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MARKET > Commentary Tuesday, April 17, 2001
by: Craig Seidler
Assistant Editor

We'll Take It

While today's market action wasn't all that impressive at first glance, things are starting to come together nicely behind the scenes. The NASDAQ held up well against Cisco's (NASDAQ:CSCO) warning last night, which was good evidence that a positive change in investor psychology is starting to wash over the bears.

The resilience of the market was even more impressive when you consider the magnitude of Cisco's warning. The company indicated that its third-quarter revenues would be off a whopping 30% from its second-quarter numbers and that earnings would be in the "very low, single digit range." The stock was down to $15.80 before recovering and closing down only $0.55 to $16.65.

Furthermore, the Cisco news did not spread to other areas of tech, indicating that investors are through with the sell-first- and-ask-questions-later mentality. In addition, we saw exaggerated moves to the upside in shares of Computer Associates (NYSE:CA) when the software company told investors that it expects fourth-quarter earnings of $0.47/share versus expectations of $0.43/share. I think this is the type of good news that is going to make the shorts cover. The risk is now to the downside for the shorts, as any sign of good news will cause these upside surges to occur.

And speaking of good news, it looks like earnings are not turning out to be as bad as everyone was expecting this quarter. Many more companies were expected to report losses this quarter than in past quarters, but that doesn't seem to be the case thus far. According to John Bollinger, in a healthy bull market about 66% of all companies report positive earnings per quarter. Last quarter, 55.2% of all companies reported positive earnings and for the past year, 58.5% of all companies reported positive earnings.

Now comes the surprising part. Over the past week, 60.7% of all companies reporting showed positive earnings. Granted its only one week, but last week saw companies from many diverse sectors report. So, we are not quite up to the 66% bogey as far as showing real health, but we are well off the sickly 55.2% pace of last quarter. We'll take it.

Today's Markets

Today's trade in the major indices was marked by range bound, sideways price action. And according to traditional chartists, this is precisely the type of price movement that defines the tail end of a bear market.

The NASDAQ (COMPX) stabilized today, shaking off the volatility that has become to be expected from the high tech index. The NASDAQ ended up adding 13.61, or 0.71%, to 1923.18. Volume came in at 1.8 billion shares and advancers beat decliners 2062 to 1713.

Things were a bit rosier over in the DOW (INDU), where components Johnson and Johnson (NYSE:JNJ) and IBM (NYSE:IBM) helped with 2% plus moves to the upside each. The DOW ended the day up 58.17 to 10216.73 on good volume of 1.1 billion shares. Advancers beat decliners 1851 to 1174.

JNJ moved up $1.85 to $94.45 after it said profits rose 14% on strong drug and medical device sales. IBM moved higher by $2.95 to $99.70. Throughout all the announcements concerning earnings shortfalls over the past few weeks and months, IBM has not uttered a word about revising estimates lower. The real answer to IBM's silence, however, will be known when it reports earnings after the bell on Wednesday.

Treasurys made up lost ground today on the heels of encouraging economic news. The benchmark 10-year note added 11/32 to yield 5.21% and the 30-year bond added 13/32 to yield 5.66%.

The March CPI number came out as expected at 0.1% overall and 0.2% at the core, which excludes the volatile food and energy components. This was taken as good news by the market, as the tame numbers indicate that inflation should not hinder the Fed from cutting rates at their May meeting. Although, looking ahead to the April numbers, escalating gas prices should boost the overall CPI. It just remains to be seen by how much and whether it will serve to deter Mr. Greenspan.

Stocks and Sectors on the Move

Earnings, job cuts and warnings were the theme of the day. On the earnings front we received word from the likes of Phillip Morris (NYSE:MO) and Caterpillar (NYSE:CAT), which reside within the DOW.

Big MO released earnings of $0.95/share, beating estimates by a penny. Shares of MO advanced $1.25 to $47.81 on the day.

CAT, on the other hand, fell victim to the economic downturn as it reported earnings of $0.47/share. This fell a penny shy of estimates and as a result, the stock closed lower by $1.00 to $45.75.

Due to announce more job cuts this week is mobile phone maker Ericsson (NASDAQ:ERICY). ERICY will hand out an additional 6,000 pink slips on the heels of further weakening of sales. The stock lost $0.29, or 4.84%, to $5.70. Coming along for the ride were shares of fellow mobile phone maker Nokia (NYSE:NOK). NOK lost $0.80, or 2.99%, to $25.95.

Coming through with the double-whammy earnings miss/warning today was Sprint (NYSE:FON). The telecom concern came in with earnings of $0.36/share for its first-quarter, while in the same breath warning investors that it would fall short of second-quarter estimates of $0.38/share. FON lost $1.37, or 5.85%, closing at $22.04.

Turning to after hours earnings reports, we have seen some heavyweights report earnings above expectations. While this has spurred some definite buying interest on the ECNs, we shall see if it spills over into Wednesday's session, as many of these companies are hurdling already lowered bars and also are warning of tough times ahead.

Intel (NASDAQ:INTC) came in with earnings of $0.16/share, beating First Call estimates by a penny even as sales declined in its first-quarter. Could the worst be over for the chips? By investors' reaction in after hours trade, it appears as if it is. Shares of the semiconductor company were higher by 10% on Instinet.

Joining Intel in reporting earnings that beat estimates was Texas Instruments (NYSE:TXN). TXN came in with earnings of $0.18/share, beating lowered estimates by two pennies. Shares of TXN were lately up 5% in after hours trade.

Looking Forward, Always Forward

While the better than expected news out of some headline stocks in the after hours will most certainly put a positive spin on Wednesday's trade, we will be watching to see if the chips can hold up, or if investors use this opportunity to sell into strength.

Some of these companies have even said that they have improved visibility going forward, which may be enough to firm up analyst expectations and keep the downgrades to a minimum going forward. As long as growth stocks can at least stabilize, investor sentiment will continue to improve and sidelined money will be put back to work.

Now, I'm not saying refinance the house and put it all into Intel, but keep that watch list close. Don't get caught up in one-day surges in market enthusiasm, as extended rallies are still not holding up in this market. This means don't chase stocks much beyond 5% above good, solid support areas in case they come crashing back down. Also, consider going into trades with half the capital you usually would use and by all means, keep using those stops.

Craig Seidler
Assistant Editor


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