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Market Wrap

After A Month Off The Dow Returns To 10,000

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      02-14-2002           High     Low     Volume Advance/Decline
DJIA    10001.99 + 12.32 10052.29  9959.23 1.26 bln   1468/1624
NASDAQ   1843.37 - 15.79  1877.74  1840.78 1.66 bln   1367/2121
S&P 100   567.13 -  0.66   571.40   564.76   Totals   2835/3745
S&P 500  1116.48 -  2.03  1124.72  1112.30             
RUS 2000  470.75 -  5.58   477.36   470.75
DJ TRANS 2686.67 - 25.02  2721.71  2681.34
VIX        22.89 +  0.47    23.66    22.47
VXN        42.14 -  2.33    45.04    42.14
TRIN        1.27 
PUT/CALL    0.91

After A Month Off The Dow Returns To 10,000

The Dow struggled all afternoon after spurting above 10,000 shortly after the open. Nobody would have expected anything different. From last Friday's low of 9580 to Thursday's high of 10052 was very close to a +500 point gain which is almost +5%. Entire years have passed without a 5% gain and the profit taking we saw today was minimal. The Dow has not traded over 10000 since slipping below that level on January 11th. The Nasdaq however failed to hold above resistance at 1865 and appeared weaker than the Dow even after some positive tech earnings.

Hewlett Packard lead the tech earnings parade on Wednesday with earnings that beat the street but a number that they clearly said would not be repeated in this quarter. The revenue for last quarter was only -4% below the same quarter last year. The surprising results had analysts scrambling to find the funny numbers in their earnings. Carly Fiorina said "I will metaphorically and literally and in every other conceivable way tell you that these numbers are exactly what they seem to be: solid execution." Carly, there may be hope for your CPQ acquisition after all! HWP did say that they expected tech problems to continue because corporations were holding to very tight budgets and waiting until they see clear signs of a recovery to loosen those strings. Carly said she was not yet convinced of a second half rebound in 2002 tech spending.

Following the HWP earnings on Wednesday was the DELL earnings tonight. Unfortunately the Dell report was not quite as strong. Dell met analyst's estimates of $.17 but also said they expected their sales to drop -3% to -5% in this seasonally weak quarter. They said they expected the PC market to drop -10% this quarter but their volume to drop less than their competitors. They still expected to meet the current estimates of $.16. Dell is taking market share from GTW, CPQ and HWP and gave the credit to the ads using "Steven" as their spokesperson. Dell has led an aggressive price war and the result is their average selling price has fallen from slightly over $2,000 to near $1,700 while their gross margins have remained flat. Dell's shares were also flat in trading after the announcement.

About the only tech stock to blow away earnings this week was NVDA which announced earnings of $.43 compared to analyst's estimates of $.34 cents. Everything about the earnings was positive but the stock got crushed in after hours. It was due to their announcement that the SEC is looking into accounting activities related to recording certain reserves and expenses in the 4Q of 2000 and the first three quarters of 2001. This review was spurred by a previously announced investigation of alleged insider trading by some Nvidia engineers. The stock closed at $62.23 in regular trading but fell to under $56 in after hours.

INTU ended the day with only a slight gain after gapping open to $39.30 on earnings and a positive guidance. The problem was a downgrade by SSB who said use this opportunity to sell into strength. Normally the second and third quarters are best for INTU but SSB thinks they are already overvalued.

Qwest hit a new two-year low after saying they were going to draw down $1 bil of their $4 billion bank line to payoff their short term debt. It appears they have been turned down by the commercial lenders for additional financing due to the various bankruptcies of telecom companies like Global Crossing. Fearing further depression in the telecom sector nobody wants to risk additional funds on these stocks. Qwest closed at $7.49 down from it high near $70 in 2000. AT&T also fell back to support near $15.50.

In the networking sector JNPR hit a new low under $11 after a report by a market research firm said Juniper's market share of the Internet communications market dropped -25% during the last three months of 2001. While traders feel this sector can't get much lower we need to remember that bankruptcy is still an option for several of the players. CSCO, who was the beneficiary of the market share gains failed to rally on the news because of the telecom woes mentioned above.

The banking sector struggled at resistance with JPM headed in the opposite direction. The WSJ said that JPM appeared to have the largest exposure to the $14.4 billion in unsecured loans that Tyco drew down last week. Analysts estimate that JPM could have $1 billion in exposure to Tyco. Let's see, Tyco, GX, KM, ENE, Argentina, Japan. Is there anybody that JPM would not lend to? Maybe PVN should consider a partnership with JPM and teach them how to get creditors to put up deposits to secure loans. Tyco issued an earnings warning on Wednesday saying higher borrowing costs and accounting distractions had disrupted their business. I wonder how many shares of TYC that JPM shorted when they heard their credit line had been executed? Multiply that times the $14.4 billion they drew down and you can see why TYC fell -$4 from Wednesday's high.

In economic news Jobless Claims fell again to 373,000 and nearing the recent low of 360,000 set back in January. The slowly improving jobless market is another indicator that the economy may actually be improving despite continued warnings from tech stocks that the 2Q will still be dreary. The pace of layoffs has also subsided as inventories of products have dwindled. The December inventory numbers announced today showed a drop of -.4% while sales were flat. The inventory to sales ratio remained 1.39 for the third straight month. Eventually there will be nothing left on the wholesaler shelves to sell and manufacturing will have to increase. With the inventory ratios not at levels not seen since early 2000 many analysts feel the eventual pickup will be very strong when it occurs.

Friday is decision day. With a weeklong rally behind us the odds of it holding over a three day weekend are slim. Much of the activity this week has been short covering, for both stock and option positions and program buying. With tomorrow being an options expiration Friday much of the volatility has been due to the market swing. When you realize that last Friday's lows were the second lowest low in three months for the Dow and this Friday's high was back over 10,000 you can see what has been driving traders nuts. The "short the rally concept" that has been working so well for a month undoubtedly took many shorts to the cleaners this week. If you remember last Sunday I said wait for the Nasdaq to move over 1875 before you could be sure the rally was for real? The high today was 1877 after fighting resistance at 1850 for three days. We are not out of the woods yet. The failure at 1875 and possible profit taking on Friday could put us right back into the low 1800 trading range again.

The S&P bounced exactly off resistance at 1125 (1124.72) and pulled back on profit taking to regroup. Still with the Dow closing one tick over 10,000 and the S&P holding its ground it is anybody's guess what will happen on Friday. With over +400 points of profit on the Dow but less than +75 on the Nasdaq this week the major averages are trapped in a divergence pattern. Tech is still weak and with Dell's warning today could get weaker. Defensive issues are seeing buying as well as cyclicals. The bottom line is that nobody has any confidence in the rally or the economy and nobody wants to buy here. Nobody except the retail investor. Equity funds saw nearly $3.9 billion in cash inflows for the week ended on Wednesday. Compared to the recent outflows this is a flood of cash. You can easily see that this cash helped power the recent rally. Some of this was the 459 cash from pension funds that hit the market on Monday. That spigot is now off and we will be back on our own for next week.

My best guess for Friday is a coin toss. Logically we should open with a spike up on final option short covering and then sell off on profit taking ahead of the three day weekend. However we all know that if you want logic the markets are not the place to look. Tighten up those stops and close the day with that winning feeling if you get stopped out for a profit.

Many of our readers have emailed in the past for a return of the market posture section in graphical format. We listened and as of today it is back in an improved format. Every index that we follow is listed and by clicking on that symbol you can see all the stocks that are in that index. Take a test drive here:


Enter very passively, exit aggressively!

Jim Brown

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