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Market Wrap

Techs Continue To Lead, Down!

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      02-28-2002           High     Low     Volume Advance/Decline
DJIA    10106.13 - 21.45 10238.70 10104.88 1.36 bln   1652/1448
NASDAQ   1731.52 - 20.36  1773.20  1728.65 1.91 bln   1634/1895
S&P 100   562.41 -  0.68   570.51   562.36   Totals   3286/3333
S&P 500  1106.73 -  3.16  1121.57  1106.73             
RUS 2000  469.37 -  3.24   473.40   467.91
DJ TRANS 2810.93 - 50.13  2879.26  2810.93
VIX        23.06 -  0.03    23.79    22.49
VXN        46.19 +  0.43    47.04    44.81
TRIN        1.32 
PUT/CALL    0.83

Techs Continue To Lead, Down!

Tech stocks weighed heavily on the Dow again as another big intraday gain evaporates before the close. For the second day in a row the Dow has given up nearly 130 points from the day's highs near 10250. This is not the kind of trend traders like to see. Volume increased on today's drop where is was light earlier in the week. A barrage of speeches by Fed governors was unable to press home the advantage of positive economic reports this morning.

Starting the day was a break out in the Chicago PMI to 53.1, which is the first indication of business expansion in this indicator in the last eighteen months. A number over 50 indicates expansion. New orders shot up to 59.5 from 48.7 in January and order backlogs turned positive as well. The employment index rose to 36.3 from 23.2 indicating that production is growing. All in all these are highly bullish reports.

Adding to the bullish PMI was a 4Q GDP estimate that soared over current estimates. At 1.4% growth it nearly doubled prior estimates and if it is anywhere near the actual number will show that the recession was the lightest economic correction in modern times. This was also very bullish with estimates for the full 2002 year now in the 2.5% to 3% growth range. Consumer spending was revised upward to 6.0% annualized in the 4Q but remember there was nearly $60 billion in auto sales as a result of the interest free financing deals. The expected fall off in 1Q auto sales has not occurred with only a moderately seasonal softness.

The negative items were a continued drop in telecom and IT spending along with a drop in orders for computers despite an up tick in January. Also, business construction is experiencing a slow down as leases signed during the boom are not being renewed and new office space is going vacant.

Initial jobless claims for unemployment rose slightly to 378K for the last week but the prior week was revised downward to only 361K. The claims appear to have leveled off slightly below 380K which shows there appears to be a balance between new jobs and newly unemployed but the employers are still not rushing to refill the ranks. Impacting the continuing claims number is the number of workers running out of benefits due to their time expiring. Many states have now put in voluntary extensions to the 26 week period due to the number of unemployed in their state. That makes the continuing claims numbers suspect even as they rose to 3,492,000 last week. Greenspan indicated that although the economy is expected to rebound soon that rebound is likely to be moderate and unemployment could rise to 6.5% before a full recovery is felt. Contributing to the theory that jobs are still tough to find was the Help Wanted Index which was flat at 47 for the second month. Slightly improved from the Nov lows of 45 but still flat. No new ads but no further drop.

The positive economic news was no help to Genesis Microchip (GNSS) which lost -17.51 on news that the merger with Sage could be dilutive and not accretive as previously thought. CIBC analyst Robert Adams downgraded the stock to buy from strong buy but cut his price target to $45 from $85. Considering the high this week was near $45 the news and the downgrades, three in all, hammered the stock price. Did I mention we picked GNSS as a put play at $45 on Feb-14th. We dropped the play today with a -$21.51 change since picked.

Shares of Riverstone Networks dropped -50% to $3.82 after saying that 4Q sales would be in the $54 million range instead of $65 million as previously expected. This was also notable as the first time in 12 quarters that sales volume fell instead of rose. RSTN said it would cut more of its workforce and attempt to cut costs by another -10% and would eliminate certain products. The networking sector just can't get a break and with this news on top of the CSCO downgrade on Wednesday the NWX.X hit a new five month low. Cisco attempted to rally from its $14.16 low from yesterday but early gains evaporated to close flat for the day. Rumors persist that Cisco will be the next Enron and while nobody really believes it the pressure and the volume is intense. CSCO traded over 100 million shares on Thursday and 122 million on Wednesday. As they say on the street, Cisco is for sale!

Adding to today's tech wreck was the warning from Gateway that they would lose as much as $120 million in the first quarter. The CEO was glowing on CNBC that although things were tough they were on track for profitability. Those profits would not come in 2002 as previously expected but had now been pushed into 2003. GTW dropped into the mid $4 range but the real impact was to Nasdaq heavyweights Dell and Intel which fell on the warning. INTC shook off a bounce to $31.50 earlier in the week and set a new four month low of $28.50 today.

Other warnings included PDLI, which announced earnings inline with estimates but warned for the entire 2002 year. MBG warned but it is not a mainline company and the impact on the markets will be muted. MBG has been climbing nearly vertically out of the September bottom and this could slow that rate of climb. DIS was hit by a downgrade by Goldman Sachs after the company expressed concern over future earnings. Disney's CEO was on Capitol Hill today complaining about the piracy of movies and their availability on the Internet. Cigna dropped -$4 on news that the Department of Justice was investigating their cost reporting practices over the last 10 years. AMR warned that they expected a loss for the full year but were unable to provide an estimate because the full impact on air travel from the 9/11 attacks will continue to be significant throughout 2002. MSFT lost ground slightly after the Justice Dept filed a revised settlement agreement after taking over 30,000 comments from consumers. MSFT said the revised agreement was mostly new language designed to make it more understandable to third parties.

EBAY was one of the few winners on Thursday. After being hammered by a downgrade from Lehman Bros. Holly Becker on Wednesday a different view was posed by Mary Meeker at Morgan Stanley. A little competition between Internet analysts or the start of a fight? Holly said the company may not have the momentum to continue growing at the prior rates and increased competition by Yahoo and Amazon could slow growth. Meeker said the +64% revenue growth last year would be met by +125% international growth in 2002 and the category expansion and fixed price efforts were gaining ground. EBAY is now the fourth largest used car seller in the nation. Meeker said the E2E efforts were exploding and cited IBM as the largest seller on EBAY and they took that position from SUNW. EBAY gained nearly +3 on the Meeker comments. She is still able to move those Internet stocks it appears.

With all the bullish economic news why are the markets still struggling? The answer it appears is historical valuations and cautious comments by everyone with a microphone. Several times, maybe dozens, this week the Nasdaq PE has been called into question by the various talking heads. Reporters are parroting views by analysts that with a forward looking PE of 88 or a trailing PE of 45, whichever you prefer, the tech stocks are very overvalued. Historically that is. Most quote a traditional PE of 10-30 for growth stocks and a flat market until those types of ratios return. While that is smoke for "they don't know why stocks are struggling" it is still having an impact on the retail investor sentiment. Add into this environment negative comments from almost every major CEO interviewed and caution prevails. The EDS CEO said today that he saw no turn around this year. The MMM CEO said he wanted to see concrete evidence of a rebound before he would acknowledge it existed. That evidence does not yet exist in his mind. Even a bullish Greenspan tempered his positive comments with caution that any rebound would be moderate.

With the major components of the Nasdaq, including the NWX, SOX, BTK and GSO heading south it is not surprising that the Nasdaq is having trouble sustaining a rally. The tech sector is acting as an anchor for the S&P and DOW and there appears to be no end in sight. Eventually the positive economic news will overcome the negative sentiment but until that happens we may be doomed to the current ranges. The Nasdaq appears headed for a retest of 1700, a level that held last Friday. The S&P has support at 1103 and the Dow at 10065. Should those levels break on Friday then Monday's gains will be at risk. Recently Fridays have been mixed with two of the last three weeks providing short covering rallies at the close. Should we get an intraday dip I would expect the same tomorrow. Bears will be afraid of another Monday rally and Bulls will be hoping for the same. Futures are slightly positive at 7:15 PM and could be telegraphing a positive day. Either way the positive economic news will eventually overpower the negative sentiment hangover and provide a real rally with legs. It just may not be tomorrow. Continue to be cautious.

Enter very passively, exit aggressively!

Jim Brown

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