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Market Wrap

Did You Trust The Bounce?

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      02-21-2002           High     Low     Volume Advance/Decline
DJIA     9834.68 -106.49 10029.94  9831.98 1.34 bln   1290/1839
NASDAQ   1716.24 - 59.33  1769.37  1716.24 1.81 bln   1188/2319
S&P 100   548.58 -  9.01   559.57   547.98   Totals   2478/4158
S&P 500  1080.95 - 17.03  1101.50  1080.24             
RUS 2000  458.44 -  8.81   467.71   458.43
DJ TRANS 2714.21 + 17.08  2752.08  2693.92
VIX        25.72 +  1.46    26.20    23.48
VXN        48.06 +  1.36    48.73    45.72
TRIN        1.43 
PUT/CALL    0.82

Did You Trust The Bounce?

I hope not! I warned you on Tuesday that any bounce would just be a short squeeze oversold rally and today proves that to be true. The continued weakness in tech stocks proved too much for the Dow to carry and resistance at 10,000 held once again. Worries continued about IBM accounting practices, INTC oversupply, more job cuts by Boeing and the new wild card, rising mid-east tensions.

Oil was about the only positive sector on the boards today and that was based on a Japanese newspaper claiming the U.S. already had troops in IRAQ. The U.S. denied the report mid-morning but oil held on the general feeling that if not today it is only a matter of time before the rumor becomes true.

The problem list today began with CSCO and a new article in the New York Post calling into question Cisco's accounting practices again. The post said that 12 top Cisco officials did not disclose stakes in a Silicon Valley partnership that made significant profits during the 1990s. CSCO fell to $15.00 on 106 million shares. What happened to those experts on CNBC who offered to take all the CSCO at $45 that anyone wanted to sell?

Adding to the CSCO woes was a warning from Ciena that Q2 revenues would be less than expected. CIEN said there continues to be a high level of uncertainty surrounding service providers near term spending. "Customers are continuing to delay deployment of new networks and we have received information from two major customers that they may purchase significantly less from us than previously expected." Q2 revenue is now only expected to be $110 million instead of $148 million.

Adding to the telecom sector demise was a warning by Bell South that revenue would be less than expected for 2002 and they were going to reduce cap-ex spending by -$500 million. BLS said deteriorating economic conditions in Argentina and currency devaluations would impact earnings.

The tech sector already hit by the telecom woes above was also hit by a downgrade to Intel by Banc of America. They said the supply of processors was catching up to demand. An excess supply of chips would prevent any price hikes from the current levels. Solomon and CSFB came to Intel's defense with SSB saying they would buy it up to $45. With today's close at $29.48 that would appear to be a generous recommendation.

The tech sector was the drag on the Dow, which attempted to add to the Wednesday rally gains. Unfortunately the Dow techs were all heading in the opposite direction from the other blue chips. IBM lost nearly $3 again hitting a new four-month low at $96.40 on continued accounting worries. IBM helped lead the average lower with fears that if IBM was dirty then many others may be also.

Another Dow component, Boeing, added to the gloom by announcing that it would cut -1,050 jobs at its satellite operations unit. AIG dropped -2.52 on news it had received a subpoena from the SEC related to deals they structured for PNC Financial. PNC fell last week on accounting concerns and that concern is mutating into three companies AIG setup for structured financing for PNC. The Enron collapse has called into question all such off balance sheet transactions including those at many blue chip companies.

After the close BEA Systems warned that the next quarter could be flat to down. XLNX raised its first quarter revenue estimates. (fiscal 4Q for them) They claim sales of their programmable semiconductors were strong and could raise revenue by +10%. AMGN fell after announcing they would sell $2.5 billion in convertible notes.

AOL continued its decline after Janus said it had trimmed its stake in the company substantially. Actually Janus sold all of its stake in EMC, dropped 20 million shares of NOK and cut its exposure to CSCO substantially. Who did they replace these tech stocks with? LLY, MO, RTN, C and Berkshire Hathaway. See the new trend? Techs are out! Multiply this by several thousand funds and you can see why tech stocks are still under pressure and out of favor.

Retail investors bailed out of all stocks with $3.1 billion cash flowing out of equity funds for the four days ended on Wednesday. January fund inflows were the worst in eleven years with flows in February heading in the opposite direction.

With economic news showing that the recession is already over and GDP is rising it is strange that investors are still in flight mode. The rise in unemployment claims by +10,000 was not a big event and the Philadelphia Fed Survey beat expectations significantly at 16.0. This is the second positive month in a row with yet another drop in inventories. While employers still expect an increase in business activity over the next six months they are not as certain as they were last month.

Definitely the market action is reflecting concern over current events instead of future expectations. The rebound out of the September depths went too far too fast and bears are taking every opportunity to sell the rallies. Today was picture perfect with resistance at 10,000 triggering the selling which accelerated as the day closed. The tech sector is just not showing evidence of an economic rebound that would justify the current valuations and with the accounting clouds growing there is no reason to buy. Funds are bleeding cash and retail investors are getting killed with every dip they buy.

While Friday may be a prime example of bipolar trading it should not offer any spectacular opportunities for long term positions. Techs may rally some from the huge -59 point drop but it is not likely. The Nasdaq closed at lows not seen since October with all major sectors under pressure. The next bounce may not be until 1675 or lower. The Dow will still be hostage to INTC, MSFT, HWP, IBM as tech leaders and JPM, C, SBC as weak sisters. Support on the Dow is around 9750. We are vacillating from overbought to oversold on a daily basis now and the only saving grace from Thursday was the dead stop by the S&P at 1080 again. The long term trend for the S&P is still bearish but 1080 has held since late January with only minor incursions. As long as the S&P holds this level the Dow/Nasdaq could take a Friday breather. Next week is another story and we will try to diagram that one on Sunday.

Enter very passively, exit aggressively!

Jim Brown
Editor

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