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Count on It!

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      09-12-2002           High     Low     Volume Advance/Decline
DJIA     8379.41 - 201.76  8574.94  8359.09  1.18 bln   885/2332
NASDAQ   1305.72 - 35.77   1305.72  1279.09  1.17 bln   1034/2112
S&P 100  443.23  - 12.18   454.80   442.06     Totals   1919/4444
S&P 500   886.91 - 22.54   909.45   884.84 
RUS 2000  386.27 - 7.10    393.37   386.19 
DJ TRANS 2253.27 - 44.05  2298.86  2245.57   
VIX        40.72 +  9.37    41.07    39.09   
VXN        56.44 +  2.44    56.85    54.05
Total Vol    2,2357
Total UpVol   298
Total DnVol  2015
52wk Highs     61
52wk Lows     155
TRIN         2.85
PUT/CALL     0.23

Count on It!
By Jim Brown

If you had thought a retest of the July lows was possible before you can count on it after today. Even more depressing is the thought that maybe those lows will be broken, not tested. Market conditions are continuing to deteriorate and we are a long way from being out of October. There are still a lot of companies which have not warned and the end of September is shaping up as serious pothole.

Dow Chart

Nasdaq Chart

It was an ugly day. Seems we are getting a lot of those lately. The futures before the open were down -15 from the 4:PM numbers on Wednesday. This caused a straight -165 point drop to 8008. The Dow bounced about +100 points from the lows and the 8000 level held until 3:09 when sellers all joined together to break the stalemate. Once below 8000 it was all over but the bleeding and bleed it did. The Dow closed at 7942 and the low of the day. The Nasdaq lost a whopping -35 points to close at a low not seen since the 1205 August 5th low.

EDS profit warning last night turned into 50% haircut as the stock dropped from $36 to $17.23. Their warning also impacted Dow component IBM, which dropped -4.75 to $64.90 in regular trading. IBM has yet to warn and several analysts came to their defense today. Considering today's drop to levels not seen since 1998 a warning could easily push them under $60. INTC dropped to $14.90 and a low not seen since Nov-1996.

There was a flood of missed earnings today along with another flurry of earnings warnings. TXI reported $.18 cents vs estimates of $.52 cents. They sell concrete and the lack of construction is hurting their business as well as weather patterns in Texas where they are located.

Morgan Stanley reported earnings of only $.55 cents a share when analysts were expecting $.67 cents. The banker said earnings were hit by weak trading results and declining merger and underwriting revenue. AG Edwards (nyse:AGE) fell -6.1% after missing analyst's estimates by -13 cents. AKLM fell -20% after warning of a pending shortfall. ASTE lost -29% after warning that it now expects a loss of -6 cents instead of a gain of 11 cents. Belden Wire & Cable (BWC) fell after warning that sales of fiber optics and network cable would fall short due to a continued decline in capital expenditures.

Not all the news was bad. FDX beat estimates and soared +4.75 on strong growth in its ground business. They affirmed estimates for the full year. The Dress Barn jumped +32% after beating the street on high margins and cost cutting. Herman Miller (MLHR) beat the street by a dime and gained +15% on strong cost cutting and improved margins. Other winners included IM, MET, PAYX, AAII and STTX. Despite the -230 Dow there were gainers although all the Dow stocks were negative.

After the bell there was good news tonight instead of bad. JBL beat the street by a penny and said business conditions had stabilized during the just completed quarter. They said the outlook for JBL was very positive and it expected substantial growth in the coming quarters. Wow! A recovery?

Qualcomm jumped $2 in after hours when it announced that chip orders for the 4Q would be around 20 million, four million more than the last quarter. They also said the next quarter would be stronger than expected due to strong demand for their newer generation of chips.

TEK reported earnings of 15 cents a share and easily beat analyst's estimates of only 7 cents. It forecast only a -5% drop in sales for the next quarter based on weakness in the optical market.

After a bad day the news from JBL, QCOM and TEK was welcome. The futures in after hours were up and expectations were improving for the open tomorrow. After a series of bad opens and no major economic reports on Friday maybe the stars are finally aligned in the bulls favor.

Economics today were just another weight on the market. The jobless claims fell to 424,000 but from a strong upwardly revised 433,000 number from the prior week. The economy is still losing steam with continuing claims rising to 3.615 million. This is the highest level since June 22nd. Housing Starts declined to 1.61 million and well below consensus of 1.65 million. This is the third consecutive drop in starts and could be indicating the end of the demand cycle. Single family starts were the slowest since Nov-2001. The Philadelphia Fed Survey came back from brink with a 2.3 and while low it diffused the -3.1 numbers from last month. The shipments component jumped to 10.6 from -3.3 last month. These numbers tend to be volatile but they have been closely watched for signs of a second dip in our future.

The immediate and unconditional return of the inspectors to Iraq now has a date. An "advance" party is scheduled to arrive on October-15th to "continue" discussions about the rules of what and where the inspectors can go with their unconditional access. UN authorities said it could be as much as two months before Iraq will let the full inspection team go to work. That should be plenty of time to hide anything of value don't you think? My idea of unconditional would be "open it or lose it". Anything on the list of prohibited sites becomes rubble the following night.

Where to from here? With 2.2 negative warnings for every positive preannouncement the outlook is not good. The positive news from QCOM and JBL after the close was nice but not of a broad market nature. The futures spiked but then they were very oversold at the close. The VIX is nearing 50 again and the TRIN was near 2.0. The put/call ratio has spent more time over 1.0 this week than I can remember in quite some time. The volume continued to increase as traders ran to the exits. I have not mentioned capitulation for a couple weeks. With the down volume running nearly 10:1 to up volume for only the second time in two months it appears that capitulation is drawing near. The good news tonight is not likely going to change the overall trend but we could see a bounce at the open without any negative overnight news.

I was surprised today that we did not see a Fed bounce at the close. With the Fed meeting next Tuesday and chances increasing for a rate cut, I expected the bulls to be mounting a much stronger "buy the rumor" attack. That possibility still exists for Friday along with short covering from the weeks -369 Dow and -75 point Nasdaq drops. With a Fed meeting only two days away the shorts should want to go into the weekend flat.

Dow 8000 was a significant support point. Coupled with the OEX at 428 and the SPX at 850 the breakdown today was a significant event. This almost guarantees a complete retest of the July 7532 intraday lows. Before we see those lows again we have to get by the Fed meeting. I doubt they will cut rates but bears will not want to be short in case they do. Sellers will want to wait for the meeting to sell in hopes of a bounce on a cut announcement. Either way it spells the possibility of an uptrend until 2:PM on Tuesday.

Enter Very Passively, Exit Very Aggressively!

Jim Brown

Check out the Traders Corner "Charting Trendlines" by
Leigh Stevens in tonight's newsletter.
http://www.OptionInvestor.com/indexes/traderscorner.asp

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