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Market Wrap

Positive, Negative, Negative, Negative, Negative..

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      06-18-2002           High     Low     Volume Advance/Decline
DJIA     9706.12 + 18.70  9721.75  9636.96 1.13 bln   1486/1500
NASDAQ   1542.96 - 10.30  1567.99  1542.77 1.51 bln   1567/1919
S&P 100   516.73 +  0.55   518.41   513.00   Totals   3053/3419
S&P 500  1037.14 +  0.97  1040.83  1030.92             
RUS 2000  460.71 -  1.03   474.64   469.49
DJ TRANS 2733.68 +  3.80  2743.86  2720.35
VIX        27.33 -  0.27    28.57    26.93
VXN        54.55 -  0.43    55.39    53.93
TRIN        0.95
PUT/CALL    0.96

That was the news flow after the market closed on Tuesday. After an amazing day of holding on to gains from Friday's bounce the markets appear ready to take a hit at the open on Wednesday. For weeks it seems we have been closing right on support and hoping for good news to keep us from falling over the edge. Tonight the markets (Dow/S&P) closed just under resistance and appeared poised to rocket over those levels if good news from Oracle scared the bears. How quickly things change.

Positive: After the bell Oracle announced earnings that beat the street on revenue that hit estimates. The crowd went wild and shorts, always expecting the worst, raced to cover in after hours. The stock traded as high as 10.31 from a $8.98 close. The news seemed great on the surface with new license revenue at $1.15 billion compared with estimates of only $1 billion. The initial guidance was weak with statements like "no improvement in business in sight" and "the summer is usually weak." Still the "Oracle prospered with higher margins in the worst IT recession in years" comments filled shorts with terror. They should not have been so quick on the trigger.

Negative: During the conference call the news was not so exciting. The company stressed the "tough conditions" and low visibility going forward. The stock tanked and was trading back down in the $9.00 range as trading drew to a close. That stinky smell is back and those cautious comments could weigh on ORCL as the summer progresses. They said they were experiencing more competition from IBM and MSFT and sales over the next quarter could be down as much as -15% to -25%. They said they did not see any improvement in the IT sector for "at least" six months. Still pumped?

Negative: Chipmaker AMD warned after the close that they would miss revenue estimates by -25% to $620-$700 million and down sharply from $820-$900 million. They said they would suffer a substantial loss in the 2Q as a result. The reason given was a broad weakness in the personal computer market in both the U.S. and Europe. In April AMD had forecasted a return to profit in the 2Q. The stock fell to $8.95 from a $10.35 close.

Negative: Personal Computer maker Apple Computer warned that earnings would fall below estimates of $.13 cents at $.08 to $.10 cents. Revenues would be about -$200 million lighter than expected. The reason, slow sales, very weak consumer sales and lack of a seasonal uptick in May/June. Normally they experience a strong bounce in May/June as college graduates buy new computers as they launch into their careers. Apple said this did not happen this year. They stressed the very weak consumer sales. AAPL lost nearly -$3 in after hours to $17.35.

Negative: Intel announced they were closing down their web hosting service and would take a $100 million charge. They said the demise of the dot.com boom had made the web hosting business not part of their long term plan. They were shedding non-core assets to concentrate on their main chip business. This is not a big deal in business terms for Intel and could actually be seen as a positive. But......... Intel did make a point of saying that the $100 million charge was not accounted in the guidance they issued last week. Think about this for a minute. Do you think they just came up with this idea overnight? I doubt it. So what was the purpose of waiting a week and trying to slip it in unnoticed? Simple. They can lump up the charges and calmly restate earnings downward again without saying they are "restating earnings." Intel does nothing without thinking through all the ramifications. INTC was trading down -$1 in after hours but the "charge" issue has not hit the airwaves yet. It has been totally ignored in light of the AAPL/AMD news. It would not be considered "operating" earnings but would offer an opportunity to hide other "kitchen sinks" in the numbers.

Negative: CIEN warned after the close that sales would be "down meaningfully" from the last quarter even if the revenue from ONI systems was included. The merger is set to close this week and even with the addition of the ONI revenue they are going to fall seriously short. Estimates had been for $100 million in revenue and CIEN now says it will be substantially less than their $87 million in the first quarter. They said final sales would depend on how many existing orders were cancelled or delayed. (Sounds promising) Last quarter CIEN lost -$622 million and with substantially reduced sales this quarter is not looking good. They claim their core business could remain weak for years to come. That is exciting thought for investors! CIEN was trading near $4 in after hours.

Positive: Also released after the close but ignored by the mainstream press was the Book-to-Bill number for May. The number increased slightly to 1.26 from a revised 1.22 in April. This is the highest level in almost two years. Shipments rose in May for the second month in a row. It is still down -41% from a year ago but growing. Orders rose for the sixth month in a row. This should be extremely positive going forward

All this negative news came at the end of a really positive day. The economic reports were very good with the CPI flat and showing no inflation and Housing Starts rising +11.6%, the highest rate in six years. There was another downgrade on IBM which had no real impact and the market appeared to be shaking off bad news like water off a duck. That duck however could be invited to dinner tomorrow as the main course. The bombing in Israel, killing 19 and injuring 50, is drawing the wrath of the Israeli army as I write this. There are likely to be numerous news stories in the morning about the retaliation. Many of the traders in New York are Jewish with ties back to Israel. This always drags on the market. Also the Brazil wild card is heating up again. The debt is on the verge of default again and this impacts not only South American countries but overseas countries as well. Japan's economy could take another swoon if Brazil troubles continue. Brazil's debt is 55% of its GDP.

Wednesday could be exciting. There are no material economic reports so stocks will be left to trade on their own merits. Now that is a scary thought! The bullishness from the last three days will be tested and a lot of conclusions about the market health will be drawn. S&P Futures are down and this negativity could change by morning but I would be very surprised. The profits from the last three days are at risk and suddenly traders are not so sure that the "bottom" is behind us. With warning season in full swing we never know who will be next. IBM, Dell, HPQ or any number of others could do the deed at any moment. Traders were buying the last three days to avoid missing the bounce, not because they loved the stocks. We will see tomorrow just exactly how confident they are about those purchases. Remember, volume equals validity. Without volume there is no conviction.

Enter Very Passively, Exit Aggressively!

Jim Brown
Editor

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