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Market Wrap

Wrong Number

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      04-06-2004           High     Low     Volume   Adv/Dcl
DJIA    10570.81 + 12.40 10570.81 10505.11 1.79 bln 1175/2087
NASDAQ   2059.90 - 19.20  2068.27  2053.32 1.78 bln 1092/2076
S&P 100   561.58 -  1.28   562.86   559.07   Totals 2267/4163
S&P 500  1148.17 -  2.40  1150.57  1143.30 
W5000   11239.80 - 40.10 11279.90 11200.54
SOX       508.07 - 10.60   518.70   502.36
RUS 2000  599.33 -  7.06   606.39   599.28
DJ TRANS 2974.84 + 19.20  2982.45  2947.97   
VIX        15.32 +  0.35    15.53    15.07
VXO (VIX-O)14.49 +  0.61    14.96    14.34
VXN        22.23 +  1.12    22.24    21.28 
Total Volume 3,786M
Total UpVol  1,242M
Total DnVol  2,474M
Total Adv  2494
Total Dcl  4637
52wk Highs  421
52wk Lows    58
TRIN       1.00
NAZTRIN    1.06
PUT/CALL   0.82

Nokia dialed a wrong number for the markets on Tuesday and the result was a serious drop in tech stocks. Apparently more cell phone buyers are opting for the cheap phones instead of those laden with expensive and profitable features. This is simply a case of the market looking for an excuse to take profits.

Dow Chart - Daily

Nasdaq Chart - Daily

Russell Chart - Daily

Wilshire 5000 - Chart

While it may sound strange to claim that the warning was just an excuse I believe the facts are clear. Nokia said their Q1 revenue would be almost $8 billion. That is a lot of phones and it is only -2% below last years levels. That may not seem like a positive sign but there were other points that bear mentioning. Nokia said industry growth rose +25% for the quarter. This is a huge number considering the saturation level of phones already. Nokia was killed on the news as well as chip companies supplying the internals for the phones. The entire market was taken down a notch.

Think about it for a second. If the market grew +25% then somebody got the business. Odds are good Motorola picked up significant share with Ericsson and Qualcomm also gaining points. The chip companies that were cut on the news still produced chips for that +25% growth only they did not sell them to Nokia. The problem as I see it is a Nokia problem. They simply did not have the right product mix and the little guys chipped away at their market share and profits. If the sector grew at a +25% rate that cannot be bad news.

The markets closed right at strong resistance yesterday after more than a week of a strong rebound. The Asian markets were not weak with the Nikkei hitting a 32 month high overnight. The Nokia warning was just a trigger for funds who were already nervous and had their finger on the trigger.

The economic reports today were positive and did not add to the negative bias. Retail Sales were weak at +0.3% but still better than last weeks -1.9% drop. The better news was the Challenger Layoff Report which showed layoffs fell -12% in March to only 68,034 and the lowest level since June-2003. This should be good for the April Jobs report. The year over year change was a drop of -20%. The sector with the biggest drop was not manufacturing but financial services. This could be due to the wave of acquisitions in the sector and the resulting layoffs. Just yesterday Banc America announced a cut of -12,500 jobs as the result of the Fleet Boston merger. Cost cutting is still the motivating factor and the current productivity surge will continue to require fewer workers. The continued drop in layoffs despite the rising growth in productivity is a positive sign the economy is still growing.

After the bell Alcoa missed estimates by two cents with earnings that were +135% over the same period last year. The stock dropped in after hours in yet another example of traders looking for an excuse to sell. A +135% jump in earnings and the stock was punished because analysts were over aggressive with their estimates. The AA CEO said demand for aluminum fabricated products was the highest level in three years and that was driving prices even higher. He said this trend would provide even higher profitability in the second quarter. Alcoa's revenue rose to $5.7 billion and the highest in nearly three years. This was NOT a bad earnings report yet the futures dove in after hours.

The biggest impact to the after hours futures drop came from Seagate Technology. They are the biggest disk drive maker for computers. STX warned for the second time in the last five weeks and cut estimates to seven cents from 20 to 30 cents they had predicted in January. This is the killer comment. They said demand for computer disk drives had fallen far below guidance primarily in notebooks. They said notebook demand for the quarter was one million drives less than previously expected. That is a -7% drop from the 14-14.5 million drives and they said the backlog from the weak demand would probably carry over into the June quarter. Remember Intel getting killed over the last month because of weak notebook sales? Looks like the problem has not been resolved. They said full size PC drives were also weak and could be another million drives below plan.

This is a major blow to the expanding IT spending theory. Removing two million drives from actual Q1 demand could mean two million fewer PCs will be sold. Obviously this is not a direct one-to-one correlation but it would be close. The number of drives sold as components into the retail market would be only a small fraction of the total demand. We had other warnings from techs EPNY and BRKT yesterday but this CTX warning is much higher profile.

The markets are showing a much weaker opening tomorrow from the after hours news events above. That is not the whole story. The markets ended weak today, far weaker than the Dow was showing at +12 for the day and a close right at the high of the day. The problem came from the Russell. The Russell was also weak on Monday and only rallied on a broad based buy program at the close. The Nokia warning this morning intensified that weakness.

We talked all last week about the window dressing and the strong rally in small caps from that dressing. We discussed the potential for window undressing this week if retirement fund flows were weak. The Nokia warning simply gave those wanting to lighten up an excuse to hurry. The Russell had closed at significant resistance on Monday and right at the all time closing high. It has failed here on each attempt since March of 2000. Many had high hopes it would break through on this attempt and lead the rest of the index higher into the April earnings period. After the close today the STX warning sent the Russell futures plunging even farther.

What I thought we were seeing on Tuesday was a rotation out of small caps and into the big caps as evidenced by the Dow breaking out to a new high while the Russell was setting new lows. This would indicate that funds were still interested in being long the market but were moving to the safety of liquidity. That theory could be tested on Wednesday if the big caps fall as well.

Another event after the bell was the 7E7 engine award by Boeing. GE and Rolls Royce were awarded the contracts and UTX Pratt and Whitney was the loser. This could put some pressure on the Dow at the open with minor gains going to GE because the size of the contract is still unknown. It could put more pressure on UTX because it lost out on what is expected to be more than 2,000 aircraft over the life of the product. Because the Dow is price weighted the impact to $89 UTX will more than offset the minor gain to $31 GE. Boeing will likely be neutral. GE has earnings on Thursday and that could weigh on the stock.

The Dow also should begin to see pressure from the Dow rebalancing as funds increase selling in EK, IP and T. There are not a lot of funds indexed to the Dow with only about $20 billion according to current estimates. By comparison there is $1.2 trillion indexed to the S&P 500. The changeover occurs on Thursday and $20B of EK, IP and T is a lot of stock to sell.

Earnings due out tomorrow include DNA, YHOO, RIMM, CBK, CKR and PERY. Clearly the big gun is YHOO and it was downgraded on Tuesday. There are quite a few analysts that think the increasing competition and over valuation from the strong rebound will clash with their announcement tomorrow night.

The Dow moved slowly closer to the 10600 level at the close and very close to the 10600-10650 resistance range. With the news after the close we probably will open much closer to the 10500 range. The overhead resistance is very strong and the cracks in the foundation could make it tough to move higher. This suggests that should we actually make a higher move it would be strong confirmation that the bulls are back to stay.

The Nasdaq is going to be the weakest link on Wednesday based on the STX. The Nasdaq closed at 2077 yesterday and 2057 today. The overnight decline in disk drives, chips and PC stocks is going to make 2000 a real target if this weakness catches on. The Russell failed at 605 and is trading at the lows at 595 overnight. This is going to be a real drag on the Nasdaq.

The key for the rest of the week is going to be expectation. If the expectations for the April earnings have been damaged then we have a rough road ahead. I think the Alcoa earnings would be ignored and even cheered tomorrow but the STX stink bomb could linger. While the Russell and Wilshire had been rising to their highs the Nasdaq and Dow were still well below equivalent resistance. There needs to be some strong earnings performance over the next couple days to provide assurance that these were random events or the house of cards may crumble.

This is normally a bullish week with Thursday a strong day. That sets up a potential for a dip buy at tomorrow's open and a rally into Thursday afternoon. Then what? A late news flash just said 12 marines were killed in Iraq in the strongest fighting since the end of the war. There is talk about sending more soldiers to Iraq instead of reducing the force. This will not help sentiment going into the Easter holiday. Also, what happened to the terrorist threat? Would a three day Easter holiday provide an opportunity to strike at the predominately Christian population in the US on a high profile religious holiday? I am not speculating that traders will dump stocks before the weekend with a strong earnings schedule next week but it is possible. We saw no fear last weekend on top of a week of gains but there was no excitement on Friday either.

I am thinking we lost a lot of bullish sentiment over the last couple days and the April earnings run could be losing traction. That is not to suggest it won't return with a bang on Monday but the rest of this week could be a coin toss. I plan on buying the dip on Wednesday for a quick two day trade but then my risk profile is different than most. One thing I will not be doing is shorting TASR. The stock was hit with a drop at 12:30 on news that some bad guys hit with a Taser eventually died in custody. The company quickly responded that NONE of the deaths had been attributed to the Taser and there was no correlation. Then, in what appeared to be a pure stock price manipulation scheme they announced a 2:1 split 30 min later. The stock jumped +$15 on the news and shorts got killed once again. 40% of the stock was short for the latest available period. It currently has a PE of 247 and insiders are dumping stock. The CFO just sold 100% of his according to one report today. While this is a highly visible short target the company has shown no reluctance to manage the price. I will pass.

Enter Passively, Exit Aggressively.

Jim Brown
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