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Market Wrap

Old Resistance Tested Again

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      02-12-2002           High     Low     Volume Advance/Decline
DJIA     9863.70 - 21.10  9906.00  9811.60 1.09 bln   1520/1560
NASDAQ   1834.21 - 12.45  1852.22  1817.13 1.59 bln   1708/1804
S&P 100   562.51 -  2.57   565.30   560.02   Totals   3228/3364
S&P 500  1107.50 -  4.44  1112.68  1102.98             
RUS 2000  472.01 +   .69   473.55   467.67
DJ TRANS 2730.76 +  7.10  2747.75  2697.32
VIX        23.47 -  0.07    24.98    23.29
VXN        45.45 -  0.96    47.59    44.87
TRIN        1.40 
PUT/CALL    0.80

After two big days of gains the markets rested. Actually the performance was nothing short of remarkable. The +300 point gain on the Dow in two days of trading held in the face of possible terrorist attacks, low volume and continued accounting questions. The Nasdaq managed to hold its gains in front of the AMAT and NTAP earnings. Even a warning by Nortel failed to tanks the techs again.

Nortel announced this morning that their CFO had quit for inappropriate stock trades and that weak first quarter demand would make it hard to meet earnings targets. The CFO had traded Nortel stock illegally in his 401K and Nortel had reported the trades to stock regulators. CFO Hungle said he was resigning due to two mistakes he made in 2001 when he traded the stock. The regulators are said to only be looking at his trades and not the company as a whole like in the Enron case. Hungle reportedly sold stock in his 401K just prior to an earnings warning and then bought stock back in December just prior to a positive earnings announcement. He lost his million dollar a year job for $20K in stock profits. Sounds like he needs to take math class over again.

Nortel said that customers trimming orders in the 1Q were going to cause NT to report lower earnings than previously expected. They said shrinking orders in the last 25 days showed that customers were not going to spend any money which was not absolutely required. They still feel that they will return to profitably by the 4Q. The warning hit the already depressed networking/telecom sectors but only slightly.

The heat on Nortel this morning was mild compared to the heat on Kenneth Lay as he was verbally flogged for over an hour even though he declined to testify. He was called worse than a carnival barker and worse than Charles Ponzi as each of the panel members took advantage of the high profile news event to campaign for future votes.

EMC and KKD were the focus stocks of the day for accounting problems. EMC lost -1.04 after a report that a former vice president, who claimed EMC booked revenue improperly, met with the SEC. Details of the meeting were not known but he said in a deposition last year he was troubled by dealings with certain resellers and related earnings. KKD went on the offensive after questions arose about questionable accounting methods. They changed their method of financing construction of a new dough-mixing plant from a synthetic lease to conventional financing that will show up on their balance sheet. They also took the opportunity to raise the estimates of the cost of the plant to $35 million and affirm their earnings estimates for the last quarter.

Another one bites the dust. Kaiser Aluminum, KLU, filed for bankruptcy blaming a weak economy, depressed prices and asbestos litigation. They received $300 million in emergency funding from BAC and assured analysts it would be enough to see it through the bankruptcy process.

On the earnings front there were two high profile tech stocks that announced after the bell. AMAT beat the street by two cents on a -54% drop in orders from the same period last year. They said the current quarter was a challenging environment but they expected orders in the 2Q to rise +10-15%. They still see a drop in capital spending in 2002 of about -25% but feel the bottom is behind them.

Network Appliance (NTAP) also beat the street on a solid quarter even though they booked only two thirds the revenue of the same quarter the prior year. The CEO said competition had eased and earnings per share would be steady (flat) this quarter on a revenue rise of 2-5 percent. "We found the bottom and we are actually seeing a slight trend up." Cheaper component prices improved gross margins to 62.2%. Let's see, EMC is facing accounting questions and NTAP is seeing less competition, higher gross margins and a rise in revenue. Who do you think will get investor votes?

Investors attempted to continue the two-day winning streak by the Dow but were simply unable to power through the 9900 level on the low volume. 9900 has been strong upper level resistance since mid-January and is the next hurdle the Dow will have to cross. After the successful penetration of 9750 on Monday the index simply ran out of steam with the weight of possible terrorist attacks and AMAT earnings looming overhead. Wednesday could be much different. With the Nasdaq knocking on the door at 1850 the positive comments from both AMAT and NTAP might be enough to push the averages to the next level.

Even though the markets finished slightly lower on Tuesday there was a slight uptrend from the morning lows. It was as though they were finally drifting up instead of down. I would advise traders to tighten up their stops at this point and watch as the battle for 9900/1850 progresses. Should the bulls win, it would be on the continued evidence of a slight upturn in the economy. Should this concept continue to pan out a real rally could be in our future. Keep your fingers crossed but also keep those stops in place.

Jim Brown

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