week but much better than the +7 point gain for the Nasdaq.

The tech sector was under pressure from the opening bell but managed to pull into positive territory for a short while after lunch. Traders began taking money off the table as the afternoon progressed but the selling was orderly and on low volume.

The tech pressure came from the JDSU earnings warning. The comments about the possibility the current quarter would not be the bottom weighed heavily. Nobody wants to consider that there could be another dip in our future. JDSU gapped down and closed at a four month low near $7.00. Corning joined the party and closed at a three month low of $8.10.

After a two day rally the software sector gave up some gains after PeopleSoft warned that they saw no recovery in the first half and only a modest recovery in the second half. PSFT lost -2.50 on the day after being down -$5 at one time. PSFT also was a target of "accounting practices" rumors. They announced they would buy an affiliate, MMTM, for $90 million. With this affiliate they had sheltered more than $230 million of expenses since 1998. Their auditor is.......Arthur Anderson. The PSFT CEO said the criticism was unfair. "Just because a person with a drivers license robbed a bank it is no reason to take away everyone's drivers license" said Craig Conway. Somehow, Craig, I don't think it is quite the same thing but we will give you the benefit of the doubt.

Oracle, which had been trading right at resistance of $17.25 nosed down as well. RSAS added to the software dip with a loss of -4.78 or -28% after announcing that the SEC was investigating some accounting practices and trading in their stock. Evidently they offered to sell some stock to an investment bank and then guarantee the value of that stock with puts. Sounds like a viable plan to me but the SEC wants a better explanation. Maybe there was insider info involved that knew the stock was going to fall. Microsoft rounded out the software dip as it neared a breakdown of support at $63.50.

Surprisingly the semiconductor sector saw its rally extend to three days with a +12 point gain in the SOX. The 7% gain in chip orders in December is providing some underlying strength even though many of the individual stocks are still showing weakness. The leaders were the equipment manufacturers like AMAT, KLAC, NVLS, DPMI and ALTR. PMCS beat estimates by a penny and Goldman Sachs raised it to the "recommended list" from "market outperform."

The biotech sector resumed its slide with IMCL still under pressure. Many biotechs are at support levels but those levels appear to be in danger. ICOS, CIMA and ADRX would be good examples of a possible support failure ahead.

Compaq raised its estimates to revenue of $34 billion for 2002 but only expects a +2% rise in that revenue. The CEO said he felt the fundamentals were in place for substantial rebound in the second half but it still remains to be seen if it will come to pass. Dell jumped +1.13 on the news and CPQ remained flat. GTW fell -1.14 to $5.22 after several brokers downgraded the stock due to this weeks earnings announcement.

The Enron scandal took another dreadful turn on Friday as past vice chairman Cliff Baxter committed suicide rather than be forced to testify against his friends according to his suicide note. He was one of the seven insiders who sold millions of shares of stock while the company was imploding. He sold $35 million and resigned as vice chairman in May. He was one of the reported "good guys" who questioned the accounting practices of the company.

Some of the midday Dow bounce was due to a rumor making the rounds that President Bush would introduce legislation to limit liability from asbestos claims in his State of the Union Speech on Tuesday. Numerous companies have suffered over the last several weeks from implied liabilities. Among them were DOW, HAL, GP, USG and VIA. Many others have been seeing selling "just in case" and have pressured the manufacturing sector.

Ford took center stage with a huge preferred convertible security offering which hit $5 billion. Ford announced the pricing of the offering and the dividend. The securities will pay an annual dividend of 6.50% or $3.25 for each share and will be paid quarterly beginning in April-2002. Each preferred security is convertible into 2.8249 shares of Ford common stock at any time. This equates as $41.25 at today's share price of $14.61. Ford raised the amount of the offering from $3 billion to $5 billion and lowered the dividend amount after rumors surfaced that they received over $25 billion in bids. This is the largest offering on record and surpasses Tyco's $3.45 billion offer in Nov-2000.

The wireless sector is looking more like a tired game of pong. The daily ups and downs are almost becoming comical. Nokia turned in a decent performance earlier in the week but lost ground on Friday after Ericsson posted a larger than expected loss. ERICY also said they expect to lose twice as much in the 1Q as analysts had expected. They also expect a "possible" recovery in late 2002 but feel that demand for the year will be flat to down. I guess that is why ERICY is trading for $4 and NOK for $23. Nokia's outlook was much brighter even though they expected the 1Q to be down.

Next week brings us more earnings and numerous economic events. The State of the Union Speech on Tuesday is not normally a market mover but Bush may be looking for a new platform for economic issues now that the terrorist war is dropping from the news. Analysts will be looking for things like asbestos liability limitation and assurances we are not going to declare war on IRAQ or IRAN. The markets are likely to be cautious before the speech unless there is a leak of economic incentives before then.

The FOMC meeting begins on Tuesday and is a two day event but the outcome is far from known. Will he or won't he cut again. Greenspan appears pretty certain that the recession is about over but then again just a week ago there were "significant risks." Now which is it? Does he go with the "fundamentals in place for a rebound" and "pressures on the economy diminishing" which he parroted this week or does he convince the board members that an insurance cut is still necessary? Remember he has alluded to another possible dip in our future if demand does not pick up. We are still working off inventory but without orders the economy will stay flat. Cut or not, it will be the guidance given after the meeting that reflects the feelings of the entire committee and not just their chairman. The markets will be cautious ahead of the announcement on Wednesday as well.

The economic reporting schedule is also huge with the biggest events being the first look at 4Q GDP on Wednesday, Employment Cost Index, Personal Income/Spending and PMI on Thursday. The week ends with Nonfarm Payrolls on Friday. If ever there was a week with a minefield of events, this is it.

The Dow finished the week exactly under overhead resistance at 9850 after rebounding +156 points from the Wednesday lows. The Nasdaq also closed under resistance again at 1950 and only +57 points above the weeks lows. The S&P failed again to break the 1140 barrier and showed smaller gains for the week than the Dow or Nasdaq with only a +5 point gain. Clearly we rebounded out of the oversold conditions of Tuesday/Wednesday and then ran out of steam once the oversold conditions eased.

There are still dozens of major earnings announcements next week but none have the power, in my opinion, to move the markets up in a big way. American Express, DOW, DIS, UAL, AT&T an AOL all announce with AOL being about the only one which could provide an upward bump. The expectations for AOL are so low that any positive news could provide the spark but probably it would be contained within the Internet sector. Of the several hundred stocks that announce most are symbols you have never heard of. Over 53% of the S&P-500 have already announced with 54% beating estimates and over 27% missing estimates. This is better than the 4Q-2000 when 46% beat and 51% missed estimates. Still there is no joy in Mudville as the mighty techs have all struck out. All failed to promise a return to the glory days and some even suggested a possible return to bad times. Not much for investors to use for emotional support.

The long-term vision is still the same, recovery in the second half. It is just that investors were hoping for a positive surprise and a quicker, faster, stronger, better, put your adjective here, rebound. That means we have come too far, too fast and will likely move sideways for some time until more recovery signs are seen. Depending on the political verbiage next week we could break out of this stalemate to the upside or to the downside! We need to be ready for both alternatives. On Thursday I raised my exit levels to 9750/1925 and those levels still stand. The Nasdaq dipped to 1923 on the opening tick on Friday and then rallied to close only +12 points above that low at the close. The Dow missed 9750 by only five points before struggling ahead. Both of these indexes are very weak. To reiterate, next week has numerous events, which could cause a market drop and very few which could cause a serious rally. Be very careful about maintaining your stops and remain long over 9750/1925 and stay flat or short below those levels.

Enter Passively, Exit Aggressively!

Jim Brown
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