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Market Wrap

Pause to Reload

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      08-20-2002           High     Low     Volume Advance/Decline
DJIA     8872.07 -118.70  8986.50  8822.02 1.54 bln   1235/1932
NASDAQ   1376.57 - 18.00  1389.84  1370.98 1.45 bln   1370/2024
S&P 100   474.03 -  6.81   480.84   471.24   Totals   2605/3956
S&P 500   937.43 - 13.27   950.70   931.86 
RUS 2000  397.84 -  3.45   401.29   396.95 
DJ TRANS 2347.72 - 16.30  2367.10  2332.78   
VIX        32.56 +  0.99    34.01    32.05   
VXN        47.71 +  0.69    48.96    46.61
Total Vol   3,174M
Total UpVol 1,120M
Total DnVol 2,000M
52wk Highs    96
52wk Lows    220
TRIN        1.24
PUT/CALL     .74

The bulls phoned home today for more cash to increase their long positions. Bears took advantage of the buying lull to press the advantage but without conviction. The volume was anemic with barely three billion total shares trading. This was by far not a rush to short or a change in directional trend. It was simply a pause in the buying. The key is whether it is permanent or just temporary.

Chart of the Dow

Chart of the Nasdaq

The morning began with a blow for tech stocks. Chip equipment maker Kulicke & Soffa (Nasdaq:KLIC) warned during a mid-quarter update that it had hit a pothole on the road to a recovery. The company makes tools to build and test microchips and said the last quarter has been a roller coaster ride. They said companies were deferring orders and recent capital expenditure cutbacks were hampering sales. They also said customers were unwilling to pay for higher performance products and were content to keep their current equipment until demand returns. They are now forecasting a steeper downturn than expected. CSFB dropped estimates for 2002 results to -$1.41 a share and 2003 estimates to a loss of -$.50 a share. KLIC had been expected to be at or above breakeven in 2003. The very negative comments from KLIC tanked AMAT, NVLS, DPMI and most of the semiconductor sector.

Dell Computer added to the negativity when they announced a decision to sell unlabeled computers to retailers at a discount. They had previously said they would not sell "white box" computers because it would cut into its own retail market. The current slow down in PC sales has Dell going back on its promise and has them courting dealers they cut off back in the early 1990s to go consumer direct. They are targeting dealers who sell to small businesses with 100 employees or less. Analysts think Dell will be less than successful selling their $499 base system without a monitor because most competitors sell for less than that. They will not pre-make the computers but only build to order and even with their quoted 5-day lead time this means time between customer order and customer delivery could be as much as 10-14 days. When you can go down to CompUsa and get one built today this is a strong disadvantage. The current independent builders offer 24-48 hr turnaround. Many feel Dell has just raised the red flag for the PC sector if they are stooping to this low margin attempt to keep assembly lines running. This may also indicate back to school sales did not appear.

Agilent (Nyse:A) said it posted a wider than expected loss today at -$.31 compared to previous estimates of a -$.10 to -$.20 per share loss. They blamed overall market weakness and problems with some software installations. The software was responsible for a nickel of that loss according to Agilent.

News after the bell today will weigh on the tech sector as well. The book-to-bill ratio for July dropped to 1.16 from 1.26 and was the lowest number in the last four months. After peaking at 1.27 in May the decline is picking up speed but still showed an apparent expansion in progress. The number indicates the chip industry is receiving $116 in orders for every $100 in product shipped. The challenge, as you can see in the KLIC news above are that the orders are being cancelled and deferred at very high rates. It does not do any good to get a million dollar order if it gets delayed indefinitely or cancelled completely a month later. The BTB number is also a three month moving average so the current number for July is using the high months of May (1.27) and June (1.26) as two components of the current July number of 1.16. Using some quick math and multiplying 1.16 by 3 = 3.48. Subtracting 1.27 and 1.26 leaves you with .95 for July. Suddenly there was a contraction and they really shipped more than they booked for July. This calculation is not precise since the numbers for May and June were also three month averages including the prior months. Since February was .90 and March 1.05 that means May/June actual numbers were higher than the average quoted. This means the actual number for July was even lower than the .95 above. I doubt many media reporters will think this through and the "headline" 1.16 number is what will be reported. Astute investors and our readers will see the truth and be forewarned.

Contrary to the published "soft recovery in progress" VLSI Research reported that chip fab utilization rates will drop in August to 81.9% from 86.5% in June. They reported that activity at global chip factories was slowing significantly. This does not bode well for the anticipated 4Q holiday sales. Many analysts are now beginning to predict a slower 2003 in consumer chips, like chips used in DVD players, as well as PC chips. Should be interesting to see how the bulls spin these reports on Wednesday.

Consumers have been on a car-buying spree driven by zero interest and high rebates. These discounts cost the auto companies between $3,500 and $7,500 per car. You didn't think the car companies were going to eat this expense did you? Chrysler announced today they were going to raise prices on 2003 models between +4.5% and +12.8% depending on the models. That is about $3,600 for their best selling $28,000 minivan. There is no free lunch!

Oil prices continue to rise and topped $30 a barrel today on fears that an Iraq attack will disrupt not only supplies but fragile supply channels as well. If Saudi Arabia suddenly decided to not supply oil to coalition partners then other suppliers would have to take up the slack. Oil would continue to flow but from whom and to whom would be in question. In 1990 oil prices correctly predicted the Iraq invasion of Kuwait as knowledgeable traders read between the lines. Oil rose to $40 a bbl when the conflict started. The same is true today as it becomes increasingly apparent there will be another war. Oil over $30 depresses the stock market and raises prices on manufactured goods. This energy inflation has been seen many times in the past. I had a dozen all electric homes in Texas during the big oil crisis in the 70s. They were fully rented when it began but all vacant within a year when the electric bills exceeded the rent. The creation of the energy surcharge sent renters back to apartments which were not individually metered at the time. An Arab controlled OPEC, angry at an Iraq attack, could cause another crisis like this at any time. OPEC is scheduled to meet on Sept 18th to discuss quotas and production caps.

The KLIC event today was also a warning that we are moving into the earnings warning cycle for the third quarter. The mid quarter updates will start hitting the wires in greater frequency as we near the end of August. With the numerous instances of slowing demand it would be silly not to think there will not be a wave of lowered guidance as we get closer to September. This is not a rare cycle. September is not known as the worst month of the year for nothing. It is historically when companies warn of a sluggish summer sales for the 3Q and after nine months of history lower guidance for the year as well. Products for holiday selling have already been manufactured and are being shipped. They have a pretty good handle on what the full year will be by September and that is when they break the bad news.

With no major economic reports tomorrow and earnings over for 97% of the S&P companies, there is nothing left for the bulls to feed on. They have not needed much lately with bad news being ignored or spun to their own uses. The bears have plenty of ammo but have been plagued with a rash of misfires. With the bulls needing no good news to buy and bears unable to capitalize on bad news it appears we are at a stalemate. There is not enough volume on either side to win the battle. This makes it more likely we will move sideways until the tug of war is won by the side with the most staying power.

The Dow traded in a range between 8800-9000 and stubbornly refused to break 8800. The Nasdaq traded in a very narrow range between 1370-1390. Despite the negative chip news from KLIC and the news from Dell it also stubbornly refused to break the 1370 barrier. This tells me there is still a bid under the market despite the low volume. There is not enough buying pressure to push it higher but it was successful in holding it up on Tuesday. With total market volume only slightly over 3 bil shares it is evident the end of summer vacation session is in full swing. I still see no reason to buy stocks but we have seen that shorting a dull market is not working either. Vacation anyone?

Enter Very Passively, Exit Very Aggressively!

Jim Brown

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