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Market Wrap

Drug-Induced Decline

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     10-22-2003            High     Low     Volume Advance/Decline
DJIA     9598.24 -149.40  9742.05  9580.24 2.07 bln    766/2055
NASDAQ   1898.07 - 42.83  1923.33  1897.36 1.71 bln    752/2338
S&P 100   521.76 -  8.36   521.76   512.36   Totals   1518/4393
S&P 500  1030.36 - 15.67  1076.03  1028.39
RUS 2000  513.15 - 12.38   525.53   513.15
DJ TRANS 2818.01 - 46.85  2863.90  2817.44
VIX        17.67 +  1.12    17.98    17.10
VXO        19.00 +  1.18    19.59    18.49
VXN        25.68 +  1.33    25.87    25.04
Total Volume 4,136M
Total UpVol  3,094M
Total DnVol    990M
52wk Highs     332
52wk Lows       32
TRIN          1.51
PUT/CALL      0.98

Drug-Induced Decline
By James Brown

It proved to be a tough day for bulls on Wall Street. Major averages lead a broad-based decline with disappointing earnings results from three Dow components and a number of drug stocks. Meanwhile a strong decline in the U.S. dollar, despite Secretary Snow's attempt to bolster the currency, sent investors into the safety of bonds and gold. December gold futures rose $4.80 to close at $386.80 an ounce. By the closing bell the DJIA had lost nearly 150 points (1.53%), the NASDAQ Composite lost almost 43 points (-2.2%) and the S&P 500 dropped more than 15 points (-1.49%). Only two out of dozens of major sector indices were green, specifically the XAU gold & silver index and the UTY utility index and then both were only up fractionally.

Foreign exchanges were little help today. Asian stocks were lower with the Japanese NIKKEI losing almost 142 points (-1.29%) to 10,889. The dollar's drop to 1.089 against the yen a likely culprit. European equities fared worse. With the euro rising to 1.182 against the dollar the English FTSE lost 1.53% and the German DAX dropped 2.5%. U.S. markets dropped quickly at the open and volume was rather modest by midday. Unfortunately, the sell-off picked up steam as we rolled into the closing bell and the final volume numbers were heftier than expected indicating some conviction by the sellers.

The market internals were bearish as one would expect. Declining stocks out numbered advancing stocks 20 to 7 on the NYSE and 23 to 7 on the NASDAQ. Down volume was better than three times up volume on both exchanges. Overall volume tipped two billion shares on the NYSE and 1.7 billion on the NASDAQ. Professional traders were not worried by the decline. Given the strong run up into the Q3 earnings season some profit taking was expected. Many are looking for a good pull back to gauge potential new entries heading into the fourth quarter.

Chart of DJIA:

Chart of NASDAQ:

It has been weeks since we've seen a triple-digit loss in the DJIA. Only three components managed to close in the green today; those were MCD, MMM and SBC. Leading the decliners were MRK, JPM and DD. It was not a coincident that all three reported their earnings today. Dow component DuPont (DD) reported a loss of 88 cents a share but if you exclude a $1 billion asset write-down then earnings appear to be 13 cents, which were 2 cents above estimates. The company did reaffirm its full year outlook for $1.60 a share, which is in line with analysts but investor's sold the news. After consolidating for a month under its 200-dma the stock hit a new relative low with a 4.27% loss on strong volume of 8.4 million shares.

Fellow Dow component and second largest bank in the U.S. is J.P.Morgan (JPM) who announced Q3 earnings of 78 cents a share. Today's result beat estimates by 2 cents but the company's revenues of $7.53 billion were significantly under analyst estimates of $8.6 billion. Shares fell 4.6% to its simple 50-dma and led both the BKX and BIX banking indices lower.

The largest drag on the DJIA was drug company Merck & Co (MRK). Not only did MRK miss estimates of 85 cents by 2 cents but they missed the revenue number and guided lower. The drug titan also announced it would cut 4400 jobs and launch a new distribution program to U.S. wholesalers. The stock gapped lower and closed down 6.5% to a new 52-week low.

MRK wasn't the only drug company to disappoint today. Schering- Plough (SGP) announced a Q3 loss of 18 cents with sales falling 16% to $2 billion. The company blamed a drop in sales for its Claritin allergy drug and its Intron hepatitis treatment. Wyeth (WYE) also reported a Q3 loss. Formerly American Home Products Corp, the New Jersey-based Wyeth blamed litigation charges and increased reserves to handle diet drug fen-phen claims for the 32 cent per share loss. Excluding charges WYE's income would have been 65 cents a share. Investors sold the news and WYE hit its 200-dma by mid afternoon but rebounded off its low for a 5.45% loss.

The biggest drug maker on the planet, Pfizer (PFE) also reported Q3 earnings today. The drug giant earned 47 cents a share, which is 3 cents better than estimates but only if you discount the acquisition charges related to its Pharmacia merger. Probably more important was PFE's fourth-quarter guidance, which they lowered from 54 cents a share to 51 cents. The standout drug maker to report today was GlaxoSmithKline (GSK). Britain's GSK said profits were up 20 percent for the quarter but told analysts that exchange rates could eat up 4 to 5 percent. At the end of the day the DRG drug index had lost 3.26% to close under support at 310 and its simple 200-dma.

Another major story today was in the Disk Drive sector. Seagate Technology (STX) reported earnings that were 4 cents better than expected with net income rising to 40 cents a share on revenues that rose 10% for the quarter. Why then did the stock plummet almost 25% to $22.28, dragging the entire sector down with it? Directly affecting investor sentiment for the stock was news that STX had amended a lock-up agreement that would now allow insiders to immediately sell more than 20 million shares instead of a previous date in early 2004. Secondly, the company disclosed that the SEC had asked for copies of all analyst reports for the last 2.5 years. That's generally not a good thing either. This one-two punch hit the DDX for a 7% loss. Major losers in the sector besides STX were HTCH (-8.65%), STK (-13.6%) and MXO (-16.99%).

I could go on with more earnings news but the focus was on the earnings misses not the successes. Of the nearly 250 companies in the S&P 500 that have already reported for the season, 65 percent of them have beaten estimates. Thomson Financial is reporting that corporate profits have risen an average of 18.6 percent, which is better than the pre-season estimates for a jump in the 16 percent range. That certainly sounds like success to me and traders are just cashing in on the good news to take some profits off the table.

Now it looks like we'll be seeing a repeat of today's action given some of the after hours news. Chip stock KLA-Tencor (KLAC) reported earnings after the close with net income at 18 cents or 1 cent better than the estimates. The bad news was revenues fell more than 15% and the company is guiding lower for the December quarter. Looking ahead KLAC says next quarter could be in the 18 to 19 cent range while analysts had been looking for 23 cents a share. KLAC expects next quarter revenues to be in the $320-325 million area, below consensus of $348 million. KLAC management said some key sales contracts failed to close in September and that customers are still cautious about the rest of 2003. They hope that the general optimism for next year (2004) will start to turn into sales but the proof may be in the post-Christmas pudding (Q1 '04). Shares were down about $4 in after hours and the entire chip sector is bound to react negatively to the conference call.

A heavy SOX is not going to benefit a NASDAQ that closed under the 1900 level and the next stop for the Composite could be the simple 50-dma near 1850. Tomorrow the earnings parade will continue and the major announcement on the books is Microsoft (MSFT) who announces after the close. MSFT management tends to be cautious and their conference calls almost always tend to be disappointing (to manage our expectations for next quarter). However, should they surprise us with an upbeat call then the mood could change.

Don't look now but that signal in the VXO (old VIX) yesterday is getting some market confirmation today!


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