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Market Wrap

Lack Of Stimulus Axes Market

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       2-5-2002            High     Low     Volume Advance/Decline
DJIA     9685.43 -  1.66  9773.72  9603.99  1.7 bln   1309/1774
NASDAQ   1838.52 - 17.01  1867.94  1828.67  2.0 bln   1417/2117
S&P 100   552.38 -  1.05   558.13   547.32   Totals   2726/3891
S&P 500  1090.02 -  4.42  1100.96  1082.58
RUS 2000  468.82 -  1.27   470.60   465.70
DJ TRANS 2702.43 -  8.81  2717.13  2684.87
VIX        26.91 +  0.06    27.74    25.68
VXN        46.75 -  0.91    47.87    44.99
TRIN        1.80
Put/Call Ratio       .99

The markets struggled to rally twice during the trading day but both times traders sold the rally with a vengeance. The first bump came on an oversold bounce around 10:AM but quickly faded. The second rally began around 1:PM as several positive comments began to lift individual issues but there was trouble brewing in Washington. Around 2:30 Senator Daschle said he was pulling the stimulus package from consideration and the bids disappeared.

The list of losers was long and painful and included many of the big names. Tyco took yet another hit and dropped another -$8 after more allegations were raised and Fitch cut the debt rating for Tyco Capital. Yesterday S&P cut the debt rating for Tyco as well. TYC traded over 174 million shares as investors, fearing another Enron, raced for the exits. TYC has now dropped from near $60 to close at $23 in slightly over a month. Investors are still reeling from the news on Monday that they made over 700 acquisitions that were never disclosed to the general public.

Worldcom, (WCOM) took another hit with warnings from several telecom companies and more downgrades. WCOM hit a new seven-year closing low of $6.97. CEO Bernie Ebbers has got to be feeling the heat even more as over 147 million shares traded including over 1500 block trades.

Pressuring the telecom sector was warnings from Sprint and Cienna and claims that Global Crossing may have deceived investors with their accounting. Sprint (FON) and Sprint PCS (PCS) announced earnings and cut their outlook for all 2002. Not a pretty picture. Even worse was warning from CIEN that they would miss estimates and be forced to cut additional jobs. Nextel added to the woes by saying it was in default on several loans and does not plan to make further payments on several loans to its NII subsidiary. WCG and LVLT have already warned they might default on future debt payments we well. DB Alex Brown went against the trend and affirmed their price target of $32 over the next twelve months. $32 from $5? That would be a major move in the face of serious pessimism.

Tomorrow will tell the tale for the telecom and networking sectors as Cisco announces earnings and issues guidance. I mentioned last week that Cisco may be cautious in their guidance after Chambers was very low key in a recent interview. Should CSCO talk down their prospects tomorrow this entire sector could go even lower. Sure CSCO is gaining market share but the market is rapidly imploding. With only 5% of the 97 million miles of fiber active there is plenty of upside but that upside could take decades to build out.

With the imploding telecom/networking sectors and multiple warnings, everyone even remotely associated with them lost ground today. The losers included NOK, WCOM, AWE, QCOM, ADCT, ONIS, JNPR, TLAB, GLW, LU, NT and communication chip stocks AMCC and PMCS for example. Even BellSouth warned after the bell that they were cutting another 650-700 employees in their call center operations.

The weakness in telecom/networking stocks tainted those with positive results as well. MXIM reported profits inline with estimates and predicted a rise in bookings next quarter and the stock dropped in after hours. Think warnings are limited to techs? General Mills (GIS) fell in after hours after saying they saw "unusually" weak volume in its retail food business.

About the only bright spot for the day was GE which affirmed its earnings estimates for the quarter. They said 1Q earnings should meet or exceed Wall Street estimates and expected full year earnings to grow by 17-18%. They said revenues for 1Q should grow by 3-5%. GE finished positive +1.21 at $36.21 after a very volatile day.

Economically the picture became even more mixed again as Factory Orders rose +1.2% in December. In that report semiconductors led the gains with a +12.75% increase in orders. However Monday's Semiconductor Billings showed a -4% drop for December. This means there is still serious volatility and zero visibility in the tech sector. The ISM non-mfg numbers out Tuesday showed a slight drop in January and the new orders component fell below the 50% level again. These three reports increased worry for investors in the possibility of a "W" shaped recession instead of the hoped for "V" recovery. Only three of the 17 industries covered by the ISM index reported an increase in business activity while 12 reported a decrease in January.

It would appear that the economy and the market still has some tough times ahead. However, while the markets look very weak there are some signs of an oversold bounce in our future. The moving average on the TRIN is approaching bullish levels and the put/call ratio closed Tuesday at .99 which is normally bullish. Both these indicators are overbought/oversold measurements and simply tell us that pressure is building. The spring is compressed and will require more and more pressure to push it lower. Traders are afraid of the Cisco earnings and new accounting problems. With the accounting cloud, even a positive and optimistic Cisco may not be able to lift the market.

The current down cycle may seem like weeks but it has only been three days. We can still become even more oversold before we see a bounce but with the economic indicators easing and new financial disclosures appearing daily I doubt that any eventual bounce will go far. For the first time in ages the overall new 52-week lows beat the 52-week highs 192/173. There is a trend change in play that has spiked the volatility to near 27 on the VIX. The Nasdaq closed at a two month low along with the S&P and the S&P appears destined to retest support at 1080 with the outcome in serious doubt. When reviewing possible plays this afternoon it was really depressing. Most put candidates appeared oversold and most call candidates appeared to be failing at support. While I could build a technical argument for an oversold bounce there is a much stronger case for continued bearish sentiment. To put is bluntly, if you took my advice to go flat or short at Nasdaq 1900 from Sunday you would have done so shortly after 9:30 on Monday morning. I still think the Nasdaq is the key and the key to the Nasdaq is the CSCO earnings on Wednesday night. Positive guidance could give us a chance. Negative guidance could add to the current tech pressure. A change in "previously reported accounting practices" could retest the September lows. Remember, Chambers ducked the accounting question in a televised interview last week. Why? Enquiring minds want to know!

Enter very passively, exit aggressively!

Jim Brown

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