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Market Wrap

Dip and Chips?

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      03-12-2002           High     Low     Volume Advance/Decline
DJIA    10632.35 + 21.11 10639.68 10510.91 1.31 bln   1544/1597
NASDAQ   1897.12 - 32.37  1899.01  1879.42 1.71 bln   1480/2059
S&P 100   591.09 -  0.64   591.73   584.84   Totals   3024/3656
S&P 500  1165.58 -  2.68  1168.26  1154.34             
RUS 2000  498.90 -  1.85   500.75   495.03
DJ TRANS 2994.81 - 22.25  3017.59  2967.14
VIX        21.95 -  0.42    23.14    21.31
VXN        43.03 +  0.98    44.48    42.71
TRIN        1.13 
PUT/CALL    0.65

The markets traded in negative territory for most of the day led by the Nasdaq and the chip sector. Lucent, no stranger to profit warnings, blessed us again with another pessimistic view of its business. The warning tanked chips, networkers and computer stocks, which led to a bad day for the Nasdaq. Microsoft also contributed to the red ink but not with a warning.

The rosy picture that Lucent painted in February dimmed in reality to black and white today. Lucent said it now expected sales to increase from zero to 10% for the quarter instead of 10% to 15% as previously expected. They said capital spending by the telecom sector was still very bleak and spending cutbacks were still prevalent. The largest customers were still reducing and delaying spending in an effort to conserve cash. Lucent has run out of divisions and business units they can sell to raise money and announced after the close that it will try to raise cash by selling $1.5 billion of convertible debt. The stock had rallied well off the lows by the close but dipped again in after hours when the convertible announcement was made.

The gloom and doom from Lucent tanked the networking sector and caused investors to take profits in stocks like JNPR, CSCO and EXTR as well as CIEN, GLW and NT.

Not enough gloom? Nokia added to the dip by warning that sales would be lower than expected and prompted analysts to question their ability to hit earnings estimates for the quarter and for the year. Nokia said weak sales in China and Europe were to blame for its -10% sales shortfall for this quarter. They said network sales were down -25%. Both of these numbers were greater than previous projections. Nokia said they still expected earnings to come in around the prior estimates despite the slowing sales but nobody cared as the stock dropped -1.41 to $22.09.

Need more telecom to worry about? Worldcom shares dropped to a low of $7.29 in early trading after it disclosed that it was the target of a SEC inquiry regarding accounting procedures and loans to officers. Oops! The SEC wants to understand the details behind the multimillion dollar loans to CEO Bernie Ebbers and others. Ebbers has said the company made him the loans to cover margin calls when the stock fell. The company gave him the loans to prevent a fire sale of his assets according to Bernie.

Surely that is enough bearish telecom news BUT there is more. Global Crossing has come under fire as being another Enron by the House Energy and Commerce Committee. Congressional investigators asked GLBXQ to turn over documents regarding their accounting practices and earnings statements. They are specifically looking for info on capacity swaps, stock sales by executives and Arthur Andersons role as auditor. They are investigating further allegations about omission of material disclosures necessary to determining the companies true health as well as material misrepresentations with regard to revenue recognition. This has been rumored for some time but as it heats up investors will become more cautious about other companies accounting problems.

The companies that have already posted their "improved" 10Ks with the SEC have been seeing relieved investors move back into their stock to some extent. IBM was the big winner with a +3.26 gain on Tuesday. GE firmed to hold over $41 after disclosing additional accounting info but did not see a rush back into the stock.

Microsoft was the biggest loser on the Dow after Goldman Sachs said it expected the software giant to reduce estimates below the current views. The analyst said the slump in PC demand would impact software sales. Microsoft also said it was willing to divulge some previously secret software code to ease concerns by the European Union. The Union is concerned Microsoft is writing code to prevent compatibility with rivals. Would MSFT do that? No way! (smile) MSFT dropped -1.62 and traded under $62 for most of the day. Life at the top must be rough with all the things hitting MSFT every day. Remember the $1 billion SUNW suit last week? Still Bill Gates found time to sell seven million shares of stock for around $434 million. Guess he needed some pocket change for the quarter. Bill, just give SUNW about 15 million ($1 bil) of your 450 million shares left and tell them to go away. Make them a partner and they will gripe much less. Better yet, your personal market cap is bigger than SUNW's $30 billion. Just buy them, become Chairman and CEO of a competing company. That would give Ballmer something to worry about and jeopardize the rest of his hair. (just poking fun here, no malice intended)

With telecoms ordering fewer switches, routers and other components the need for chips to power those components will slow. At least that is what investors feared as they took profits in the chip sector. That sector had risen +20% since Feb-28th on the hopes that with the recession over the economic recovery was in full swing. While the chips may have dipped today as a result of the continuing telecom disaster it was just profit taking which pulled back only to support from last week. Considering the big gains companies like KLAC and CCMP had made beginning on March 1st even a drop of -$8 as seen in CCMP today only brought it back to last Wednesday's levels. That level is still well above the prior week. That will be little comfort to investors in chip stocks it still needs to be taken in context to the recent tech rally.

The Nasdaq, which had been previously been lagging the Dow, gained over +200 points since February or nearly +10%. The -32 point drop on Tuesday was negligible in context. The majority of the selling was broad based and represented only minor drops in most stocks. Will the drop continue? It has produced a ton of mixed opinions among analysts. Leigh Stevens, our new market strategist, expressed concern in one of the intraday updates today that the markets could move sideways to down for the next week or so. He bases his opinion on his equity only "call/put" ratio. (not put/call) You can see his rationale at this link.


For me the picture is not that clear. The Dow is performing beyond anybody's expectations. The 10632 close was the highest close since June-6th 2001. It is clearly wedging higher and it appears a breakout over that 10600 resistance is in progress. The Nasdaq is doing the same dance just below 1900 as the Dow was doing at 10600 except for the two day gap up which it has now given back. Where the Dow looks ready to break resistance and run to 11,000 the Nasdaq has many more roadblocks in front of it. It has serious resistance at 1950, 2000 and finally 2075. The run to daylight may take it a lot longer than the recovering blue chips. Complicating this picture is the S&P which has formed a triple top at strong resistance of 1175. Still it is also edging up closer to that resistance every day.

The bullish case is built on "the recovery is coming and whether it takes 3mo, 6mo, 9mo or a year, everyone will be prosperous again. New GDP estimates are back in the +4% growth range for the 4th quarter already. What recession? That is dead and gone, let's roll. The bears are building a great case for a double dip and that dip expectation may just coincide with the annual April/May selling season. Their premise is that earnings expectations have escalated so quickly to almost bubble like proportions that companies have no chance of hitting the raised bar. They agree that things are better than the October lows but not yet back to the +4% growth rate. They claim that even if that growth rate is achieved it will not be in tech stocks since most tech is still suffering from the post bubble depression. What is a tech stock worth in the "new economy"? That is a "post recession economy" not an Internet economy as the phrase used to refer.

According to the bears we are building a new bubble based on false expectations and that bubble will end badly. Not a crash but possibly another dip as expectations meet reality just before the summer doldrums appear.

As traders we are faced with the perpetual quandary. The market may go up, or it may go down. Nobody knows. On Sunday I suggested that as traders we needed to be long the market above 10450 on the Dow, 1865 on the Nasdaq and 1145 for the S&P. Trading below these levels represents a breakdown of the current bullish trend and suggest an exit point for long positions. While nobody can guarantee the market will go up or down we can take steps to profit from rallies and protect those profits from sell offs. If you stay long above those levels and a breakout occurs then you are along for the ride. Should the markets continue upward a wise investor would raise those exit points to protect himself. We are all wise investors, right?

Sell Too Soon!

Jim Brown
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