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MARKET > Commentary Sunday, March 04, 2001
by: S.P. Brown
Editor

Capitulation

You knew it was only a matter of time before the last of the big- cap tech stocks would raise the white flag. Over the past month, Cisco Systems (Nasdaq:CSCO), Microsoft (Nasdaq:MSFT), Intel (Nasdaq:INTC), Dell Computer (Nasdaq:DELL) and Sun Microsystems (Nasdaq:SUNW) have all warned of lower-than-expected earnings over the coming quarter. Conspicuously absent from this list, though, has been Oracle Corp. (Nasdaq:ORCL).

Well, as we all learned on Thursday, Oracle's distinction of continuously meeting quarterly earnings expectations is no more. The king of all business application software providers now says it expects to report quarterly earnings of $0.10 a share, $0.02 shy of the forecast of analysts surveyed by First Call. And for 2001, Oracle reduced its earnings-per-share forecast to $0.47 from $0.52 and reduced its revenue estimate to $11.3 billion from $11.9 billion.

Trader reaction to the news was thoroughly predictable: Oracle's stock was routed mercilessly (which is proof once again that there is no such thing as a bullet-proof business model). On Friday, the company's stock plunged $4.50, or 21 percent, to $16.88 and was the most-active stock with more than 223 million shares traded -- the third-busiest day for any U.S. stock.

Of course, Oracle doesn't operate in a vacuum; there is such a thing as guilt by association. In other words, many of those companies operating within Oracle's circle of competency were taken to the cleaners, too. Siebel Systems (Nasdq:SEBL) tanked $8.52 to $36.11, Veritas Software (Nasdaq:VRTS) tumbled $7.06 to $63-5/8, BEA Systems (Nasdaq:BEAS) dropped $6.23 to $32.69, PeopleSoft (Nasdaq:PSFT) skidded $7 to $27.06 and Mercury Interactive (Nasdaq:MERQ) plunged $10.50 to $48.50.

As the more astute reader will quickly note, all of these stocks are of the four-letter variety, meaning that they trade in the Nasdaq market, so it should come as no surprise that the Nasdaq Composite Index (COMPX) had yet another sub-par outing on Friday.

For the day, the COMPX closed down 65.74 points, or 3.01 percent, to 2,117.63, posting its lowest finish since December 1998. What's more, it was the fifth losing week in a row for the COMPX, meaning the tech-heavy index is now down 14.3 percent for the year.

Last week, I said that the COMPX was a mess technically. Since it finished below last week's levels, its situation hasn't improved. The index is down nearly 60 percent from its March 2000 high of 5,132, which means it's firmly ensconced in a bear market. What's more, should the downward trend began back in October 2000 continue, the COMPX will likely challenge its December 1998 lows of 2,000.

As for the Old Economy, the picture appears rosier. On Friday, the Dow Jones industrial Average (INDU) gained 16.17 points, or 0.15 percent, to 10,466.31. However, it wasn't a smooth ride to higher ground. The blue-chip barometer traded as low as 10,302.06 and as high as 10,579.27 during the day. For the week, the INDU rose 0.2 percent.

Technically, the INDU is in better shape than the COMPX. It's down only 11 percent from its January 2000 high of 11,720. What's more, it's down only 8 percent from its 52-week high of 11,425.

However, the INDU is still caught in that all-too-familiar trading range of 10,300 to 11,000. And that range could be tightening thanks to a bearish diamond formation that can be traced back to January 1999.

Looking at the broader market, the S&P 500 Index (SPX) slipped 7.05 points, or 0.57 percent, to 1,234.18 on Friday, posting its fifth-straight down week. However, the sell-off was confined mostly to the index's large-cap tech issues. In fact, of the 87 industry groups in the SPX, only 25 declined. Nevertheless, based on Friday's closing print, the SPX is down more than 20 percent from its 52-week high of 1,553.11, meaning we are now officially in a bear-market.

In stock news on Friday, sector rotation continues to be the norm, as traders appeared to be exchanging their networking stocks for tobacco stocks en mass. Cisco Systems dropped 9.4 percent to hit a new 52-week low, JDS Uniphase (Nasdaq:JDSU) sank 9.8 percent and Sun Microsystems closed off percent.

On the flip side, the AMEX Tobacco Index (TOB) finished the day up 2.6 percent thanks to R.J. Reynolds (NYSE:RJR), US Tobacco (NYSE:UST), British American Tobacco (AMEX:BTI), Philip Morris and Splittrader current play member Loews (NYSE:LTR), all of which hit 52-week highs on Friday.

Speaking of current plays, our Current Play list continues to hold its own despite the selling pressures in the COMPX and SPX markets. In fact, many of our plays did more than hold their own this week. In addition to Loews, Granite Construction (NYSE:GVA), Performance Food Group (Nasdaq:PFGC), Lockheed Martin (NYSE:LMT), and Texaco (NYSE:TX) all posted solid gains.

Much of Friday's selling could be attributed to Oracle's mea culpa, but not all of it. Sentiment was soured by a fresh slate of economic data pointing to a slowdown in consumer spending. U.S. consumer sentiment, as measured by the University of Michigan's twice-monthly barometer, hit its lowest level in nearly five years in February. As I mention in last Sunday's commentary, consumer sentiment and the COMPX appear to be highly correlated.

In other economic news, Fed Chairman Alan Greenspan spoke before the House Budget Committee on fiscal policy Friday morning. The Fed chief made no mention of monetary policy but did reaffirm his support for George W. Bush's tax rate cut proposal.

Looking ahead, this week's major economic data kicks off on Monday with the National Association of Purchasing Management's (NAPM) non-manufacturing index. The index is a measure of business activity outside the manufacturing sector, and is expected to have risen to 52 during February, up from 50.1 in January. An index reading of 50 or higher indicates expanding business conditions within the sector.

Unfortunately, there isn't much to hold the market's attention until Friday when we get the unemployment rate for February, which is forecasted to have held steady at 4.2 percent, unchanged from the prior month. In addition, the economy is expected to have added 88,000 non-farm jobs in February, off from the 268,000 non- farm payrolls added in January. Average weekly hours are forecasted to post little changed at 34.2 in February, from 34.3 in the prior month.

Don't expect these data sets to encourage the Fed to cut interest rates between now and March 20th. Most market players seem resigned to waiting another two weeks for a 50-basis point cut. To that end, the futures market predicts a 4.91 percent fed funds rate in April, which implies that traders are anticipating at least a 50-basis point cut to 5.0 percent by the end of March.

So, if the economic news and the Fed aren't going to move the market this week, will this week's batch of earning reports? It's unlikely. Set to report this week is Target (NYSE:TGT), Krispy Kreme Doughnuts (Nasdaq:KREM) and National Semiconductor (NYSE:NSM) -- lightweight fare to say the least.

Despite the dearth of economic and earning reports, I think the market could move higher, anyway. As I stated earlier, technically, the markets aren't looking great, but they are holding their own. On Friday, the INDU once again held support at support at 10,300, while the COMPX held Thursday's lows and continues to signal being oversold according to its Relative Strength Index (RSI) reading of 30.

I also think current sentiment could move this market. On Friday, the CBOE put/call ratio closed the week at 0.80, which is an unusually bearish reading (readings of 0.60 are considered bearish and of 0.30 bullish). More traders are obviously betting on lower stock prices based on the increased activity in puts compared to call. In other words, a lot of folks are worried, which means more folks are likely to begin positioning themselves on the opposite side of these nervous traders.

I also like the chatter I'm hearing on the Street. Remember last year when the talk was of COMPX 6,000? Now, the talk is of COMPX 1,000 (which I seriously doubt we will even get close to). This has me thinking that nearly everyone who is going to sell tech has already sold, which means there should be little additional selling pressure on techs, particularly in light of Oracle's capitulation on Friday.

And let's be honest, how much further can the tobacco stocks run? I think based on current risk/reward analysis, the big-cap techs offer the potential for much better returns than their more mundane counterparts over the coming 12 months. Most of the big- time tech companies have seen their shares halved over the past year, while nearly all the tobacco stocks have doubled.

A year ago, if you had asked me which stock had the potential for greater returns, Cisco or Philip Morris, I would have said Philip Morris. But today, with Philip Morris near $50 and Cisco near $22, I have to go with Cisco. In fact, I think today's current low prices in many of the tech issue could provide investors with a buying opportunity that comes around only once every three to four years.

S.P. Brown
Editor
www.Splittrader.com

 


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