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MARKET > Commentary Thursday, March 01, 2001
by: Craig Seidler
Assistant Editor

International Rumor Machine

International Business Machines (NYSE:IBM) sparked a sharp late session rally on swirling rumors that an analyst was reiterating his positive 2001 outlook for the computer giant and that the company had supposedly given optimistic comments at an investor meeting. At precisely 2:30 p.m. EST, IBM started to "boot-up" and within an hour and a half, had rocketed over 7.5%, closing up $6.15 to $106.05.

Before the gunpowder smell from the rumor gun had settled out of the air, the rest of tech land was off and running. And run they did. Sun Microsystems (NASDAQ:SUNW) popped from $29.50 at 2:30 p.m. to close at $32.25, EMC Corp. (NYSE:EMC) went from $37.50 at 2:30 p.m. to close at $42.90 and Applied Micro Circuits (NASDAQ:AMCC) bounced from $23 to close at $29.63.

AMCC actually was halted midday on what turned out to be an on-air, live profit warning on CNBC earlier in the day. The company's CEO, Dave Rickey, read a prepared statement in an interview with Maria Bartiromo, which indicated that the company was lowering fourth-quarter revenue estimates to $125- $135 million from previous estimates of $175 million due to warnings from its largest customers. The fact that investors were able to brush this off and take the stock higher as soon as it was reopened for trading is suspect, but I'll have to admit, slightly encouraging.

The fact that the market is still reacting to rumors like a giddy schoolgirl, however, is not good news. But being rational traders, we can look at this in two ways. I will let you be the judge as to what scenario is closer to the truth.

Number one, we are in a market that is thirsty to believe any good news that comes along, whether it's true or not. This probably means that once the Fed cuts, earnings improve and the market stabilizes, the optimistic investors will come out of the woodwork in droves, tipping their money market accounts (which are bursting at the seems) into tech and the rest of the market and we will be off and running again.

Number two, we are in a schizoid market that doesn't know which way is up and that is hanging on any piece of news that may give it direction to the upside. In this scenario, the market swings violently and emotionally; in part because there are so many people on the short side that cover-buy with a vengeance anytime a hint of positive news hits the market.

Suffice it to say that I believe number one and a half. I believe that yes, we are in a market that is acting irrational and desperate but that behind the scenes, there is a pile of money that belongs to folks that are willing to forgive and forget, given more clarity in profit outlooks.

In addition, I believe that number one is driving number two. By this I mean that investors (in general) are still too optimistic. The banner year of 1999-2000 is still in the back of investors' minds causing most to hold on to high hopes. We therefore have still not seen the now cliché, "capitulation bottom" that marks the beginning of a new bull market.

One indicator that tracks investor sentiment is the CBOE Volatility Index (VIX.X). When we bottomed in October 1998, during the "Asian Crisis" the VIX.X was hovering around 50, signifying high levels of fear and put/call buying. But throughout this whole NASDAQ drubbing, the VIX has not closed above 40.

Today's Markets

Up until the IBM induced rally, the markets acted as if they were content to do a slow burn lower for the whole session. There was no real sector rotation, but rather general weakness across all areas of the market.

The NASDAQ (COMPX) gained 31.54 today, closing at 2183.37 after briefly venturing below the 2100 level. Volume was impressive, with 2.25 billion shares crossing the tape, a large portion of that occurring in the volatile afternoon session.

The DOW (INDU) closed off 45.14 to 10450.14 after having been down almost 200 points earlier in the day. NYSE volume was 1.2 billion and market breadth continued lower with decliners beating advancers 1562 to 1469.

Treasuries continued higher today despite the late day flow of capital back into stocks. The 10-year note finished up 6/32 to yield 4.88% and the 30-year bond closed higher by 9/32 to yield 5.30%.

Turning to economic news, the National Association of Purchasing Management Index (NAPM) came out at 41.9%, just slightly above January's figure of 41.2% but lower than economists' expectations of 42.4%. But lest you think this is actually good news, any reading below 50 still indicates a contracting manufacturing sector.

Stocks and Sectors on the Move

While quite a few tech stocks rebounded in the afternoon, 3Com (NASDAQ:COMS) had dug too large a hole in the morning to benefit by the exuberance. COMS came out late Wednesday and said that it would miss its current third quarter revenue bogey. It now expects to lose $135-$145 million on revenues of $625-$640 million. COMS closed down $1.63, or 17.81%, to $7.50.

Other losers on the day included the brokerage sector, as measured by the AMEX Broker/Dealer Index (XBX.X). It fell 1.64 on the day, after being down close to 30 points in the early going. The sector came under continued pressure after J.P. Morgan (NYSE:JPM) downgraded two of its own, Goldman Sach's (NYSE:GS) and Morgan Stanley Dean Witter (NYSE:MWD) to "market perform" from "long-term buy". The stocks finished down $0.14 and $1.53 respectively.

Airline stocks were also grounded today, as US Airways (NYSE:U) indicated that its first-quarter loss would be wider than expected. Goldman Sach's also go in on the action and proceeded to downgrade a slew of the winged wonders. These included Northwest (NASDAQ:NWAC), which finished down $0.69 to $21.31, Southwest (NYSE:LUV) down $0.60 to $18.00, Delta (NYSE:DAL) down $1.77 to $40.35 and AMR Corp. (NYSE:AMR) down $1.93 to $31.32.

Accomplishing a complete 180-degree turnaround and avoiding a new 52-week low in the process was the PHLX Semiconductor Index (SOX.X). On the heels of the aforementioned IBM and AMCC about face, the SOX.X added 29.53 to close at 570.76. Earlier in the day, the SOX.X had taken out previous intraday lows at 516.64. Winners included Texas Instruments (NYSE:TXN) up $2.85 to $32.40, Xilinx (NASDAQ:XLNX) up $2.63 to $41.5 and Linear Technology (NASDAQ:LLTC) up $3.50 to $43.13.

Looking Forward, Always Forward

Tomorrow might prove to be more rough sailing for techs, especially software stocks. After the bell, Oracle (NASDAQ:ORCL) issued a downward revision in its third-quarter earnings per share figure. They now expect to come in with an EPS of $0.10, down from previous estimates of $0.12. They also announced that sales are flat to slightly lower.

Also, expect the folks who bought tech today on the IBM rumor to unload in the early going. We'll see if we get an afternoon oversold bounce, but I wouldn't hold my breath. Friday afternoons have been a tough time for the longs, as the pros have not been willing to hold stock over the weekends lately.

On the bright side, compared to the Nikkei, we are rocking and rolling. The Nikkei has just hit a 15-year low and interest rates are at .25%. In addition, the 50-basis point cut in interest rates that the Fed enacted in January should just be starting to work its magic upon the economy as we fire up the barbeque and take to the beach in July. Hold onto your flip- flops, I smell a summer rally.

Trade Smart and Have a Good Weekend

Craig Seidler
Assistant Editor


Copyright 2001

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