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Intel To Gross $25 Billion, Market Loses Billions?

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        WE 6-07          WE 5-31          WE 5-24          WE 5-17
DOW     9589.67 -335.58  9925.25 -179.01 10104.26 -248.82  +413.16 
Nasdaq  1535.48 - 80.25  1615.73 - 45.76  1661.49 - 79.90  +140.54 
S&P-100  507.32 - 21.88   529.20 - 10.72   539.92 - 13.38  + 30.06 
S&P-500 1027.53 - 39.61  1067.14 - 16.68  1083.82 - 22.77  + 51.60 
W5000   9752.69 -353.80 10106.49 -144.15 10250.64 -223.54  +456.71 
RUT      470.51 - 16.96   487.47 -  6.17   493.64 - 15.30  + 16.21 
TRAN    2686.66 - 62.60  2749.26 +  5.59  2743.67 - 54.69  +155.26 
VIX       26.65 +  3.75    22.90 +  1.64    21.16 +   .88  -  4.75 
VXN       52.24 +  6.29    45.95 +  3.09    42.86 -   .08  -  7.79 
TRIN       1.30             1.11             1.59             0.78      
Put/Call    .79              .73              .82              .72      

What a fun day! The hangover from the Intel party on Thursday night lasted through the day on Friday. The chipmaker lowered guidance to $6.2 to $6.5 billion for the quarter and margins to about 50%. Would you like to have a business with that type of earnings potential? A flock of investors decided that was not good enough and they dumped over 150 million shares for a -$5 loss over yesterday's close. The rest as they say is history.

Friday morning started out bad with a -100 point gap down but all the major indexes struggled back into positive territory in late afternoon. End of day profit taking pushed them back to negative but floor traders were mostly satisfied with the results. They would have liked a roaring V bottom rebound reminiscent of the olden days but were happy to just settle close to even for the day.

The Intel guidance drew downgrades faster than a picnic in July draws flys with everyone jumping on the bandwagon to get their name in print. The key here is how long it will take before somebody like Merrill jumps back on the Intel bus at this "attractive" level as they say. Knock them down before the meeting and prop them back up after the smoke clears. How else are you going to generate commissions?

Am I the only one that thought the news was not that bad? Now before you answer that remember I was bearish on the chip/upgrade cycle process in last Sunday's commentary. They said the weakness was an "overly enthusiastic estimate" of business in Europe that caused the guidance change. The sales in Europe in the first quarter were so good they used too large an estimate for the second quarter. They said sales were still good, just not at the same growth rate as in 1Q. Is that bad? They also said they were still expecting a ramp up in business for the second half. Did I miss something? Their profit margins were 3-4 points lower because of product mix. They were selling more Celeron processors than they expected. That could mean AMD is selling less of their products? Gaining market share is not negative even if it means -3% lower margins. It did mean the higher priced, high performance P4 processors were not selling at the expected pace. That ties in with the slower upgrade cycle comments from last week. Intel still expects this segment to pick up as pent up business demand accelerates in the second half. Buy good stocks when nobody else wants them. Sounds like a long-term opportunity to me. I am not saying Intel does not have problems but compared with other available tech stocks it looks like a "safe" port in the storm. Safe because much of the risk was removed on Friday with the -$5 drop back to October levels.

In a related news event Dell announced it had dumped IBM in favor of Intel and is jointly developing a new chipset with Intel. Dell was going to offer servers based on IBM's proprietary "Summit" technology. They are now going with Intel to develop a high-end server to compete with Unix platforms. This should boost sales for each company since these servers tend to be sold to larger clients and include storage systems and other computer products.

If it is Biogen it must be warning season. The company warned today that increased competition was eroding sales and profits would suffer. The warning cut nine cents off the 40 cents analysts had expected. The warning itself is only a passing news item but the more critical point is it telegraphs the advent of the 2Q warning season which begins in earnest next week. While the trend has been fewer warnings so far this quarter that does not mean they will not happen. Many companies face an extremely back end loaded quarter and will not know how bad "bad" is for a couple more weeks. They may have put off warning until the last minute to put things in the best light possible.

The sum of all fears stock, Tyco, took another pounding Friday when Moody's and S&P cut their debt to one notch above junk. This happened during a conference call where Tyco management was trying to circle the wagons against the onslaught of accusations being brought by authorities. No interest loans, undisclosed compensation and criminal probes continue to plague the company. The IPO for the companies CIT Group could be delayed and the value received could be much less due to the negative connotations. TYC lost another -4.50 to $10.15 on the news with 200 million shares traded. (10% of the NYSE volume)

Just when you thought it was safe to go outside (in Kashmir) things went to heck again. Several press stories about cooling tensions between India and Pakistan made the rounds during the trading day and the possible resolution of the nuclear war worries was a positive impact to the market bounce. After the close it was announced that an Indian spy plane was shot down by Pakistan and the heated rhetoric flamed once again. India/Pakistan, Israel/Palestine and now Argentina and Brazil heating up again. At least there are no war worries in South America but economic woes are growing. A friend told me last week that people in Argentina wait in lines three blocks long just to get an "application" for a visa to the few countries that will accept them. They have to prove they have sufficient assets in Argentina to convince authorities they will actually come back.

Economically the Employment situation in the U.S. improved with 41,000 jobs created in May. This was less than the 65,000 expected but just another plus in the recovery column. The unemployment rate fell to 5.8% from 6.0% in April. Not a particularly exciting report but the overall evidence of the recovery is growing.

Next week is going to be critical. (How many times have you heard that in the last few months?) The Dow closed under key support at 9600 and the Nasdaq barely finished above the key 1525 level. For the S&P it seems that every close is one step closer to retesting the September lows. The intraday low on Friday of 1012 was an exact -71% retracement of the gains since the 9/11 attack. That post 9/11 low was 944.75 which suddenly does not seem that far away. The trading on Friday was not your typical V bottom rocket rebound. It was slow, orderly and while it was on heavier than recent volume, it set no records. The NYSE volume was 1.7 billion and the Nasdaq was just over 2.0 billion. Good volume but not great and up volume was only slightly higher than down volume on the NYSE and down volume won on the Nasdaq. This was not a capitulation day as everyone had hoped.

Traders look for a monster dip followed by 2:1 or even 3:1 or 4:1 up volume to down with advancers beating decliners 3:1 or 4:1. They barely broke even today. New lows at 385 beat new highs at 96 by a landslide. The best indication of the broader market direction, the S&P, closed at 1027.53. The low for the day was 1012, the 71% retracement level as stated above but the high of the day at 1033 was the 61.8% retracement. The S&P stopped dead in its tracks at that 1033 level which is also just below down trend resistance from May-24th to present.

These resistance levels would tend to indicate that the broader markets could struggle to make substantial gains from the current levels. With heavy resistance coming together around the 1034 level that would be my target for any bounce on Monday morning. This is very reminiscent of the dip and bounce on June 4th/5th. The markets dropped to the bottom of the channel (and the 61% retrace) only to fail again at the top of the channel.

This is key for the bulls. They must show up with money in their pocket on Monday. Considering $6.8 billion flowed out of mutual funds in the week ended on Wednesday according to TrimTabs.com this could be a tall order. The economic calendar is void of any material events until the PPI and Retail Sales on Thursday. Not that stocks had been trading on economic news lately but for the first three days next week they will be on their own. Supported by stock news only and that is where the earnings warnings will come into play. We will be hostage to anybody that warns and to whatever world news captures traders attention. There are rumors that IBM will have a negative announcement soon to compensate for bankruptcies of some high profile customers impacting nearly $4 billion in services orders. That could be a market mover! The bottom line remains KEEP THOSE STOPS TIGHT regardless of which direction you are trading.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor

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