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Market Wrap

Tech Wreck Revisited

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      04-09-2002           High     Low     Volume Advance/Decline
DJIA    10208.67 - 40.41 10304.99 10201.13 1.21 bln   1741/1375
NASDAQ   1742.57 - 43.30  1795.62  1742.40 1.49 bln   1588/1924
S&P 100   558.83 -  5.12   565.21   558.20   Totals   3329/3299
S&P 500  1117.80 -  7.49  1128.29  1116.73             
RUS 2000  503.01 -  0.00   505.44   502.70
DJ TRANS 2767.96 + 14.66  2778.85  2751.02
VIX        21.05 +  0.31    21.25    20.64
VXN        42.45 +  2.17    42.46    41.05
TRIN        1.40 
PUT/CALL    0.86

The big kid on the tech block, Cisco, was hit by the same rumors that plagued IBM last week. Fears of an earnings warning after the close and memories of the huge hit taken by IBM on Monday prompted investors to dump CSCO now and avoid the rush. Cisco dropped nearly -9% or -1.36 to a two month low of $14.82. The continued demise of the telecom sector is prompting the rumors. Nortel warned again today to emphasize this point.

Cisco was not the only tech giant to suffer on Tuesday but was probably the biggest drag on the Nasdaq. RBC cut estimates and talked down their outlook. Cisco was the most actively traded stock in after hours. They report earnings on May-7th.

Microsoft also was a drag on the Nasdaq and Dow with a -2.35 drop for the day. Lehman Brothers warned that Microsoft may lower guidance when they announce earnings on April-18th. Despite market share gains by the XBOX game system the lack of business software sales is weighing on the company according to analysts.

Intel completed the big cap trio by dropping -1.47 to $28.46 and a six month low. Intel is falling on similar worries that business buying has fallen to near zero with no changes in sight. SunMicro also lost ground on slow server sales and dropped to $8.12 and only a quarter away from a six-month low.

Rounding out the Nasdaq tech wreck was a new low on WCOM at $5.40 and a two month closing low on QCOM. If you are playing the downside you should be very happy. Still not every tech was negative. MCHP actually gained ground after upping their guidance for the next two quarters. It did close well off its high of $45.34 at $42.16 but it did manage to close positive.

Other notables included Eastman Kodak, which was upgraded by SSB to "outperform", not a big upgrade but bulls are grasping at any straw here. Lands End (LE) also raised its guidance for the quarter and possibly for the year. The problem for the market is of course small gains by sideline companies and large losses by the big caps. Traders do not seem to care if Widget Inc, Podunk Corp and Junk-R-us Co. are raising their revenue guidance by a couple million if the big caps could miss earnings by a hundred times that much. Can't say I disagree! However let one of those smaller companies lower guidance and they are punished severely. KRON for instance lowered guidance to $.26-$.27 cents per share instead of the $.29 cents analysts were expecting and the stock dropped -10.42 or -22% on Tuesday.

The collective refrain appears to be, "don't worry the market is falling on low volume". And the point is? Seems to me if IBM drops -$10 on ten million shares or 100 million shares the result is still the same. Everyone knows that the conventional wisdom is that a market drop on low volume shows less conviction than a blow out on twice the normal shares. Our problem appears to be that the low volume is due to lack of interest more than eager sellers. With a gradual roll over since January it does not take a market wizard to see that the trend is accelerating into the normal spring earnings sell off. Institutional traders are going short with abandon once again. The COT numbers show near historical levels of institutional shorting.

Retail traders are trying to find the next IBM and load up on front month puts. OIN readers saw a -$15 drop in IBM from the price when recommended on March 26th. Who will be the next warning candidate? MSFT, INTC, who knows? Everybody is willing to bet against the leaders by shorting them or buying puts but nobody appears to willing to bet with the companies by buying their stock. Remember earnings runs? During the late 90s and into the Y2K bubble, companies typically saw strong price gains as earnings announcements approached. Just the opposite is occurring now. Warnings and earnings misses have become so common place that shorting into earnings is becoming the trading rule.

Analysts almost unanimously agree that earnings for this quarter will be terrible. Put this together with no investor interest and it should be pretty clear what the market direction will be. Until there is a clear trend of improving earnings there is no reason to rush into the markets, especially into tech stocks. With companies like INTC, MSFT, CSCO, SUNW and others closing in on six month lows it is clear the majority of investors are just not buying the recovery story yet.

Granted this will all change and it could be soon. It is possible that the light earnings warning season could mean companies are going to meet or exceed estimates beginning next week, but just not probable. If we did see a stronger than expected earnings parade then cash on the sidelines could come back into the markets. The real question is "would it?" With the summer doldrums ahead of us would investors take the bait here or wait on the sidelines for more confirmation from the July earnings cycle? I suspect they will want to wait for confirmation.

The Dow came within 24 points of my 10100 target on Monday before traders bought the intraday IBM dip. Shorts covered, longs bought and everybody made money. Those same traders reversed their positions on Tuesday as the Dow began a slow roll again. I still think 10100 could provide some support for the week. After earnings begin in volume next week that number may not be low enough. The Nasdaq broke my target of 1750 and now appears to have risk to 1710. A bounce there could be expected as traders anticipate a double bottom rebound. The S&P appears to have risk to 1105. Notice all the targets are down, not up. We could be building a bottom here but bottoms are typically built on high volume, not low volume.

Positive factors are a rising VIX, better advance/decline numbers than you would expect from the Dow/Nasdaq losses and rising put/call ratios and TRIN. These numbers could continue to go up before the next bounce but at least they are trending in the right direction. The put/call ratio at .86 is indicating that some of the complacency is evaporating from investor sentiment. Investors who were sure the only possible direction was up several weeks ago are now not quite so sure. The index put/call ratio was 1.21 at the close on Tuesday. This implies substantially more put activity than calls and worry that the selling may not be over. With fear coming back into the markets we are finally making progress in the right direction.

The last week has seen some interesting resistance levels develop on the three major indexes. These levels could produce some significant short covering if a surprise rally broke out. I am lowering my entry points for AGGRESSIVE traders to 10350/1800/1130. I would remain short/flat below those levels and consider going long should we break above them. The markets have moved into a new range and we should take advantage of any breakout/breakdown from here. FYI, the QQQs hit my target of $33.50 for the Editors Play from last week. I suggested taking profits there but based on the charts I would just tighten the stops and see what happens. We already have more than 125% gain in both puts but we could see more.

Enter Passively, Exit Aggressively!

Jim Brown
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