Box Breakers

If sales of PCs slump, that means there are fewer semiconductor chips required. That fear gripped the market today, as it was announced that PC sales slowed in the last quarter. An industry report stated that growth in unit shipments of personal computers slowed in the second quarter to less than half of the growth rate in the same quarter last year. There is very little margin for error in technology stocks because valuations continue to be high. Any negative news has walloped premium and shaky stocks alike.

Last week, the excuse for selling was profit-taking on the heels of a run up associated with high earnings expectations. Although earnings have been mostly solid, we have seen a slew of technology shares drop after reporting earnings that just met and sometimes exceeded estimates. It is very frustrating as a trader to be long a stock that beats expectations by a couple of pennies and then tanks. This is why we always exit our plays before an earnings announcement.

Moreover, if a company cannot meet expectations they usually pre-release. Subsequently, analysts change their estimates based upon the new guidance from the companies they cover. Once the estimate is set, many companies have the ability to tweak their numbers to make sure they can beat the estimates by a penny or two. This tweaking usually occurs in the form of selling some profitable stock market assets or buying back some of their stock in the open market. Another common tactic is to push some sales forward to ensure next quarter will be good. All of this activity results in an earnings period where everybody pretty much knows the results before they are announced and a "sell the news" scenario develops.

Anyway, earnings and desktop PC makers did little to help the market today.

The NASDAQ (COMPX) is once again negative for the year. The key swing point number is 4069. It certainly seemed probable that the NASDAQ would bounce on support at 4000 after failing at the 4069 support. Obviously, a bounce never materialized and the COMPX closed at 3981.57, down 112.88 for the day. The close was just above the low of the day at 3976.51. We started the day with the expected options expiration counter move bounce.

The immediate drop into negative territory foretold the rest of the day's action despite a pretty sharp rally. It looked like a bull trap. Dell Computer (DELL) was an influential loser (more on this story later) and dropped $5.94 to $46.44.

Previous market standout JDS Uniphase (JDSU) was very strong early as it was influenced by the rumored purchase of Northern Telecom's (NT) fiber optic equipment business by Corning (GLW). Nevertheless, JDSU was caught up in the selling and dropped $3.19 to $131.63 on huge volume. Other notable losers were, Brocade (BRCD) down $12.38 to $187.50, Cisco Systems (CSCO) off by $2.06 to $66.06 and Juniper Networks (JNPR) slipped $11.56 to $$149.67. Volume was about the recent average with 1.45 billion shares blipping across terminals and advancers were trampled by decliners 27 to 14.

The Dow (INDU) was relatively stronger for most of the day but finally succumbed to the pressure from its technology components. The Index fell a less damaging $48.79 to close at 10,684.77. The close was barely 6 points higher than the low for the day. The PC sales slowdown damaged Dow components Microsoft (MSFT), off by $1.75 to $70.56, Hewlett Packard (HWP), cut by $4.63 to $118.75 and IBM slipped $1.94 to $112.50. There were winners that helped buoy the Dow and they were led by Merck & Co (MRK) which was up a very healthy $6.00 to $69.63. Johnson & Johnson (JNJ) also enjoyed some sector rotating cash as it gained $2.19 to $94.44.

Other widely watched market indices also dropped. The S&P 500 (SPX) fell 15.9 points to 1464. The Russell 2000 (RUT) lost 8.45 to 514.25. The NASDAQ 100 (NDX) was crushed in late market selling by 118 points to 3791.

Sector rotation was evident among the various industry specific indices. Pharmaceutical stocks (DRG) did very well by rising 10.04 to climb just above 400. Semiconductors (SOX) were strong early and attempted to bounce but finished the day on the down side by 7.2 points closing at 1075.3. Banks (BKX) were basically unchanged and Biotechs (BTK) suffered a decline of 17.88 points to a close at 682.56.

Cash vacating the stock markets was unable to find its way into bonds as the 10-year Treasury note lost 9/32 and is now yielding 6.035% and the 30-year bond lost the exact same amount in point terms and is now yielding 5.815%.

Deutsche Telecom (DT) may be getting the wireless communications carrier it wants. Over the weekend Deutsche Telecom hammered out an offer for VoiceStream Wireless (VSTR). The deal calls for DT to pay $46.5 billion in the form of 3.2 of each of its own shares plus $30 in cash for each VSTR share, plus the assumption of nearly $5 billion in debt. The deal prices each projected year-end VoiceStream customer at an incredible $16,000. Some analysts have questioned the high offer and a declining DT share price may invite other suitors. Another possible stumbling block is that there is increasing concern on Capitol Hill that the German Government, which would own a 45 percent stake in the merged companies by virtue of its 58 percent stake in DT, would pose a security risk by having access to multiple US communications licenses. Deutsche Telecom ADR's on the NYSE fell $6.94 to $44.56 and VoiceStream (VSTR) dropped $21.25 to $128.50.

There was a curious sequence of events affecting the shares of Dell Computer (DELL) today. SG Cowan analyst Richard Chu called Dell the "bottom line action idea of the week" and raised his target price to $70. When the PC sales numbers were released some analysts expressed concern because Dell's growth dropped from 30.6% to 22.3%. It is the slowest growth rate in 6 years and some analysts fear that Dell will be unable to achieve revenue and earnings expectations down the road.

Who do you believe?

It is probably a bad sign for the market in the short-term that traders stomped all over Dell, concentrating more on the bad news than on the good news. It is also another example of how nervous market participants are and how little room there is for companies to miss estimates or upset expectations. This type of reaction is indicative of the perception that stock valuations are extremely high. Dell finished the day down $5.94 to close at $46.44 on more than two times average daily volume.

There could be a relief rally tomorrow among semiconductors because Texas Instruments (TXN) released better than expected earnings after the close. TXN reported that income jumped 37 percent to $525 million. The $0.31 per share profit was a penny ahead of estimates. The stock is currently up $4.50 to $68.00 in after hours trading.

So, Texas Instruments gains a nice chunk by beating estimates by a penny, but Dow component American Express (AXP), which also beat expectations by a penny fell today. Go figure. Earnings were up a healthy 15 percent as the company reported a profit of $0.54 a share. Some of the increase was attributed to an increase in fees collected by its Financial Services and Advisory division. AXP dropped $2.31 to close at $56.94.

Priceline.com (PCLN)was an earnings related disaster today, even though quarterly results were solid. PCLN beat the consensus estimates by only losing a penny, which was a vast improvement over the 10-cent loss last year. The consensus estimates were for the company to lose 3 cents. Despite approaching profitability, the share price of PCLN dropped a painful $8.94 to $31.13 in today's trading.

Look for the markets to continue to be influenced by all of the earnings coming out this week. The following is a partial list and please verify any information by calling the Investor Relations Department of the companies you are interested in learning more about.

Tuesday: Before the open; Ameritrade (AMTD), Ask Jeeves (ASKJ), AT&T (T), Chevron (CHV), DuPont Photomask (DPMI), Earthlink (ELNK), Exxon Mobil (XOM), McDonald's (MCD) and Pfizer (PFE). After the close; AFLAC "quack-quack" (AFL), Aware (AWRE), BMC Software (BMCS), Coherent (COHR), Compaq (CPQ), eBay (EBAY), Electronic Arts (ERTS), Linear Technologies (LLTC) and Nortel Networks (NT).

Wednesday: Before the open; DuPont (DD), Hershey Foods (HSY), Keane (KEA), Marsh Mclennan (MMC), Minnesota Mining and Manufacturing (MMM), Nextlink Communications (NXLK) and Xerox (XRX). After the close; Amazon.com (AMZN), Amgen (AMGN), Clear Channel Communications (CCU), Flextronics (FLEX), InfoSpace (INSP), JDS Uniphase (JDSU), KANA Communications (KANA), Lam Research (LRCX), Microstrategy (MSTR), Quest Software (QSFT), Rainbow Technology (RNBO), Sealed Air (SEE), VeriSign (VRSN), VerticalNet (VERT) and Walt Disney (DIS).

Thursday: Before the open; Apache (APA), DaimlerChrysler (DCX), Dow Chemical (DOW), eToys (ETYS), Human Genome Sciences (HGSI), Kellogg (K), KLA-Tencor (KLAC), MGM Grand (MGG), Nokia (NOK), Phillips Petroleum (P), Spyglass (SPYG, Texaco (TX) and Worldcom (WCOM). After the close; American Power Conversion (APCC), Celera Genomics (CRA), Clarent (CLRN), Cree (CREE), Gilead Sciences (GILD), MRV Communications (MRVC), Scientific- Atlanta (SFA) and Starbucks (SBUX).

Friday: Before the open; Bowater (BOW), Tommy Hilfiger (TOM) and Williams Companies (WMB). There are no major releases planned for after the close at this time.

In addition to the earnings reports there will be a slew of economic reports that could have their impact upon the market this week.

Tuesday: Existing home sales and Consumer Confidence.

Thursday: Employment Cost Index and Durable Orders.

Friday: Gross Domestic Product and the Michigan Sentiment Index.

Now what? Well, the NASDAQ could easily fall to the middle of June's trading range, which offers pretty good support at 3800. A resurgent Semiconductor Index (SOX) tomorrow could help us to avoid continued selling, especially after the positive reaction to Texas Instrument's (TXN) earnings report after the close.

However, if the SOX does not rally immediately, it does look like the NASDAQ is heading for a dismal week. One discouraging technical indicator is the MACD, which has now issued a sell signal on the SOX. The RSI is only in the middle of its range, so there is still down side room before an oversold condition is signaled. Having said that, very aggressive traders may step up to the plate and try and buy at 3940 in the hopes for a quick bounce trade if there is more selling tomorrow. One negative influence on the NASDAQ is a slew of IPO offerings for the rest of the week. Market participants may be raising cash by selling existing holdings to buy the new stocks. If this is true, it is a bearish sign that investors are unwilling to commit new cash.

The Dow is a fair bit stronger and should probably continue to hold support. It has been a long sideways consolidation for the Index but there has been plenty of action within. The low 10,600's to the high 10,800's has been an eminently tradable range. Be cautious of a drop below 10,600, which could result in selling pressure all the way down to 10,300.

Good Luck! And may all of your trades be winning ones!

Jim Booth
Research

 
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