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Investors React to CSCO's Earnings

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     02-04-2004            High     Low     Volume Advance/Decline
DJIA    10470.74 - 34.44 10524.22 10447.18 2.02 bln    705/2132
NASDAQ   2014.14 - 52.07  2044.68  2013.92 2.24 bln    689/2405
S&P 100   558.87 -  4.49   563.36   558.11   Totals   1394/4537
S&P 500  1126.52 -  9.51  1136.03  1124.74
RUS 2000  564.03 - 15.12   579.15   564.03
DJ TRANS 2822.11 - 29.28  2853.88  2815.66
VIX        17.87 +  0.53    18.06    17.46
VXO        17.58 +  0.52    18.10    17.25
VXN        26.65 +  0.35    26.89    25.99
Total Volume 4,772M
Total UpVol    859M
Total DnVol  3,858M
52wk Highs     270
52wk Lows       19
TRIN          1.06
PUT/CALL      0.81

Investors React to CSCO's Earnings
By James Brown

The NASDAQ has almost wiped out its 2004 gains after investors used CSCO's earnings report last night as another excuse to take profits. What started out as a tech-specific decline quickly widened into a market-wide sell-off. Wall Street completely ignored the two positive economic reports out this morning and chose to rotate money out of tech and cyclicals and into more defensive consumer staples and drug stocks. The only two sector indices that closed in the green today were the RLX retail index and the DRG drug index.

The NASDAQ composite lost 52 points or 2.52% to close at 2014. Today's close marks a 6.4% pull back from its high and a test of the 2000 level is almost guaranteed. Meanwhile the Dow Industrials dropped 34 points to close at 10,470 after bouncing twice intraday near the 10,450 level. The S&P 500 index lost almost 10 points to close at 1126. Its short-term trend also looks bearish and a breakdown under the 1120 level may portend a move toward its 50-dma near 1100.

Foreign stock exchanges were generally negative, which didn't inspire any investor confidence here. Noteworthy was Japan's NIKKEI index, which fell almost 200 points to 10,447. Renewed concerns over their banking system's bad loans may have been the catalyst to sell and the constant drop in the dollar against the yen doesn't help Japan's exporters. Across the Atlantic rumors surfaced that the Bank of England may actually raise interest rates by 25 basis points while speculation continues for a potential rate cut by the European Central Bank.

Here in the U.S. tech stocks took a beating after CSCO's CEO John Chambers said many of their customers remain cautious on capex spending and hiring. Shares of CSCO gapped lower and closed down 8.8% on massive volume of 190 million shares. This lead the NWX networking index to a 5.18% loss. Riding its coattails were the semiconductors, software and hardware sectors. Noteworthy was the 3% drop in the SOX, which broke round-number price support at the 500 level. Shares of Intel reversed yesterday's decent gain for a 4.27% loss. Investors also took money out of homebuilders, biotech, and broker-dealers.

Market internals were very bearish. Declining stocks outnumbered advancing stocks 3-to-1 on the NYSE and almost 4-to-1 on the NASDAQ. New highs were the lowest I've seen in a very long time at 164 between both exchanges. Down volume completely overwhelmed up volume 3-to-1 on the NYSE and 6.5-to-1 on the NASDAQ. Overall volume was strong with more than 2 billion shares trading on each exchange.

The charts below show the DJIA just above support at 10,400 but in a very clear short-term down trend of lower highs. Meanwhile the NASDAQ has broken its 50-dma and is quickly approaching the 2000 mark. I've also listed the SOX to show its long-term rising trend and the breakdown today through the 500 level.

Chart of the DJIA:

Chart of the NASDAQ:

Chart of the SOX:

The big economic report released today was the ISM services index. Economists were looking for a jump to 60.0 from December's 58.0 reading. What we got was a spike to 65.7 in January; a very strong report. Compounding the good news was the factory order numbers released by the Commerce Department. Estimates were for a gain of 0.5% for December's factory orders. The result was a much stronger 1.1% gain. Making the report even brighter was an upward revision for November's factory orders from -1.5% to a -0.9%.

Unfortunately, no one was buying the economic news. John Chamber's comments were a great excuse to sell. If that wasn't enough CIENA issued an earnings warning last night that put further pressure on tech and telecom stocks. Shares of CIEN sank nearly 18% to close under its 200-dma at $5.99 after management lowered their first-quarter revenue guidance to $66.4 million. Last month the company had forecasted revenues would be $70.6 million, which was still below analysts' estimates of $76 million. CIEN blamed the timing of a single, albeit large, order for the shortfall.

Speaking of timing, Oracle (ORCL) has upped its bid to buy PeopleSoft (PSFT) for the second time. This morning ORCL raised its bid to $26.00 a share in cash (about $9.4 billion) for PSFT. In ORCL's press release Oracle's Chairman and CFO, said, "Given PeopleSoft's current prospects, including its recent downward revisions to earnings guidance for the first quarter, we believe our offer presents compelling value to PeopleSoft's stockholders." Their offer is an 18.8% premium over yesterday's closing price for PSFT but some doubt whether or not the government would approve of such an acquisition. If ORCL doesn't buy PSFT then they might start shopping around for another target. If they do get PSFT, then we could see rivals begin looking for acquisitions to stay competitive.

Today's market declines are likely to weigh on investor sentiment more than usual because traders are already apprehensive about Friday's non-farm payrolls report. If jobs fail to materialize there could be a rush for the exits. Many have rationalized that last month's gain of just 1,000 jobs was an abnormality and comments from the government have sustained this belief. However, two months of no job growth starts to look like a trend. We also have the G7 meeting on Friday and Wall Street has already assumed that the dollar's decline will take center stage. There is hope that tomorrow could see a bounce. Thursday will see dozens and dozens of companies report their fourth quarter earnings. If we get enough positive surprises it might turn things around. Of course this goes against the recent trend of sell the news no matter how good the numbers are.

We'll also have to contend with an earnings warning by Medtronic (MDT) who warned tonight after the close. MDT had previously guided revenues in the $2.15-2.23 billion range and actually suggested they might surpass it. Naturally analysts pegged their estimates at the top of the range. This evening MDT is reporting that revenues will be closer to $2.195 billion, a 15% rise from the same period a year ago. The stock was trading lower after hours and rivals GDT and STJ are likely to trade lower as well.

Thursday also brings the initial jobless claims and a host of same-store sales figures for January. Overall the January sales numbers should be positive. Retailers should have easier year over year comparisons since last January the country was holding its breath as we prepared for the Iraq war. Unfortunately, apparel retailers may under perform the pack as steep markdowns and snowy weather on the east coast reduce margins and traffic.


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