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Market Wrap

Shorts Are in Trouble!

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      07-11-2002           High     Low     Volume Advance/Decline
DJIA     8801.53 - 11.97  8854.90  8605.34 2.06 bln   1131/1879
NASDAQ   1374.43 + 28.43  1375.58  1323.59 2.26 bln   1469/2017
S&P 100   462.92 +  4.23   464.06   448.92   Totals   2600/3896
S&P 500   928.44 +  6.90   929.16   900.94 
RUS 2000  416.68 -  3.10   419.78   408.19 
DJ TRANS 2504.58 - 42.58  2548.97  2546.44   
VIX        38.55 -  0.47    41.64    38.55   
VXN        68.60 +  3.38    70.47    66.31 
Total UpVol 2,709.1M
Total DnVol 1,683.1M
52wk Highs   97
52wk Lows   722
TRIN        0.51
PUT/CALL     .89

Shorts Are in Trouble!

Is the headline you were looking for? I hope so because Friday's opening could be a shorts nightmare. Typically a severe decline like we had this week ends dramatically with a final negative news event. Sometimes when things appear they cannot get any worse a positive event appears to jerk bears back to reality, if only for a couple days. That positive event came after the close today and S&P futures jumped to +7 and Nasdaq futures gained +20. Still a lot of darkness before morning trading begins but the prospects are encouraging.

Chart of the Nasdaq

Chart of the Dow

Helping the rebound during the day was a rumor that Dan Niles was going to upgrade Intel and there was another rumor that they would pre-announce tonight. This powered the semiconductor sector to a +6.85% gain and it came within three points of filling the Tuesday morning gap down. It also helped produce a double bottom bounce off support at 345. Half of the rumors were true. Dan Niles did make some positive comments about Intel but also said the expectations still need to come down. They did not pre-announce after the close and with earnings on Tuesday most traders doubted that rumor anyway.

Not everything started off positive with SAP warning that they would miss 2002 earnings due to heavy cancellations by customers. SAP is a major competitor to ORCL, PSFT, SEBL and MSFT and analysts see the warning as a leading indicator for the PSFT and SEBL earnings to come. Oracle affirmed estimates yesterday but warned that visibility was still very bad. The CFO said he believed the worst was over but he had no proof that things were getting any better. He said he had no better visibility than he did six months ago. They also said business in Europe was slowing. Not very encouraging.

Another software vendor fell on hard times when NET warned that the 3Q would be less than expected. The stock dropped -3.25 (-18%) after management cut revenue estimates by up to 10%. One broker cut his rating to a rare "sell" due to a lack of growth and weak results. The company is being investigated by the SEC for accounting problems in 2000 after the company restated lower results for 1998-2000. Several analysts voiced concerns that Symantec was taking market share. SYMC still dropped -1.09 on the news but finished well off the $30.50 low at $32.86.

I have kept you in suspense long enough. The big news after the close came from two companies, DELL and JNPR. Dell, which had just affirmed earnings estimates last week, came out again and said they would now beat estimates by a penny on stronger than expected revenue. They said market share gains and improving profit margins would boost their earnings. A real surprise after last weeks inline affirmation. Dell jumped to $25.40 in after hours after closing at 23.91. The announcement also boosted Intel who supplies the chips for Dell computers. INTC jumped nearly $1 to $19.07 in after hours. This is good news for the sector despite the fact that it represents no growth in overall PC sales. Just more share for Dell.

Also announcing after the close was JNPR who beat analyst's estimates by a penny despite a drop in sales to telecoms. JNPR also raised guidance for the next quarter. Suddenly the network sector does not look so bleak despite news from SONS tonight that their sales would be flat next quarter. JNPR jumped nearly $1 in after hours to $8.05.

While these two events may seem less than exciting, tech investors will be glad to get any good news no matter how slight. The severely shorted tech sector has not seen much positive news and after the drop this week it was ripe for a short covering rally. Relatively speaking the Nasdaq had resisted the drop better than the other indexes but still hit five year lows today of 1323. That severely oversold condition was crying for some event to release the spring.

Now, the bad news, it won't last. The Dell news is company specific and does not represent any greater PC demand overall. There may be an opening bounce as shorts cover on the news but this should be viewed as a new entry point for a short position. The JNPR news was nice but they also had no real growth news for the sector. Remember, we have three major earnings events next week. Intel on Tuesday, IBM on Wednesday and MSFT on Thursday. Where Dell may be gaining market share from HPQ and Gateway, Intel supplies chips to everyone and will be the true measure of demand. It is widely expected that INTC will guide lower on Tuesday. IBM is the elephant in the closet. They have so many problems that the odds are good several will appear on Wednesday. They have said they will disclose more information and the attempt to soften the blow this week with the restatement for the sale of their disk drive business was the first try. It is widely expected they will miss earnings and guide lower. MSFT is the only major tech that is expected to provide an earnings surprise or at least not guide lower. This is not an environment for a continued tech rally.

Economically we will be challenged on Friday with Retail Sales and the next installment of the Consumer Sentiment. The forecast for sales is an optimistic +0.6% and for consumer sentiment to be flat at 92.2. Remember, sentiment is driven in some part by the market and I can't imagine how it could surprise to the upside. The best we can expect is for it to remain flat to only slightly down and not blunt the short covering rally at the open.

While I would applaud a strongly positive day tomorrow my longer term view is still lower lows ahead. There are just too many problems. The possibility of a second recessionary dip is strong and the new accounting rules are going to be a killer. What I mean by that is the fear of prosecution for misstating your financials. Beginning August 14th the 945 largest corporations will have to certify on pain of criminal prosecution the truth of their financials. They will have to disclose everything that could be material in any way. Many companies have skeletons in the closet and those bones are beginning to rattle. Every CEO has seen pictures of other CEOs on TV recently and they do not want to play musical chairs in front of a congressional committee or worse a criminal judge. You can bet that before they put their signature on that affidavit they will grill everyone who prepared the statements about every possible entry. The buck has stopped at the CEO level but the stock prices have farther to go. The odds of more companies disclosing embarrassing details and stocks reacting negatively are very high. Late news tonight said that Sullivan (WCOM CFO) has now told congress that Ebbers knew for a year that the numbers were fraudulent. If this is true then expect a high profile criminal proceeding very soon. The prosecutors will want to move fast to strike fear into the corporate community.

The Dow hit a low of 8605 (-204) before rebounding today. That low was -804 points below Monday's high. Think about that for a minute. -804 points! The rebound from these lows was nice but nowhere near the V bottom rocket you would have expected from extremely oversold conditions. While the other indexes finished positive the Dow fell short. Despite the heavy up volume and over two billion shares traded on the NYSE, declines still beat advancers 19:11. Many analysts claim the current decline is nearing 1929 proportions. We may not have had a "capitulation event" yet but we are seeing capitulation by breadth as new lows across all exchanges swamped new highs 722:97. Will we get a short covering rally at the open? Futures are pointing to that possibility but the consumer sentiment could crush that hope before the bell. Should the rally occur you should not expect it to be the ONE we are looking for. Trade it but don't marry it!

Enter Very Passively, Exit Very Aggressively!

Jim Brown


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