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Market Wrap

Worst Ever

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      02-04-2003           High     Low     Volume Advance/Decline
DJIA     8013.01 - 96.80  8104.61  7935.12 1.68 bln   1338/1880
NASDAQ   1306.15 - 17.60  1310.48  1292.20 1.34 bln   1257/2005
S&P 100   428.84 -  6.86   435.70   436.14   Totals   2595/3885
S&P 500   848.20 - 12.12   860.32   840.19 
W5000    8049.55 -105.30  8154.81  7980.27
RUS 2000  368.72 -  1.53   370.25   364.99 
DJ TRANS 2145.38 - 12.10  2160.41  2131.29   
VIX        36.70 +  2.72    38.08    36.22   
VXN        48.31 +  2.27    48.90    47.55 
Total Volume 3,213M
Total UpVol    783M
Total DnVol  2,368M
52wk Highs  168
52wk Lows   232
TRIN       2.16
PUT/CALL    .84

Worst Ever
By Jim Brown

That was the comment by John Chambers about the current technology environment. The AIG CEO made similar comments about the current state of the liability insurance business when warning this morning about a -$1.8 billion charge. Does this sound like an economic recovery?

Dow Chart - Daily

Dow Chart - 45 min

Nasdaq Chart - Daily

We began the day with the Factory Orders report, which posted a +0.4% gain on the headline number, which was above the +0.3% consensus. Unfortunately if you take out defense and aircraft the number actually dropped to -0.33%. The Computer and Electronics orders component rose +3.2%. Order backlog fell again suggesting more layoffs ahead. It was obviously a mixed report and despite the rise in the headline number it did not encourage investors.

According to the Challenger Layoff Report the number of layoffs increased +42% from 92,917 in December to 132,222 in January. This was above the 2002 monthly average of 119,200. According to John Challenger there is no evidence that the pace of layoffs has slowed. This is a leading indicator for the Nonfarm Payrolls on Friday and a telling clue to the strength of the fragile recovery. We saw last week that the Help Wanted Index had fallen to a very low level. Fewer jobs and higher layoffs are not indicating an end to the soft patch.

Chain Store Sales came in at -0.9% and reversed the gains for the prior two weeks. Some feel the slow sales are a result of lower inventories going into the holiday season leaving lower levels of clearance items to dump in January. Stores would rather not have any sales than have to sell excess holiday inventory for a loss. With confidence/sentiment slipping toward the lows and rising unemployment the odds of a pickup in buying are slim.

Impacting the market more than the economic reports was a warning from AIG that they were going to take a $1.8 billion charge to cover spiraling claims. They claimed premium rates have been driven down by fierce competition to levels that did not cover damage awards in today's litigious environment. This knocked -3.63 off the price of AIG and the comment about lower premiums due to fierce competition rippled through the sector and drove prices lower.

Another example of tough times was the decision by the Goodyear board to eliminate their 12-cent dividend to save cash. They decided to take the action in light of disappointing results and challenging conditions. GT notified employees in January it may cut -15% of its US workforce. Are they telling us the auto companies are ordering less tires in expectation of slower sales?

After the bell Cisco reported earnings that beat the street on the surface at 14 cents a share compared to estimates of 13 cents. That was the good news but that news was tainted. Those results were also based on Cisco's buyback of $1.5 billion in stock in the quarter. That is 100 million shares. Other factors included a revenue number that was on the bottom edge of the consensus. Cisco said that sales could fall -2% to -3% in the current quarter due to the "most challenging environment the information technology industry had ever faced." Not very bullish words from the master of spin himself. He was very positive about Cisco and the potential for profits WHEN the spending in the IT sector returned. I believe him because their gross margins rose to a whopping record 70.4%. While this is great one analyst said he would be more comfortable with 50% so they would have some growth room. Performing at such high profit rates means they could explode on volume in my personal opinion. Still CSCO fell in after hours on the outlook statements.

While Cisco may be performing well despite the tough environment and falling sales there are probably few other tech companies who are doing that good. The news of the 70% margin for Cisco is great for Cisco but other companies are fighting to make a profit much less prosper. Cisco may have a decent day on Wednesday but other techs may not do as well based on the tough environment talk.

In geopolitical news North Korea took exception to the US statement that they were going to move ships and planes into the region to combat a potential future threat. Iraq claimed again they had no weapons despite another minor find by the inspectors. Regardless of the claims and posturing we will see the evidence the US is willing to release tomorrow when Powell goes before the UN. The coalition is actually growing with a few more countries leaning in the US direction due to strong lobbying by the top players. I have no clue as to the market direction after this speech. If he proves his case and gets more UN support that would be a good thing for the war but a negative for the market? If he does not prove anything and the world realizes the US is going to act by itself wouldn't that be bad for the market? Who knows what is priced in at this point.

The markets need help from somewhere. The Dow tested 7950 once again and held but struggled getting back over 8000. The Nasdaq finally gave up the 1320 level and the 1300 level for most of the day but clawed its way back to 1305 on short covering in front of Cisco's earnings. The rising oil, gold and falling dollars is extracting money from the markets in a torrent. Comments like AIG, GT, CSCO today along with the Challenger Layoff report are not building any confidence in a recovery. The Nonfarm payrolls are due out Friday and most bets are for a negative number again. This will be the third consecutive month and fourth out of five months if it happens.

I think the bottom line is still a negative outlook despite all attempts to spin it to the contrary. There are pockets of strength like we saw last Friday but the potential war is keeping those areas from expanding. The markets are showing a strong desire to hold at this level but the overall trend is still down. Tomorrow should be one more step toward clearing the war uncertainty and the results of "seeing clearer" could be good or bad. These next 2-3 weeks are going to be tough unless the US says "ok, we are giving up and going home." Anything else will continue to be a drag of some sort.

In the S&P Emini futures there was an unusual event this afternoon. They were trading for 847.25 when Cisco earnings were announced. The intraday high was 848.00. When CSCO announced they beat the street they spiked to 948.00. No, that is not a misprint. Somebody entered a trade to buy several hundred contracts but added an extra zero. In literally a couple of heartbeats the price jumped +100 points. Traders were dumbstruck. I had about a dozen charts of the ES03H contract open on my desktop for different intervals and the price literally rolled off the top of the screen within a couple seconds as buy stops were triggered for level after level. Globex eventually busted all the trades above 860 once the error was reported but there were some really unhappy traders for about 20 min. Several really happy ones as well who had shorts parked well above the current ranges. When I first saw the spike I thought Cisco had blown away estimates but could not imagine a win that could produce that type of spike. Immediately I thought Saddam had been eliminated or Osama had been found. That would be the type of reaction I would expect. Just not in 5-10 seconds. Just proves you always need stop losses regardless of how far away you are from the current price. Have you hugged your stops today?

Enter Very Passively, Exit Very Aggressively!

Jim Brown


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