Earnings Worries Cause Investor Jitters

Not all is well in technology land. Earnings problems have crept into the sector and slowly turned last Monday's euphoria into Friday's angst. Friday's selling may just be a fluke related to options unwinding and isolated earnings problems, but it could be a sign of things to come.

It's not surprising that the NASDAQ Composite gave back most of Thursday's gains. The lineup of heavy hitters that reported bad news were some of technology's all stars and included Agilent (A), Ericcson (ERICY), Lexmark (LXK), Macromedia (MACR) and of course, Lucent (LU) preceded them on Thursday. An almost gleefully positive report from Sun Microsystems (SUNW) did little to stop the bleeding in the tech sector.

The coming week has some big names of its own, including Texas Instruments, Nortel, JDS Uniphase, Amgen, Nokia and Worlcom. If they report strong numbers, (I should say FORECASTS of strong numbers), this market may get back on track.

It will also be a heavy week for economic numbers, with Existing Home Sales, Consumer Confidence, Employment Costs and GDP all scheduled. Favorable reports could lift all boats and move the market higher, at least temporarily.

But the market will have to contend with a historical bias now. Late July is the time of year that the summer doldrums tend to set in. In both 1998 and 1999, the summer rallies topped out near July 20th.

Putting it simply, we are at a key point in this summer rally. It's certainly possible that the market could work higher, but as the earnings season moves forward, the momentum is likely to continue falling off.

Friday's tally:

The NASDAQ Composite lost 90 points to close at 4094 on volume of 1.5 billion shares traded. Declining issues beat out advancers in a 2 to 1 ratio. For the week, the NASDAQ was off 152 points.

The Dow Industrials fell victim to profit taking in the technology stocks, which beat down Thursday's large gains from IBM, Hewlett Packard (HWP), Intel (INTC) and Microsoft (MSFT). A 110-point decline knocked the index back to close at 10734. Volume on the NYSE exchange was moderately heavy at 967 million shares. Declining issues beat advancers by 18 to 11. The weekly change was negative by 78 points.

The S&P 500 index lost 15 points to close at 1480, down 1.02%. The last print is just above the 100 day moving average, so an upturn is necessary to avoid a negative chart bias. Over on the Russell 2000, it was 12 points lower, closing at 522.70, or a decline of 2.25%.

Treasuries moved slightly higher following Thursday's huge gains. The 10-year note yield finished at 6.00%, while the 30-year bond finished at 5.795%.

Sector and Stock News:

Somewhat troubling is the lack of any rally participation from the semiconductor group. Friday's selling pushed the SOX 5.5% lower. Chips have been the marquee group in the technology arena for the past 9 months, but now they are lagging and Friday more worries crept into the sector as Xilinx (XLNX) was downgraded on valuation concerns. There are also growing concerns that the chips will soon have new production supply on-line. If the market discounts new supply six months in advance, then the chip stocks could be near their peak right now.

Semis may get some help soon though. The Robertson Stephens Semiconductor Conference begins Wednesday and their semiconductor analyst, Dan Niles, is a leading chip promoter. We will probably hear some comments coming from them to prop up the sector.

Biotechs staged a small comeback rally Friday, spurred on by news from bio-giant Amgen (AMGN). The company's premiere drug called Epogen, which treats anemia caused by kidney disease, has been in dispute over patent infringements by a company called Transkaryotic Therapies (TKTX). A preliminary court ruling went in Amgen's favor, and as a result, the stock gained 3.94 points. The biotech index posted a 2.12% gain.

Pharmaceuticals gained 0.74% while the tech sectors slipped back. That's hardly worth mentioning except that Pharm's are a defensive play when technology is weak. I've been happy to see the drugs stay down while technology sold off on Tuesday and Wednesday, but now I'm a little concerned that money might float back to drugs again. The DRG index does have some support at the current level, which might make those stocks a low risk, short-term play. On the other hand, drugs typically are weak in August.

Financials had a huge week overall, but Friday the sector started positive then slowly gave into profit taking as the sliding market pulled it down. Nevertheless, there were some bright spots Friday. Citibank (C) closed at a new all-time high of $70.88 and American Express (AXP) surged 2.38 points to close at a new record of $59.25. AXP received an analyst upgrade from Prudential to Strong Buy. Their earnings are Monday before the market, so some profit taking is likely unless the numbers are very strong.

Computer hardware stocks were a mixed bag Friday. Sun Microsystems (SUNW) gained 5.94 points to close at $104, very near their all time high. Their earnings report forecasted future growth of 30%, very pleasing to traders. The index as a whole suffered from profit taking in other stocks such as Hewlett Packard (HWP) -6.00 and IBM -2.50.

In other tech groups, Networking (NWX) fell 1.52%, primarily on earnings problems associated with Lucent Technologies (LU) -3.06 and Agilent Technologies (A) -5.94. Software (CWX) lost 4.13% and the dotcoms (INX) lost 3.3%.

This week's outlook:

It's still an earnings story and the outcome of the week will probably be determined by the strength, or lack thereof, of the forecasts for next quarter. Monday look for American Express (AXP) and Merck (MRK) before the market. After the close are Aether Systems (AETH), Akamai Tech (AKAM), Affymetrix (AFFX) and Texas Instruments (TXN). Watch AKAM - they may be a short candidate because their IPO lockup expires on the 25th with 57 million shares coming to market.

Later in the week look for AT&T (T) to report on Tuesday, Amgen (AMGN) Wednesday and Nokia (NOK), Worldcom (WCOM) and JDS Uniphase (JDSU) Thursday.

Technically, no damage has been done to the support levels on the NASDAQ composite it's the psychological damage that I'm worried about. The problem is that with a couple of big name disappointments under our belt, investors are a little jumpy and not altogether giddy about the prospects of going long just before a possible 15% drop. From a chart perspective I see a funny looking little head and shoulders on the 60 minute chart - it's something to be aware of.

The INDU, go where it will, wasn't able to break resistance, but it is still in an uptrend. It will need the help of the techs to move higher though.

It's likely to be a narrow market for awhile now, with the action located in groups that react to earnings news. Be sure to check the earnings dates of stock you own and the dates of leaders in the respective industries. Also, I've been warning about this recently and I want to point out again that the VIX is at 21.47 - primed for selling. It's not necessarily a reason to sell your favorites, but then again you might want to consider tightening your stops. The rally does appear to be weakening so if you are waiting for an entry it may be wise to stay on the sidelines unless you can watch your trades closely.

Good Luck!
Steve Pekarek
Editor

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