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MARKET > Commentary Tuesday, March 27, 2001
by: Craig Seidler
Assistant Editor

And The Oscar Goes To……

The market! Tell me, what does Gladiator have that the market doesn't? In the Oscar winning best picture, Gladiator, the main character goes from being a general, to a slave and finally to a charismatic gladiator that wins over Rome. In its own Oscar winning performance, the market has gone from hero that could do no wrong, to slave whose master was earnings, and finally to a nervous, over-reactive child that just wants to grow up to be a hero again.

While the market's performance has been nothing short of dramatic (and probably should be rated R for retrenchment), many wouldn't mind a bit of a respite. And a respite may just be what the market has in store for act four. I say this because there are crosscurrents blowing through Wall and Broad that should keep the market in check.

The main current, or at least the one that Mr. Greenspan surfs, just came in on the high side today. If you have been paying attention for the last few months, you know that I am referring to the Consumer Confidence Index.

After dropping for five months straight, the Consumer Confidence number unexpectedly ticked up in March to 117.0. Economists were expecting a number around 105. This gives credence to the fact that even though the manufacturing sector is already in dumps, the consumer is holding up and continuing to spend in an environment that is marked by low interest rates and high employment.

At first glance, this appears to be great news. But, take one look at what the Fed funds futures did after the release of the number and it becomes immediately clear that the market has kissed an inter meeting rate cut by the Fed bye-bye.

While the market still expects more cuts at the May Fed meeting, if we continue to get strong data that show consumers are gaining confidence, these may disappear as well. The question for me still remains, "Is Alan & Company giving the consumer too much credit in its collective ability to single handedly save us from the depths of a prolonged downturn?" In other words, can the consumer drag the manufacturing and corporate sectors out of the depths without the help of aggressive rate cuts.

Getting back to the whole crosscurrents thing, any good economic news going forward should be tempered by the fact that we are getting close to the dreaded pre-earnings season. Economic conditions have not changed much for the better since most companies reported last quarter. And although many companies have already pre-announced earnings shortfalls, many are waiting in the wings, crossing their fingers and hoping for a sudden pick-up in orders to at least get them close to their numbers. With investors still in worry mode and with earnings still the focus (as they should be); a flurry of warnings or negative comments out of company's conference calls will certainly put a lid on any prolonged rally attempt.

Today's Markets

The market was expecting a hint out of the Fed Chairman's morning speech to the National Association of Business Economics as to the direction of the economy and or monetary policy. Greenspan failed to cooperate in this regard, but it didn't stop the market from powering higher anyway on the heels of a strong consumer confidence number.

The NASDAQ (COMPX) was lifted by 53.81, or 2.80% to 1972.30. Volume was moderate at 1.8 billion shares. But the stat that will make folks smile the most has to be the advancers versus decliners. Advancers beat decliners 2209 to 1566 today and this is exactly what we need to see going forward as the market firms.

Some tech leaders included our play, THQ, Inc. (NASDAQ:THQI) up $2.00 to $38.88, Microsoft (NASDAQ:MSFT) up $2.19 to $58.25 and Apple Computer (NASDAQ:AAPL) up $1.09 to $22.87.

The DOW (INDU) powered ahead by 260.01, or 2.68%, to close just under the psychologically important 10,000 level at 9947.54. The DOW was bolstered by just about every sector within its makeup, but real strength was seen in the lagging banks, brokers and drug stocks. Merk (NYSE:MRK) was lifted by $2.13 to $73.61, Merrill Lynch (NYSE:MER) added $1.77 to $59.77 and Citigroup (NYSE:C) rose $2.25 to $46.45.

Treasurys reacted to the high consumer confidence number by selling off heavily. Bond traders were obviously not expecting such a robust reading and immediately took to locking in profits. The 10-year note lost 31/32 to yield 4.99% while the 30-year bond fell by 29/32 to yield 5.43%.

Stocks and Sectors on the Move

The semiconductor index (SOX.X) managed to close with meager gains of 3.82 but didn't get any help from the communication chip stocks. This was because one of the communication chip giants, Vitesse (NASDAQ:VTSS), bellied up to the bar today and announced that it would not meet its $0.20/share earnings estimates for the second-quarter. In fact, it lowered estimates to between $0.10 and $0.11 citing continued weak demand and order cancellations during the quarter. VTSS closed down $4.88, or 14.36%, to $29.06.

Other chips that took a dip included TranSwitch (NASDAQ:TXCC), which also lowered its earnings estimates today from $0.16/share down to $0.09 to $0.10/share. TXCC fell $3.75 to $15.13. In addition, Conexant (NASDAQ:CNXT) continued to fall after it warned of lower profits yesterday. CNXT lost $0.44 to $10.06in today's session.

In the world of wireless stocks, two handset giants both weighed in during the regular session with words of job cuts today. Nokia (NYSE:NOK) announced that it would eliminate up to 400 jobs and Ericsson (NASDAQ:ERICY) gave notice that 2,100 jobs will be going by the wayside. Of course, cost cutting was the impetus behind the cuts, as both companies try to deal with drastic declines in demand for their mobile phones. NOK closed up $0.26 to $27.34 and ERICY finished the day up $0.88 to $6.72.

Just when communications investors thought the coast was clear, Nortel (NYSE:NT) dropped another bad-news bomb after the bell that it was to cut an additional 5,000 jobs and that it would fall very short of current revenue estimates. The stock was halted in the after-hours session.

In other after-hours news that could serve to put a speed bump in the recent NASDAQ rally, Palm, Inc. (NASDAQ:PALM) reported earnings of $0.02 for its third-quarter, beating estimates by a penny, but echoed Nokia's woes going forward into its fourth-quarter. PALM said that it will be trimming about 250 employees and expects a loss of $0.08/share in its upcoming quarter. PALM shares plummeted in the after hours session after coming off a halt. PALM competitors Handspring (NASDAQ:HAND) and Research in Motion (NASDAQ:RIMM) also felt PALM's pain as they sold off sharply after the bad news.

Looking Forward, Always Forward

No economic news to worry about tomorrow, but we do have initial jobless claims on the horizon for Thursday. With the market trading largely on economic and earnings news, without any economic data tomorrow, investors will be free (unfortunately) to focus upon the bad news out of Nokia and Palm.

Lest you think that I have turned totally bearish, I would like to state that I am very encouraged by the recent break out activity that we have seen in many different types of stocks. Prior to this week, any stock that dared stick its head above a defined base pattern got hammered right back into it the following day. It seems that investors are again willing to trade on hope, so if we see more of these break out moves holding up, it can only mean that the Bull is not far behind.

Although I do think that the Bull is out there in the pasture somewhere, we still have to remember that we are in Bear territory and therefore have to play by Bear rules. Bear rules state that after a big rally, watch for a pullback. Due to nervous investors, the sticking power of rallies still has to be seriously questioned.

One look at the DOW tells us that the next few days may witness some selling pressure.

Keep Stops In Place and Play By Your Rules

Craig Seidler
Assistant Editor

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