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Market Wrap

Four In A Row For The Nasdaq

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        WE 2-22          WE 2-15           WE 2-8           WE 2-1
DOW     9968.15 + 65.11  9903.04 +158.80  9744.24 -163.02  + 67.18 
Nasdaq  1724.54 - 80.66  1805.20 - 13.68  1818.88 - 92.36  - 26.46 
S&P-100  554.04 -  5.61   559.65 +  2.37   557.28 - 12.07  -  5.79 
S&P-500 1089.84 - 14.34  1104.18 +  7.96  1096.22 - 25.98  - 11.08 
W5000  10179.29 -136.19 10315.48 + 66.16 10249.32 -240.85  - 86.35 
RUT      465.07 -  4.18   469.25 +  2.58   466.67 - 13.37  +   .69 
TRAN    2725.65 + 41.42  2684.23 + 24.29  2659.94 - 99.39  - 20.59 
VIX       24.89 +   .80    24.09 -  1.38    25.47 +  2.60  +   .94 
VXN       48.57 +  3.58    44.99 -  4.29    49.28 +  6.20  -  2.59 
TRIN       1.33             1.89              .64             1.44 
TICK      +1044             -128             +957             +652  
Put/Call    .94              .90              .73              .67   

The Nasdaq stretched its losing streak to four weeks in a row while the Dow managed to post another small gain for the week. Friday was a sleepy day despite the afternoon Dow rally which briefly saw the Dow over 10,000 once again. The Nasdaq traded in negative territory until 2:30 as techs remained under pressure. Even improved guidance from XLNX on Thursday night failed to revive the semiconductor index which barely managed to post a gain of +1.69.

The talking heads had to stretch to find something to hype on Friday with more traders interested in Olympic hockey than investing. Heading the list was an announcement that JPM was undergoing a probe by the Federal Reserve Bank of New York over a JPM offshore entity named Mahonia. JPM traded oil and gas with Enron through this entity and the FRB is questioning if the "trades" should have been classified as loans instead. It appears JPM paid Enron in advance for oil and gas which was never delivered. JPM backed up the deals with surety bonds. It is now suing the insurance companies to cover the debts and the insurance companies are claiming that the transactions were really off balance sheet loans instead of actual payment for product which was never delivered. JPM lost another dollar on the news after briefly trading under $27.

Computer Associates admitted on Friday that it is the subject of two probes on whether it intentionally inflated its earnings to deceive investors. The U.S. Attorney's office and the SEC are asking pointed questions about maintenance agreements that were recorded as software sales in order to boost recorded revenue. CA is showing the impact of the probes with news that it had to draw down $600 million of one credit line to pay off another, leading to concerns that its debt is being called. S&P lowered its credit rating to negative from stable on the basis of the news. CA lost another -2.91 to close at $15.99.

INTC struggled back to positive territory after a week of losses but the nickel gain is likely only temporary. Dan Niles was negative on the stock again in a public interview stressing that at 30 times 2003 earnings it is very richly priced. There are clues that PC demand may be slowing at the same time that INTC has completed ramping up production. The excess supply of chips will weigh on prices and create margin pressures. In good times Niles pointed out that Intel normally trades with a PE in the mid teens meaning the stock price could drop significantly from here on any negative economic recovery news. It closed at $29.53 on Friday.

Remember JDSU? The stock was the darling of the tech investment community in 2000 trading at levels near $140 several times with every analyst issuing glowing strong buys. Friday CIBC and SoundView Technology lowered their ratings from Buy to Hold prompting another -5% drop in the stock. Not to fear however. Five percent now equates to $.26 cents with the stock closing at $5.00. So, if you bought JDSU at $100 on the basis of recommendations from these analysts I hope you saw the righting on the wall long before they did. If they loved it at $100 they should be borrowing money to buy more now. Would you like to bet on that possibility? I doubt it.

Roundly criticized last Tuesday for slamming Circuit City with a warning on remodeling concerns, Scott Ciccarelli, an analyst for GKM, was a hero today. Having the last laugh, Scott watched as CC warned that they would post lower than expected earnings due to remodeling expenses. Those expenses would run in the $182 million range over the next two years and knock 6 cents off 2002 and 18 cents off 2003 earnings. While Scott may have the last laugh does anyone think it is strange that he made such a specific and high profile call only a week before the company made exactly the same call? Sounds like a inside leak to me.

The markets rallied unexpectedly Friday in the face of more probes, accounting concerns, warnings and possibly weakening PC demand. Does this seem strange to anyone else? I mentioned above that INTC was "richly valued" according to Dan Niles at a PE over 30 with demand slowing not rising. The Nasdaq's fourth weekly loss in a row is due to the same problems. With the Nasdaq trading at 88 times 2003 earnings it is suffering from PE compression on a grand scale. It is not just the sky high flyers with triple digit PEs like EBAY, PNRA, NVDA and GNSS. It is every tech stock as the market as a whole continues to correct for three years worth of excesses. Every time a high profile CEO/company makes a "no recovery in sight" speech like the new IBM CEO did this week, those recovering PE ratios take another hit.

The Nasdaq is now down -18% from the January high of 2098 and is on the verge of breaking down even further. Some analysts feel that only a successful retest of the September lows will pave the way for future gains. They point to the fact that the Nasdaq was already in a nose dive when 9/11 occurred and they feel the tech bounce was artificial given the lack of an economic recovery.

Next week there is a minefield of economic reports that could fan the recovery flames or smother them depending on the results. Batting cleanup for the economic week is Greenspan who will give testimony again on Thursday on the state of the economy. Is it a V bottom, a U or a W? Greenspan will try and tell us it is could be all three and none are really bad as long as we come out with an eventual recovery. Also on Thursday is the Q4 GDP, which is expected to show that the recession is history and on Friday we get the Consumer Sentiment numbers again. Do you think Greenspan gets those in advance so he knows how to slant his speech?

The bottom line for Friday was "short covering again." Actually several traders said there was a buy program when the S&P bounced above support at 1080 at 2:PM and that buy program scared shorts from Thursday's plunge to cover rather than risk a Monday surprise. Whether this was the case or not the facts remain. The Nasdaq is struggling and may continue to be the anchor dragging us down. The S&P may have bounced off 1080 yet again but it clearly has a down trend of lower highs and 1080 is likely to remain under pressure next week. The Dow on the other hand is behaving well. It has a clear pattern of higher lows since Jan-30th and while the top remains slightly over 10,000 the trading range continues to narrow.

With the common indexes conflicting we need to look at a broader indicator. The Dow is 30 stocks, Nasdaq 100, S&P 500. Of these only the Dow is showing any strength. Using the Wilshire-5000 as our tiebreaker, the broadest index of them all is showing the same down trend as the S&P and Nasdaq. The index of 5000 stocks closed Friday at 10179, only +100 points above critical support at 10080. The Russell-2000 is also showing the same downtrend pattern and closed only +5 points above support at 458. These broadest of all indexes confirm the Nasdaq and S&P moves. The Dow, while being the most reported measure of the market is not really since it only consists of 30 stocks. Still it is the Dow that is keeping us from falling into oblivion. Without the strength shown by this figurehead a retest of the September lows would already be in progress. The question here is "how long can the Dow continue to carry the flag?" IBM is already under pressure along with INTC, MSFT and the financials. None of that is likely to change and how many +3.00 days can we expect MMM to provide?

The bottom line for me is still flat to down for the markets and flat or short for traders. Don't get burned buying the next dip. If the Nasdaq breaks 1700 it could get ugly really fast.

Enter Very Passively, Exit Aggressively!

Jim Brown
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