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MARKET > Commentary Monday, April 23, 2001
by: Jim Booth
Research Analyst

The Power of Perception

Technology stock traders were a bit nervous today. We are nearing the end of the first quarter earnings release period. The earnings release period began with an incredible amount of fear that many high profile companies would miss their earnings and guide analysts even lower going forward. This perception caused much of the selling we saw earlier this month.

Last week investors starting feeling better about stocks because there was a perception (or perhaps illusion) that earnings were quite strong because companies were coming out and beating lowered estimates. The bounce from oversold levels has been impressive and I am sure that no one was terribly surprised that we saw a pullback today. Markets cannot go in one direction forever.

To that end, the Dow Jones Industrial Average (INDU) dropped 47.62 points and closed at 10,532.23. Meanwhile, the NASDAQ (COMPX) lost 104.05 points and closed at 2059.36. The major indices also saw declines. The S&P 100 (OEX) slipped 9.76 to 633.90, the S&P 500 (SPX) lost 18.65 to 1224.35 and the Russell 2000 (RUT) gave up 5.64 to 461.07.

Volume was a bit light, but this was typical for a Monday. The NYSE finished close to an even 1 billion shares traded while the NASDAQ (COMPX) finished with 1.79 billion shares traded.

Technology stocks, which were the biggest winners last week, were among the weakest stocks today. Oracle (NASDAQ:ORCL) was crushed $2.60 to $17.15 following a downgrade to "buy" from "strong buy" from Lehman Brothers. Chip industry leader Intel (NASDAQ:INTC) dropped $2.11 to $30.32, as it too was downgraded after last week's rally. Merrill Lynch moved their rating on Intel to "intermediate-term neutral" from "intermediate-term accumulate". Merrill Lynch also lowered its ratings on several communications chip stocks. As a consequence, Applied Micro Circuits (NASDAQ:AMCC) lost $4.40 to $25.60, PMC-Sierra (NASDAQ:PMCS) fell $6.05 to $38.76 and Vitesse Semiconductor (NASDAQ:VTSS) dropped $2.33 to $32.44.

The most active list over at the NYSE was also dominated by declining technology stocks. EMC Corp (NYSE:EMC) fell $5.15 to $39.95, Corning (NYSE:GLW) dropped $3.60 to $23.10 and IBM (NYSE:IBM) slipped $2.83 to $112.00.

On the plus side, Minnesota Mining and Manufacturing (NYSE:MMM) was quite strong with a gain of $3.80 to $116.30 following an earnings release that net estimates, TETRA Technologies (NYSE:TTI) moved up $3.25 following a good earnings report and EOG Resources (NYSE:EOG) gushed $3.20 higher to $46.90 after its strong earnings report attributed to strong natural gas prices.

Meanwhile, Play of the Day, GTECH Holdings (NYSE:GTK), bucked the market trend and pushed its way to a new high of $30.62 with a gain of $0.82.

There has been plenty of action after the close that could give us an idea about how tomorrow's opening may look.

JDS Uniphase (NASDAQ:JDSU) announced that it will have an important statement to make tomorrow morning before the market opens. Some are speculating that JDSU might issue an earnings warning ahead of Thursday's official release, while others believe that the fiber optic equipment company may be announcing the acquisition of Lucent's (NYSE:LU) fiber optic business (it might not be a coincidence that Lucent will be reporting its quarterly results tomorrow morning). JDSU finished the regular trading session down $4.35 to $24.18 and was trading down to $22.50 in after hours trading.

The big earnings news after the close came from computer manufacturer Compaq (NYSE:CPQ). Analysts were expecting the company to report profits of $0.13 a share but the technology leader fell a penny short. Revenues of $9.2 billion were $300 million less than the same quarter a year ago. CPQ finished the regular trading session down $0.86 to $20.65 but is slipping to just below $20.00 in after hours trading.

Novellus (NASDAQ:NVLS) reported first quarter profits of $0.62 a share, which was a penny ahead of consensus estimates. This major semiconductor equipment company enjoyed huge revenue growth this quarter when compared to the same quarter a year ago. Revenues came in at $458.7 million while last year's first quarter revenues were $220 million. NVLS finished the regular trading session down $1.94 to $51.14 but is coming back a half point in after hours trading.

Tomorrow could be a very important trading day for the NASDAQ (COMPX). Technology stocks may be generally weaker on the open due to the Compaq (NYSE:CPQ) earnings and the company's less than encouraging forecast for only 5 cent in earnings in the second quarter. The JDS Uniphase (NASDAQ:JDSU) announcement (depending on what it is) could also have a negative influence.

It will be important for the NASDAQ (COMPX) to hold the psychological support of 2000. A bounce off this level would strengthen the argument that the NASDAQ is just backing and filling its recent advance and going through a natural consolidation. If the NASDAQ closes below 2000, we may see some more aggressive selling later in the week. The MACD is still positive but looks to be slowing its recent ascent. The RSI never reached a level that would suggest a severely overbought condition. That said, the RSI did reach its highest level since September during the most recent rally. Ultimately, bulls are looking for a mild pullback that will enable them to pick up some of their favorite stocks that they missed last week. Resistance for the NASDAQ can be found at last week's high of 2200.

It looks like the Dow Jones Industrials (INDU) will also start to consolidate its gains. Many of the Dow's components have already reported their earnings. That said, there are still enough remaining earnings reports coming out this week to influence trading. If the Dow slips below 10,500, do not be surprised if the Index test 10,250 later in the week. It appears to be unlikely that the Dow will test resistance of 10,750 this week. As long as this pullback does not pick up steam with some heavy volume, the current decline will be considered to be part of the ebb and flow of the market and actually be perceived to be healthy for the longer-term prospects for the market.

As we approach the end of the earnings period, traders will once again start focusing more on the economic data during the month of May. It is entirely possible that we are heading into a period of slower and narrower trading. It will be hard for people to really start throwing cash into this market until they get a clearer picture about what the Fed may do at the end of May as well as anxiously await the next earnings pre-announcement period. Nevertheless, there are always opportunities to make money. Stay keenly aware of sector rotation. These types of moves may be the best opportunity to make money over the next four weeks.

Good Luck, and may all of trades be winning ones!

Jim Booth
Research Analyst


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