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Market Wrap

Bad News Bears Batter Bourses

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06-19-2002        High      Low     Volume Advance/Decline
DJIA     9561.57 -144.55  9733.39  9542.74 1126 mln   1194/1998
NASDAQ   1496.83 - 46.13  1538.36  1496.08 1725 mln   1095/2407
S&P 100   507.64 -  9.09   516.99   506.33   totals   2289/4405
S&P 500  1019.99 - 17.15  1037.61  1017.88
RUS 2000  462.62 -  6.79   473.83   462.92
DJ TRANS 2755.10 + 21.42  2786.54  2724.58
VIX        29.71 +  1.38    29.87    28.05
VIXN       55.24 -  0.16    56.86    54.49
Put/Call Ratio      0.90

Bad News Bears Batter Bourses

High profile earnings warnings and a rash of negative news items pounded the markets lower despite a brief morning rally attempt. After a tough session the Dow Jones Industrials ended down 144 points to close back under the 9600 level at 9561. Volume was close to 1.3 billion on the NYSE and advancing issues faded decliners 12 to 20. The Nasdaq Composite faired even worse with an almost 3 percent loss that put the closing total back under the 1500 mark by 4 points. Volume on the Nasdaq was 1.7 billion and declining issues tromped advancing ones 24 to 11. Broader market indices also failed poorly with the S&P 500 dropping 1.65% to 1019.99, the Russell 2000 slipping 1.44% to 462.92 and the Wilshire 5000 Total Market index cutting 1.59% to 9658.

The second quarter earnings season is just around the corner but before corporate America turns in their report cards mid-July, investors have to wander through the always-joyful earnings- warning season first. If you didn't notice, the tech sector helped kick off this quarter's warnings season with a bang last night. OptionInvestor.com covered the big ones in Tuesday's wrap but here's a quick recap.

The PC Law of Gravity

It should come as no surprise that Apple Computer (Nasdaq:AAPL) is suffering the same slow down that has mired the rest of the PC market. Wall Street had already anticipated potential bad news as the stock had dropped from the $26 level in mid-May to close just above $20 Tuesday night. After the company warned that their traditional seasonal sales in late May and early June "didn't materialize" shares of the stock gapped down sharply and closed at $17.12 for a 15% loss. In a conference call, Apple's CFO Fred Andersen said, "The consumer market for personal computers is soft around the world." I could imagine Michael Dell and Carly Fiorina sending him a card saying "welcome to the club." That is if they weren't busy watching the damage to their own stock prices. Shares of DELL lost 7.4% and HPQ shed 5.14%.

Fried Chips

The Tuesday evening newswires were also humming with negative comments from rival chipmakers AMD and INTC. Shares of INTC were already suffering from their early June analyst call. Given all the (negative) press Intel received, it looks like AMD wanted a piece of the action and offered a warning of their own. Complaining about a weak personal computer market (see above) and a poor start to the essential back-to-school shopping season, AMD stated that they would miss revenue estimates. Some analysts speculated that AMD was also suffering from additional pricing pressures and stolen market share from Intel. More than one broker was quick to stamp the stock with a downgrade and lower their own earnings estimates for the company. Not to be outdone by AMD, Intel took the opportunity to announce they were closing their doors on its web hosting business, which would amount to a $100 million charge.

Four more semiconductor companies were also to blame for the weakness in the sector on Wednesday. The Federal Trade Commission pointed its anticompetitive finger at memory chip designer Rambus. Claiming the company tricked the memory industry into using technology that RMBS was seeking patents on, the U.S. regulators are going for the jugular. RMBS generates about 75% of its revenues from its licensing fees for its patented technology. These antitrust violations further weaken its defenses as the company currently battles several private lawsuits over similar issues.

It was also revealed today that three of the world's largest computer memory makers had been subpoenaed in "an ongoing criminal investigation" (Associated Press). Samsung Electronics, Infineon Technologies and Micron Technology all confirmed they were subpoenaed and that they would cooperate.

By the end of the day, shares of INTC fell almost 8.8%, AMD gave up 15.5%, MU also lost 14.9%, RMBS plummeted almost 36% and the $SOX.X index closed down 6.7%.

No Nets Work

Investors have been wishing for months that they had some kind of net to catch this falling technology sector but the Networking industry or as some call it the communications equipment group was dealt another blow by previous high-flyer CIENA. Last night the company warned that revenues would be significantly lower despite their merger with ONI Systems. With orders being canceled or delayed (what's new?) their Q2 is looking worst than their first. Investors hit CIEN for a 10% loss today and big names for the group also felt the pain with JDSU losing 8.27% and JNPR down 6.24%.

Any traders hoping for a dead cat bounce in this group might want to keep looking. After the close today, Sycamore Networks (Nasdaq:SCMR) offered a warning of their own. SCMR plans to slash their workforce by a third and stop development of some of its products. Cutting 235 jobs is expected to force SCRM to take a restructuring charge of $45 to $55 million. Management also took the press time to lower their Q4 outlook.

More Biotech Terror

Rounding out our parade of earnings warnings is Genzyme Corp (Nasdaq:GENZ). The biotech company came out right after the close with bad news regarding its second-quarter results. Wall Street estimates had been for a 33-cent profit, but GENZ now expects a gain of only 25 to 26 cents a share. Shares closed today at $25.87 but in after hours trading the stock was closer to $21. This could be a serious blow to the $BTK.X index, which already looks like it's rolling over inside its descending channel. I wouldn't be surprised to see GENZ close near the $20 mark tomorrow.

Another biotech stock trading lower after hours is ImClone Systems (Nasdaq:IMCL). You might be as sick of hearing about the company as we are but the corporation can't seem to escape bad news. This time the news hounds picked up word that the company had received a "Wells Notice" from the SEC, which indicates the agency is considering civil action. According to sources, a Wells notice means the SEC has already decided a violation has occurred and the company or individual now has a last chance to explain its actions before the SEC makes their final decision(s). Shares of IMCL had rebounded nicely off their lows of $7 in mid- June to close at $11.41 tonight. However, after the report, the stock was trading closer to $10 in after hours.

Good News Ignored

Investors were just not willing to chase after any good news that did manage escape today. The home improvement & building products company, Masco Corp (NYSE:MAS) raised their Q2 and full year earnings guidance claming strong sales for their faucets and cabinets. This shouldn't be a surprise given the incredibly strong housing sector that the U.S. economy refuses to let go of. This probably isn't going to change in the near-future given the propensity for mortgage rates to remain low over the next few months.

Goodyear Tire (NYSE:GT) also raised its Q2 outlook with new estimates of 10 to 15 cents a share outpacing the previous guidance of 5 to 10 cents. The company claims that ongoing cost- reductions and improved numbers from their international units will contribute.

Rohm & Haas (NYSE:ROH) is another big board stock that raised its second-quarter guidance today. Previous estimates were 32 to 36 cents but business for the specialty materials maker (plastics and rubber) has been good and the company should earn 44 to 48 cents a share in Q2.

Burning Hotter
The only issues that might come close to burning hotter than the Colorado and California wildfires are the tensions in the mid- east. Two devastating suicide bombings in two days have set the Israeli-Palestine conflict back into the spotlight. This comes at a very bad time for President Bush who was due to make a big speech on the subject at a press conference today. The President cancelled his press conference as Israeli troops and tanks moved into reoccupy sections of Palestinian territory. Prime Minister Sharon stated that Israel would continue to occupy more and more of the West Bank and Gaza Strip until the violence and suicide bombings stop.

The one thing Wall Street hates the most is the unknown. It hates to be left in the dark and right now no one knows how the mid-east conflict will evolve and its ramifications on terrorist activities here in the States. The U.S. has close ties to Israel but we also want to keep our Arab "friends" in Saudi, Pakistan and across the region on our side while we continue our global hunt for terrorism and drum up support for ousting Saddam Hussein.

What brings the indecision and fear of the unknown even closer to home was the discovery of a mysterious package identified near the Federal Reserve Building in Washington this afternoon. According to the news, the mysterious package did indeed turn out to be some kind mechanism similar to a pipe bomb. What should concern us as investors is that fact that the markets are quietly terrified about when and where the next terrorist attack on our home soil will occur. Right now the FBI has all of its field offices working on plans for how they will cover their local communities during the upcoming Fourth of July holiday. There will be a lot of events and parades that could be seen as targets but the agency says this activity is not a response to any one particular threat.

Overall Climate

Desperate bulls may be disappointed in today's market action but informed traders should not be shocked that the major indices gave back some ground. The $INDU, COMPX and the SPX had all seen big moves from Friday's lows and short-term traders did not want to see those gains evaporate in another sell-the-rally event. Unfortunately, that's exactly what we appear to be seeing again. There was some excitement generated when the major indices appeared to breakout of their short-term descending channels but they failed to reach, hold or close over significant resistance levels. Furthermore, the lack of truly strong volume that might indicator investors are pulling the money off the sidelines, out of their money markets or out of bonds and into equities has not materialized.

Chart of the Dow Jones Industrials

Chart of the Nasdaq Composite

Chart of the S&P 500

What we are observing in the markets is exactly the opposite of what bullish investors want to see. Big money continues to seek the safety of bonds because the risk-reward ratio is still not enticing enough in equities. The outbreak of a potentially painful earnings warning season last night will only reinforce worries that this mythical second-half recovery may not materialize and businesses are already looking to 2003 in hopes of a turnaround (at least in tech). Investor confidence continues to be riddled by CEO resignations (think DYN today), a hyper-active group of government regulators announcing investigations almost daily into accounting irregularities, insider trading and anti-trust violations. Combine all of these ingredients with the seasonal summer slowdown in the markets and in business (especially Europe), plus concerns over Brazil's economy and debt load, plus simmering nuclear powers in East- Asia, an outbreak of violence in the Mid-East, bomb-like packages in Washington, and you can see why there isn't any strength behind the rallies.

I realize this paints a pretty bleak picture going forward. It sort of reminds me of Edvard Munch's famous painting titled "The Scream". (don't remember it? check it out with this link) http://www.ibiblio.org/wm/paint/auth/munch/munch.scream.jpg

Despite all the bearishness, as traders we can really take advantage of the volatility. While the market's going down, let's learn to play the downside. When we finally reach the September lows for the Nasdaq and the SPX then we can look for a potentially profitable bounce higher. If that miraculously turns into a sustainable rally, then all the better! I for one am not going to let the falling markets depress my enthusiasm for profitable trading opportunities that we see appear on a daily basis.


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