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MARKET > Commentary Wednesday, March 21, 2001
by: S.P. Brown

Dow Makes for Bear Territory

It was only a matter of time. Through January and February the Dow Jones Industrial Average (INDU) stubbornly fought the trend to trade within a boring, though wealth preserving, 10,300 to 11,000 range. Well, those halcyon days are now only a fond memory. The INDU has tanked over 1,300 points, or 12 percent, over the past two weeks to obliterate any remnants of those carefree sessions.

Of those 1,300 points, 233.76 were realized today when the INDU closed at 9,487.00, putting the blue-chip barometer down 19.1 percent from its all-time closing high of 11,722 and only 110 points shy from a closing print of 9,377, which would officially signify a bear market. Today's major culprits were American Express (NYSE:AXP), Johnson & Johnson (NYSE:JNJ) and Microsoft (Nasdaq:MSFT), all of which lost more than $2 in share value.

However, they weren't alone. Of the 30 INDU stocks, 25 finished in the red. Bucking the trend were Intel (Nasdaq:INTC) International Business Machines (NYSE:IBM), Wal-Mart (NYSE:WMT), Hewlett-Packard (NYSE:HWP) and Disney (NYSE:DIS).

With today's latest round of capitulation, the INDU is trading at levels not seen since February 1999.

No need to worry, though, because the INDU didn't go down alone - - it had plenty of company. The Nasdaq Composite Index (COMPX) continued to give up value like a drunken sailor on furlough. Today, the COMPX was rolled for 27.21 points, or 1.46 percent, to 1,830.23, meaning the COMPX is once again trading at October 1998 levels (the genesis of its exponential move to 5,132).

Oddly (at least for the COMPX), the tech-heavy index traded in positive territory for part of the day. The COMPX was bolstered for a while by Qualcomm (Nasdaq:QCOM) and Oracle (ORCL). The pair signed a deal that will have Oracle supplying Qualcomm with e-business application suites. For the day, Qualcomm added $4.13 to $58.13 while Oracle added $0.63 to $14.75.

As for the broader market, the S&P 500 (SPX) fell 20.49 points, or 1.79 percent, to 1,122.13, which means the SPX is now trading at a 27 percent discount to its March closing high of 1,527 and a 32 percent discount to Abbey Joseph Cohen's year-end target of 1,650.

All in all, $5.1 trillion in market value has evaporated over the past year, as measured by the Wilshire 5000 Total Market Index, with $225 billion of that sum coming today.

Needless to say, with the major market indices again going down for the count, market breadth was, of course, again dreadful. On the Nasdaq, losers beat winners 2,487 to 1,228 on 2.08 billion shares while decliners pummeled advancers on the NYSE 2,212 to 859, as more than 1.3 billion shares changed hands.

There was one bright spot in this otherwise gloomy day. The semiconductor sector rallied after yesterday's sell-off. In fact, the PHLX Semiconductor Index (SOX) added 15.97 points to close at 558.02. Leading the SOX higher were Texas Instruments (NYSE:TXN), lattice Semiconductor (Nasdaq:LLTC), Applied Materials (Nasdaq:AMAT) and KLA Tencor (Nasdaq:KLAC). Moreover, the SOX appears to have established support at 540, at least based on the past four trading sessions.

But large storm clouds were the rule for the day, and there were few more rotund than computer-skills classes provider Learning Tree International (Nasdaq:LTRE), which slumped $11.13 to $15.38 after reporting that fiscal second-quarter earnings will fall short of analysts' estimates because of lagging enrollment.

Some notable big-cap names also rained on today's market. Consumer products king Procter & Gamble (NYSE:PG) lost $2.70 to $63.20 after the Wall Street Journal reported that the company will cut 10 percent to 20 percent of its workforce.

Meanwhile, General Electric (NYSE:GE) continued to make for terra firma like so many Russian space stations. The market-cap king lost another $1.05 to close at $39.00, a closing low not seen since October 1999. What's more, GE has seen its market cap shrink over the past seven months from a world-beating $596 billion to a still world-beating, but more pedestrian, $386 billion.

As for economic news, there wasn't much constructive to report here, either. The Consumer Price Index (CPI) for February came in at 0.3 percent, which was stronger than the consensus estimate for 0.2 percent. The CPI was bolstered by rising costs for clothing, medical care and airline tickets. In addition, the "core" CPI (CPI sans food and energy costs) also rose 0.3 percent, meaning the core CPI is rising at an annual clip of 2.7 percent.

The CPI report got a chilly reception from investors and traders already smarting from yesterday's 50-basis point cut in the fed funds rate. Many traders believe that the stronger-than-expected CPI number could prevent the Fed from cutting interest rates again before the next FOMC meeting on May 15th.

However, that sentiment isn't universally shared. Bear Stearns chief economist Wayne Angell, for one, told clients that the statement that accompanied the Fed's cut on Tuesday strongly suggests Chairman Alan Greenspan is considering a further reduction between meetings. Keep in mind, though, Angell, was hung out to dry last month when he predicted that the Fed would likely make a cut before yesterday's FOMC meeting, something the Fed failed to do.

Inflation fears coupled with diminished inter-FOMC interest rate cut prospects took their toll on the Treasury market as well. The 10-year Treasury note finished down 2/32 to yield 4.77 percent while the 30-year government bond slipped 2/32 to yield 5.27 percent.

Not that interest rates are the sole consolidator in this ever- shrinking market, don't forget about earnings concerns. According to First Call, analysts expect S&P 500 companies' profit growth to slow to about 1.5 percent this year from 16.2 percent in 2000, which means we will probably be deluged by another flood of earnings warnings in the second quarter.

The prospect for continued bad news obviously doesn't bode well for the long end of the market over the short term, though there are signs that we may be reaching full capitulation. The recent selling in GE stock could be one such sign. This last hold out among the big-cap stocks finally looks ready to fold its cards (if it hasn't already). For most of the year, GE has traded in a tight range of $43 to $48. However, that range was obliterated on a gap-down sell-off that occurred on March 12th.

Another sign the end may be near is the increasing number of days where down volume exceeds up volume by at least a 2-to-1 margin on the Nasdaq and NYSE markets. In February, the NYSE only experienced two days where down volume exceeded up volume by more than a 2-to-1 margin. In March, the Big Board has already experienced six such days.

Still, like I said in Sunday's commentary, I would like to see one final resounding flush were we get losers routing winners by a 25-to-1 margin on down volume exceeding up volume by a 10-to-1 margin before I declare the worst over. Of course, markets usually aren't that conciliatory.

In the meantime, don't be surprised should the INDU make a go for 9,377 before the week is over, so keep those stop-losses tight.

S.P. Brown


Copyright 2001

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