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Market Wrap

Techs Drag Markets Into Cellar

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       2-7-2002            High     Low     Volume Advance/Decline
DJIA     9625.44 - 27.95  9743.05  9624.12  1.4 bln   1403/1681
NASDAQ   1782.10 - 30.61  1824.07  1781.73  2.0 bln   1384/2124
S&P 100   548.69 -  1.51   555.82   547.24   Totals   2787/3805
S&P 500  1080.17 -  3.34  1094.03  1078.44
RUS 2000  458.40 -  4.01   463.14   458.09
DJ TRANS 2604.60 - 17.38  2633.08  2604.60
VIX        27.33 -  0.87    28.53    26.52
VXN        50.90 +  1.84    51.11    49.14
TRIN         .68
Put/Call Ratio       .85

Techs Drag Markets Into Cellar

Cisco's earnings failed to inspire confidence in a coming recovery tech stocks took yet another dive. Even a bounce by TYC and WCOM failed to bring investors back into the game. At 2:PM an attempt to rally failed and selling picked up speed. Hardest hit were chip stocks with GNSS losing -9.40, NVLS -3.79, AMAT -2.83, KLAC -4.45 and BRCM -3.08. If chips are going to lead the Nasdaq then where are we going?

Cisco announced earnings on Wednesday and while they were better than expected the all important guidance left a lot to be desired. Cisco said they saw the next quarter to be flat to "low single digit" growth and they declined to speculate on future quarters given the difficult economic outlook. Chambers said on the conference call that he would like to be more confident of economic growth resuming in the next several quarters but "in our opinion, no one is really sure." This lack of positive guidance slammed the networking sector and almost anything related to the tech sector on Thursday. Reassuring comments from WorldCom did little to put a floor under telecoms. WCOM said in a conference call that "bankruptcy or credit default is not a concern." They did however miss estimates and warn for 2002.

GNSS helped crash the chip sector when Pacific Growth initiated coverage with a "neutral" rating. They said that GNSS has "nearly maxed out its potential." They said competitive threats combined with average selling price reductions would drive revenues lower on an organic basis. They also felt the Sage acquisition should hide the declining revenues for the next two quarters but after that the fundamentals would break down. GNSS fell from $55 on Wednesday to $44.10 at the close on Thursday.

The Retail sector did a crash and burn after a gap and crap open on stronger than expected same store sales from some of the group's leaders. Reporting higher sales were WMT, JCP, KSS, SKS and MAY. Target also raised its estimates for the current quarter. Stores that lost sales included GPS, FD and Sears. Chain Store sales rocketed +5.2% in January up from 2.2% growth in December. This was the biggest jump in sales growth since April 2000 when sales grew +7.9%. Analysts said consumers responded well to the special sales designed to part consumers from their money during a recession but while inventory was sold, profits could be hard to find. The entire sector gapped open on the news but almost everyone closed with a loss for the day. Buy the rumor, sell the news.

The economic data may have told us more then Cisco. The meager calendar today was highlighted by the Jobless claims which fell from 391K to 376K and marked the fifth week below 400K. The continuing claims and the four week moving average also fell. This shows that the layoff picture may be easing even in the face of new job cuts announced this week. Labor markets are expected to be weak for sometime but every minor gain should be accepted graciously.

With the Enron cloud hanging over the marketplace and testimony blaring from the news/stock TV channels there are just not very many good reasons to rush out and buy stocks. Investors are worried that any stock could be next with rumors flying about almost everyone. Even GE, which should be bulletproof, has been in the rumor mill constantly. ELN announced after the close that the SEC was investigating them for possible deceptive accounting practices. Hardly a day goes by without someone becoming a new target. Until this confidence crisis passes it will be hard to mount a strong rally.

On the positive side there appears to be a capitulation event in our future. Numerous analysts have said that the accounting problem would need to see stocks move to a new level which discounts any future revelations. With the total market cap somewhere in the $12 trillion range and already over a trillion dollars lower than it was when the crisis started we have seen a 10% drop. Many are now saying the discount is about done and all we need is a capitulation event to cause institutions to come back into the market. For the Dow that could mean another dip below last weeks low of 9529. Hopefully that low will slow the descent since the next meaningful support is 9050. The Nasdaq, which has been substantially weaker than the Dow, does not have support until the 1650-1700 range. The S&P has spent two days clinging to current support at 1080 with the next level at 1060. A capitulation event could take the form of the deep V drop on Jan 29th/30th where the S&P dropped -54 points in two days. It is just unknown where that drop would stop since we are already below the lows from that January dip.

The markets are not oversold on a trading basis. The VIX is moving sideways at 27 and the TRIN is very anemic at .67. The put/call ratio at .85 is only slightly bullish. There is definitely room for more selling before expecting a rebound. While the Dow has tried to rally the tech sector continues to drag it back down every day. Several Nasdaq bigcaps are setting new relative lows. SUNW 9.22, MSFT 59.79, finally broke $60, QCOM 39.11, broke support at $40, DELL 26.20. The other bigcap techs, INTC and ORCL are not far behind. The giant chip sector crash today could be an omen of the coming capitulation. The strongest sectors are the last to sell off and with increasing chip orders (according to some reports) this sector had been gaining ground. Their crash on Thursday could be the start of the re-valuation that institutions have been looking for. Still we are just grasping at straws here since there is nothing concrete on which to base these assumptions. It is pure speculation but it has happened in the past. Chips lead the way up, get crushed last and then lead again.

Unfortunately speculation can be expensive if you guess wrong. Instead of speculating on possible outcomes I would recommend trading what the market gives us. These would be my suggested scenarios. Should the markets rally from here I would want the Dow to be over 9775 and rising on strong volume but only if the Nasdaq was rising as well. Finding a bullish breakout level on the Nasdaq is much more difficult. The downward trend is just too pronounced. Ideally I would like to see the Nasdaq over 1960 but that is almost +200 points from the Thursday close. The interim level would be around 1875 but that is nearly +100 points above our close. The problem here is the steepness of the decline. Any attempt to buy techs closer to our current level could set us up for another failed rally and a new loss.

I would rather suggest that we anticipate a bounce in the Nasdaq 1700 range and attempt to bottom fish from that level. A real capitulation could put us in that range any day now. Without that event we could be just throwing good money after bad. The market hates techs today which builds a strong case for that coming rebound. Cash is building up on the sidelines from a week of selling pressure. It is not coming in from the retail sector per TrimTabs.com which said only $1.5 billion flowed into funds over the last week ended on Wednesday. My bottom line recommendation is to stay flat/short until we get that capitulation sell off. Should we rise from here I would close Nasdaq puts at 1835 but not go long calls until at least 1875 or higher. Selling the rallies has been very profitable lately and should continue to be so until the trend changes. Should we dip near 1700 I would look to buy the bounce as a trading play only. Fridays are not normally market bottoms but can produce bullish swings. Shorts who do not want to hold over the weekend will cover if the trend flattens and investors hoping for a Monday bounce will go long at the close. Neither of these normally begin a lasting trend but provide the opportunity for a quick scalp or two. I view tomorrow as a throw away day unless we get the deep selling. Until then everything else is just noise.

Enter very passively, exit aggressively!

Jim Brown

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