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Quarter Pounded

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      12-17-2002           High     Low     Volume   Adv/Dcl
DJIA     8535.39 - 92.00  8638.64  8525.03 1.53 bln 1235/1964
NASDAQ   1391.85 -  8.50  1408.16  1385.37 1.29 bln 1430/2043
S&P 100   458.58 -  4.68   463.26   457.86   Totals 2665/4007
S&P 500   902.96 -  7.44   911.22   901.74             
RUS 2000  391.25 -  3.65   394.90   390.16
DJ TRANS 2343.38 - 15.60  2367.90  2338.56
VIX        30.16 +  0.17    30.70    29.59
VXN        48.14 -  1.70    50.50    47.81
Total Vol   3,004M
Total UpVol   998M
Total DnVol 1,963M
52wk Highs   135
52wk Lows    133
TRIN        1.49
PUT/CALL    0.76

Quarter Pounded
By Jim Brown

McDonalds set the tone for trading on Tuesday with its eighth profit warning in eight quarters and its first anticipated quarterly loss ever. MCD gapped down to a seven year low below $16 and took WEN with it. The slowing sales at burger outlets are being blamed on competition and lower priced menus that are making it tougher to turn a profit.

Dow Chart - Daily

Nasdaq Chart - Daily

On the economic front the CPI managed only a modest +0.1% gain and caused only a yawn among traders. Inflation is far from a problem and is not expected to be a factor for at least six months. Industrial Production was weaker than expected at only +0.1% as demand across the manufacturing sector remains weak. However the prior months drop was revised up slightly. This was not enough to energize traders but any positive numbers weakens the possibility for a second dip. With capacity utilization still low at 75.6% there is no need to invest in business equipment and that means any recovery is also being postponed. Looks like a deadlock. Until those utilization rates lift off the 20 year lows there will not be any new cycle.

Homebuilders have more lives than Morris the cat and the Energizer bunny combined. Warning after warning about the bursting of the housing bubble have passed but the new housing starts rose by +2.4% for November to 1.70 million units. Critics claim that starts are different than sales but most builders are claiming a backlog of orders. Nobody knows how many of those are due to the down payment gifting which could go away soon. Watch for the starts to turn into a glut once interest rates begin rising. Still the trend is clear in the stocks. They are well off their highs and most are showing slow downtrends. Sell the bounces on news event like today's and ride them down with stops. RYL has been trending down since May and would be my choice. NVR is the builder that refuses to die and continues to hover in the $340 range. Sorry, no options.

In a surprising contradiction of news the weekly chain store sales numbers came in slightly higher than expected at +1.9% but comments from BBY, TGT and others pointed to a different picture. The +1.9% gain reversed the prior weeks -2.3% loss but only put the retailers back on track for a potential 2.5% growth rate for December. Very disappointing for retailers expecting a 2002 recovery. Dana Kelsey, a retail analyst, lowered her estimates from 2.5% growth in December to estimates of flat to at most +2.0% growth based on in store surveys. Target a large discount retailer likely to be on the positive side of the retail buying binge reported that month-to-date sales were "well below plan" and threw cold water on holiday sales hopes.

Electronics retailer Best Buy warned that profits would be below prior estimates due to slow sales in home entertainment products and fierce price competition. They said the massive promotions necessary to attract buyers for the holiday would cut into margins. Circuit City posted a loss for last quarter and its stock hit a ten year low. Trends showed that consumers have cut spending on high priced digital satellite systems, wide screen TVs and expensive wireless phones due to the uncertain economy and fears of layoffs after the new year. BBY and CC also faced increased competition from Wal-Mart in the electronics area. WMT slashes prices on big-ticket items to get customers in the stores in hopes they will load baskets on higher profit items. WMT also dropped -$1.00 on the news. It looks like our Market Monitor retail updates beat the street by a couple weeks.

Techs were weak today and tomorrow may be more of the same. Micron reported earnings after the bell and posted a -$.52 cent loss compared with analyst estimates of only -.23 cents. Despite the report by Gartner Dataquest that worldwide DRAM sales increased +37% to $16 billion the sector is still dropping. The reason for the drop is that they are selling +37% more chips but they are selling them for a loss. Infineon (IFX) lost ground today after they announced they won a $2.5 billion contract to make DRAM chips for Kingston Memory. In this business it appears the more contracts you win the more money you can lose. MU lost -1.50 in after hours and helped drag down other stocks in the sector as well. Nasdaq futures were down -9.00 as I write this.

Tomorrow traders will be focused on ORCL, which announces earnings after the bell. Analysts are worried that the lack of big orders could cause them to miss their estimates. Either way their guidance will be critical to any holiday rally hopes. Larry Ellison is known for great spin control and even weak guidance will be played for all it is worth.

GE affirmed lowered estimates of $1.51 today and said they expect to raise between $5 and $10 billion next year by selling non-performing assets and shifting into higher growth technology and consumer finance businesses. They are considering sales of their insurance units after the big losses in the 9/11 attack. They lowered their growth estimates to only +7% for 2003, which is down from the +15%-18% estimates earlier this year. The guidance was back end loaded and is predicated on a strong second half of 2003. This was a negative for analysts since it means GE is betting on the distant future instead of realistic current conditions. GE said it did not see any future spark that would enable it to raise estimates. GE fell on the news to $26.

Today's drop was just about half of yesterday's gains. Those gains were way overdone and included some strong short covering from those who were expecting a continued drop this week. Just like every one day wonder recently there was no follow though and volume remained very light. The last nine days have been lackluster at best as traders position themselves for a potential holiday rally. The afternoon drop broke just below support at 8550 on the Dow and 1395 support on the Compx. Without the Micron news after the bell I would have expected another rebound at the open. The Micron earnings has created a very negative cloud over the chip sector and consequently the Nasdaq. The S&P futures are surprisingly flat indicating a mixed view point. Several Dow stocks are still looking weak led by MMM, WMT, IP, KO, BA, GM, MCD, HD, INTC. This means any gains will be hard fought unless these companies turn around.

With the exception of the MCD warning the news on Tuesday was mostly good but stocks sold off anyway. With more bad news after the close from Micron and others there is not likely to be a material change tomorrow. The prospect of a holiday rally is probably the only thing that will keep us afloat for the rest of the week unless good news breaks out somewhere. I would still be a buyer of the broader market at 8450 or lower with a stop loss at 8250. We could see another retest of that 8450 level before next week but with the 50 DMA at 8452 and the 100 DMA at 8414 there is little risk of a serious drop before the holidays. I am counting on the retail traders to boost us back to 8750 by the end of next week. Time will tell.

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Jim Brown
Editor

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