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Market Wrap

Tech Wreck

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       WE 04-16        WE 04-09        WE 04-02        WE 03-26 
DOW    10451.97 +  9.94 10442.0 - 28.56 10470.6 +257.62 + 26.37 
Nasdaq  1995.74 - 57.12 2052.86 -  4.31 2057.17 + 97.15 + 19.55 
S&P-100  554.94 -  1.18  556.12 -  1.98  558.10 + 14.58 -  0.16 
S&P-500 1134.57 -  4.76 1139.33 -  2.48 1141.81 + 33.75 -  1.68 
W5000  11078.08 - 87.98 11166.1 - 36.36 11202.4 +362.24 - 12.80 
SOX      480.14 - 31.64  511.78 -  2.08  513.86 + 34.61 + 15.90 
RUT      583.37 - 14.51  597.88 -  5.57  603.45 + 30.53 +  2.18 
TRAN    2939.47 + 12.59 2926.88 - 39.78 2966.66 +130.76 + 49.07 
VIX       14.99 -  1.35   16.34 +   .69   15.64 -  1.69 -  1.82 
VXO       15.67 -  0.16   15.83 +   .27   15.56 -  1.65 -  1.95 
VXN       22.30 +  0.92   21.38 +   .03   21.35 -  1.69 -  2.95 
TRIN       1.47            0.82            0.52            0.89 
Put/Call   0.76            0.74            0.68            0.77 

The Nasdaq struggled with the psychological 2000 level Friday as the list of techs with earnings problems continues to grow. The Nasdaq was negative most of the day while the cyclical heavy Dow rallied out of its mid week slump. Helping keep the major indexes out of the ditch was the Russell which moved higher and away from the 575 support.

Dow Chart - Daily

Nasdaq Chart - Daily

SOX Chart - Daily

Friday produced another mixed message with the Dow up +55 and the Nasdaq down -6. Earnings messages and the economic outlooks were mixed and traders could not make up their mind between rising economy and higher rates or weaker economy and continued lower rates. You can't have both and traders were trying to decide how much of a rate increase they could bear and what stocks were worth at that rate.

Complicating the outlook was less than expected earnings and guidance from numerous tech leaders. While most companies were beating estimates and raising guidance they were lost in the crowd. Those posting less than expected results or weak guidance produced significant disappointments and the market fixated on those few.

Leading the losers list were IBM, IPIX, LEXR, NFLX, SNDK, NOK, SUNW, INTC, MCDT, DCLK and CY to name a few. All were a disappointment to traders and most suffered substantial losses. Those losses knocked the Nasdaq for a -57 point loss for the week and where it closed under 2000 once again.

The excuse for the week was given as the threat of rising interest rates but there are still those voices in the background suggesting the economy is not as hot as the economics suggest. We had an unexpected drop in Industrial Production in March as reported on Friday. The -0.2% drop compared to estimates for a +0.2% gain may not have earth shaking but it was looked at carefully for signs of weakness. There was no major change in any of the components and Capacity Utilization only fell -0.2%.

Consumer Sentiment numbers for April also fell unexpectedly to 93.2 from 95.8 in March and well below estimates as high as 98.5. This is the lowest level for the index since Dec-03. The present conditions component dropped -2.7 points. Most analysts feel the drop is due to high energy prices, the recent drop in the market, terror news and candidates bashing the economy. If the jobs environment continues to improve and the tax refunds appear this drop in confidence should evaporate.

The initial fund flows for the week according to estimates from TimTabs.com were in the neighborhood of +$1.6 billion into equity funds. While this is not a lot of money it was a positive number and suggests there was not a rush of tax withdrawals. It is however only an estimate through Wednesday. By the time we get the final numbers next week it could be negative.

The economic calendar for next week is light with the real danger coming not from reports but from the eleven speeches from Fed heads. Greenspan speaks on Tuesday and Wednesday with the Wednesday speech being the critical event. Broadus went on record Friday as saying the Fed would have to wait for "some time" before raising rates. He also said the Fed would have to see definite confirmation of the recovery before they could take action. This tended to calm the rate fears for the day but the Greenspan speech on Wednesday before the Joint Economic Committee of Congress has been used in the past to warn of coming changes. Traders will be watching carefully for signs of patience or signs of change. On Thursday Bies and Bernanke both speak on the current economic outlook in separate appearances. This flurry of speeches on the economic recovery should put the bond groupies into overload mode.

Putting traders into information overload mode will be earnings from over 500 companies. Some of the more visible companies include AMZN, AMGN, BRCM, MCHP, MSFT, UTX, EBAY, JNPR, QCOM, MMM, MO. There are at least 20 chip companies reporting and the SOX needs a lot of help. It remains to be seen if these earnings will help it or hurt it. The semiconductor earnings so far have been split almost equally between positive and negative.

The lack of excitement over the current crop of earnings is not because they are bad. In fact they are excellent. Of the 94 S&P companies already reported 68 beat estimates, 16 reported inline and only 10 missed estimates. This is very strong results and First call said today the current numbers are just over +19% growth. Even with the crop of high profile disappointments they are still expecting something over 20% for the quarter. The challenge as I have pointed out before is that this is the peak quarter. It is all down hill from here. According to First Call today they are only expecting earnings growth in the second quarter of +15%, +12% for Q3 and +13% for Q4. Stocks are currently priced for that 20% growth we have seen for the last three quarters and a drop to 12-13% would be a letdown. Obviously investors are hoping the numbers for the next three quarters are revised up after the current earnings cycle but without some better guidance than what we have seen already the odds are slim. Without some better economics the chances decline even further. Add in a rate hike in August and another in November as the Fed funds futures are predicting and the odds decrease even further.

It is not that +15% growth per quarter is not good it is just that investors are spoiled after the great run we had over the last year and the last three quarters of +20% growth. They have been promised the economic moon for over a year and the skies are still cloudy. Investor risk is growing and we are not seeing a lot of buyers stepping up to buy that risk. Investors buy risk at the lows not at the highs. I listened to one fund manager on Friday that said his universe of buyable stocks had dropped from over 600 two years ago to less than 100 today and he was already invested in most of the 100. He was a value buyer and we do not know what his selection criteria was but in his eyes the market was still over valued based on the 12-18 month outlook. Another manager of a growth fund said he was 35% in cash. Same problem in his eyes, everything is overpriced compared to future earnings and event risk. Both said retail investors were chasing results based on historical results (last 12 months) and not pricing in the future outlook. These are just two funds out of thousands but the sentiment seems to be the same day in and day out.

I do not want to be seen as Chicken Little. I am not trying to paint a picture of a market crash ahead. I don't see it at this time. What I am seeing is a lack of excitement and lack of a catalyst to drive the market to new highs. Maybe that excitement will appear after next weeks earnings but that is not a normal historical April trend. I think we are entering a stock pickers market. The out performers are going to move higher and the rest of the pack is going to consolidate for the summer.

Jeff and I were talking this week about market outlook and I based my cautionary view on the breakdown in those stocks that have been bullet proof like SYMC and EBAY. Plus, the market is not going up with the four biggest techs, INTC, MSFT, IBM and HPQ trading at or near their recent support lows. Intel is 42 cents from a seven-month low. HPQ is 90 cents from a six month low. IBM is only $2 from a multi month low and after the weak guidance on Thursday it should be there soon. There is simply no strength in techs and this is a normal April/May syndrome. It is nothing to worry about as it is just a normal consolidation phase while traders become accustomed to the new outlook.

The Dow rebounded +54 on Friday to end the week flat at 10450. Considering we spent three days testing 10325 support this is a positive sign. We have strong support below us and strong resistance above at 10550-10650. This would be a great range to trade while we wait for the earnings cycle to pass. It is high enough to keep investors from fleeing the market but not at the nosebleed levels that would tempt the hedge funds to load up on shorts. Should the range break at 10300 then 10000 would be the next natural level for buyers to appear.

The Nasdaq closed just under 2000 with a -57 point loss for the week. This puts it right in the middle of its range from 1900-2100. Again, this would be a great range to trade while we wade through earnings from several hundred more techs.

For next week I am expecting a positive open on Monday if there are no negative events over the weekend. I would expect any Monday rally to fail as we approach the Greenspan testimony on Wednesday. Microsoft does not report until Thursday but several hundred other companies will keep our focus blurred. Monday earnings include MMM, LLY, FNM, LXK, CD, JDAS, KFT, IDXX and CNF to name a few. CNF is on the verge of a breakout at $36 and is leading a transportation sector rebound. MMM is nearing resistance at $85 and could see some profit taking on less than exciting numbers but I think they will surprise. CD is the sleeper and needs some good news to justify its rise but I think it to will beat. Don't be too quick to jump into the next trade and try to look for entries at the top and bottom of the ranges I mentioned. Entering in the middle significantly increases your risk.

Enter Very Passively, Exit Very Aggressively!

Jim Brown


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