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Slipping and Sliding

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01-22-2002                  High    Low     Volume       Adv/Dec
DJIA     8318.73 - 124.17  8444.61 8306.59    1542 mln  1171/2080
NASDAQ   1359.48 -   4.77  1379.61 1358.23    1491 mln  1293/1957
S&P 100   452.10 -   4.68  445.67  445.31      totals   2464/4037
S&P 500   878.36 -   9.26  889.74  877.64
RUS 2000  380.53 -   2.64  383.44  380.20
DJ TRANS 2213.63 -  67.60 2274.31 2213.50
VIX        32.01 +   1.48   32.40   30.56
VIXN       44.16 +   0.92   45.06   42.54
Put/Call Ratio 0.73

Slipping and Sliding
By Kent Barton

Last night the stage was set for an oversold bounce in the tech sector. After watching the NASDAQ give back nearly 7% over the past four sessions, the bulls could've rallied around Tuesday evening's strong earnings report from Motorola and the better-than-expected semiconductor book-to-bill number. Positive news from JDA Software (JDAS) and Lucent (LU) also created a favorable climate for a short-covering rally. The Composite did manage to post a decent gain during the middle of today's session, but sputtered out in late-afternoon trading and finished its fifth consecutive loss. What happened?

For starters, Motorola took much of the wind of the bulls' sails this morning when they released cautious comments regarding the next quarter. MOT may have had a great Q4, but these days it's the forward-looking guidance that's of paramount importance for investors. Shares of the communications equipment provider posted a loss of 2.5%. However, the more vexing problem for tech investors was a complete lack of strength in the rest of the equity market. The bulls just couldn't seem to find any traction in the face of a steady drift lower in the key non-tech sectors. The market is attempting to scale a rather large wall of worry, and several of today's earnings reports made for a very slippery journey.

Daily chart - NASDAQ Composite:

While the weak technical picture pictured above certainly doesn't inspire much bullish confidence, news after the bell is likely to give the NASDAQ an upward bias tomorrow morning.

Shares of Qualcomm were ticking higher by more than 4% in after-hours trading after beating estimates by four cents and raising its Q2 guidance to 34-35 cents/share. The consensus expectation was for earnings of 30 cents/share. The company also raised its 2003 top-end EPS estimates from $1.20 to $1.39. Strong earnings and upside guidance...Not too shabby! This news could help the NASDAQ to find a bid on Thursday. Especially considering how short-term oversold the market is.

Texas Instruments (TXN) was also rising in the extended session after the company reported earnings that were three cents better than expectations. Strong demand during the final weeks of 2002 was largely responsible for the upside surprise. TXN also updated its Q1 outlook and said they are now expecting a result of six cents, "plus or minus a few cents." Analysts had been looking for three cents/share in the first quarter. Meanwhile, fellow chip stock Altera was trading slightly lower following their fourth-quarter announcement. ALTR beat estimates but gave a Q1 estimate that was somewhat less than expected.

While the book-to-bill number was largely ignored today, the TXN data supports the idea that demand has been picking up within the semiconductor industry. Of course on the other hand you have Intel cutting capex spending and AMD doing its best impression of a cliff diver. But at the very least, it looks like tonight's news could trigger a short-term bounce in the SOX.X.

Daily chart - SOX.X semiconductor index:

Non-tech earnings also continued in earnest today as many more high-profile companies reported their quarterly results. Banking behemoth J.P. Morgan kicked things off with a fourth-quarter loss of $0.20/share. Factoring in a 13-cent restructuring charge, this was in-line with expectations. JPM finished the session with a 2.8% loss and closed just above its 50-dma. Meanwhile, fellow Dow component Eastman Kodak offered up a snapshot of severe fundamental weakness after missing earnings by 2 cents and guiding lower for the first quarter. The company also announced additional job cuts. EK was whacked for a loss of nearly 12%, contributing to a triple-digit decline in the Industrials. Pfizer (PFE) fared much better with its quarterly report and beat estimates by a penny. The company recorded a 46% increase in net income, thanks in large part to strong drug sales. This news wasn't enough to keep the DRG.X pharmaceutical index out of negative territory.

Another earnings-induced decline was seen in shares of General Dynamics. As you might expect, the company's defense division did quite well. Pentagon expenditures on warships, weapons systems, and military vehicles raised the company's profit. Unfortunately for shareholders, GD's aerospace unit saw a huge revenue decline related to weakness in the business jet market. The bottom line showed a profit of $1.21/share, 12 cents below than expectations. Shares lost 12% after plummeting through long-term support near $72.

Speaking of jets, the XAL.X airline index was pushed into a nosedive yesterday after Northwest Airlines (NWAC) reported a quarterly loss that was 41 cents wider than consensus expectations. However, it was this morning's announcement from AMR that sent the sector into an utter tailspin. The world's largest airline reported a narrower fourth-quarter loss and a modest increase in revenue. Those are decent results, but Wall Street is far more concerned with the outlook for future growth. Unfortunately that outlook is extremely gloomy. According to AMR's Chairman and CEO Don Carty, "Clearly, results such as the ones we reported today are unsustainable." Carty went on to state that a "permanent shift" in the airline industry would demand a reduction in annual costs by at least $4 billion. Talk about a Catch-22! AMR must aggressively cut costs in order to avoid the same fate as UAL...But these reductions will make continued revenue growth extremely hard to come by. This applies for most of the other major airline companies as well. Investors responded by slashing nearly one quarter off of AMR stock. On the other end of the spectrum, Southwest Airlines, one of the few profitable carriers, reported earnings that were 2 cents better than expectations. The company still had a very difficult quarter and suffered a 33% decline in net income. LUV finished with a 4% loss.

Daily chart - XAL.X airline index:

Airlines (and the transportation sector in general) are also being pressured by the sustained high price of oil. February crude oil futures (cl03g) reached new relative highs and closed above $34.00/barrel. Yesterday the first signs of cracks in the Venezuelan strike appeared when tanker captains agreed to go back to work. This should help to boost the country's oil exports from the current amount that's trickling out. But with 90% of oil workers remaining on the picket line, there's still no end in sight for the labor stoppage. Sector giant Sclumberger missed earnings by a nickel, citing "the absence of any significant growth in energy demand." This news pushed both the OIX.X oil index and OSX.X oil service to multi-week lows. Of course the other major catalyst for rising oil prices is the looming war with Iraq. During a speech in Missouri today President Bush reasserted that the country has weapons of mass destruction. But unless the U.N. inspectors find the proverbial "smoking gun," he'll face an uphill battle in finding international (and domestic) support for an invasion. Meanwhile, some pundits continue to speculate that Saddam Hussein might relinquish his power and go into exile with full immunity from persecution related to his various war crimes. Obviously this would be the optimal solution for both the U.S. and Iraq, not to mention the equity market. But as the saying goes, if it sounds too good to be true...it probably is. The chances of Hussein willingly stepping down are next to nil. We're talking about a power-hungry dictator who idolizes Josef Stalin and once ordered an assassination attempt on his own son. Perhaps a coup within his regime would be more likely, but in the past he's managed to squash any threats from within.

Everything will be coming to a head next week with Bush's State of the Union address on the 28th, one day after the critical UN deadline. The related uncertainty has made it very easy for potential bulls to retract their buy orders and play the waiting game. The growing geo-political tension is also reflected in the volatility index (VIX.X), which has moved sharply higher over the past week. Technically, the Dow and NASDAQ are both looking painfully oversold on a short-term basis, and the latter index might possibly find some buying on the positive TXN and QCOM news. The NASDAQ seemed to be held back by the rest of the market today and should be able to move back towards the 1400 area on Thursday if the overall equity climate is more favorable. Meanwhile, the Dow is trading just above support in the 8200-8300 range. It would take a serious bearish effort to push the index below this region.

Daily chart - Dow Jones

Tomorrow will bring another round of earnings. Noteworthy announcements include Dow components CAT and T before the bell, followed by tech heavyweights AMZN, AMGN, and KLAC after the market closes. Barring any major downside surprises, the major indices (and the tech sector in particular) look poised to retrace some of their recent losses. Short-term traders might be able to take advantage of such a rebound, but bear mind in that any sustainable, multi-day rally probably won't happen ahead of next week's UN deadline.

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