Stocks Stagger into the Weekend

Over the past few weeks, the economic data have confirmed what we already knew and that's this white-hot economy is finally cooling, which is what we wanted, right? After all, a cooling economy would finally remove the specter of interest rate hikes from the investing equation, leaving us once again to evaluate our selections using such mundane metrics as revenue growth, click-throughs, burn rates and, of course, earnings.

Unfortunately, as many of us have learned this week (some painfully), an economy doesn't just cool innocuously in a vacuum; it cools perniciously on the bottom line. It seems those folks that actually know how to turn a buck are turning fewer these days.

A rash of earnings warnings and negative press releases swamped the major market indices this week, particularly the Nasdaq Composite Index (COMPX). On Friday, this high-tech, high- octane barometer plunged through the 4,000 level for the first time in a dozen sessions, closing down 119.94 points, or 2.93 percent, to 3,978.41. For the week, the index dropped 255 points, or 6 percent, putting it below its 200-day moving average for the first time since August 22.

Pressuring the COMPX were two of its largest components, Intel (INTC) and Cisco Systems (CSCO). Intel dropped $2.03 to $65.18 on Friday after dropping nearly $6.00 earlier in the week on the news its investment rating was cut by U.S. Bancorp Piper Jaffray.

Meanwhile, Cisco closed Friday by tanking $2.38 to $63.81 after the Wall Street Journal said the telecom sector's slowing revenue growth and slumping share prices could cut its spending on Internet infrastructure equipment. If that's the case, Cisco is vulnerable. The Internet routing king already trades at 178 times trailing twelve month earnings. At this lofty level, investors and traders will be quick to sell should it show any signs of a slowdown, which unfortunately, is inevitable. A company can only post 50 percent year-over-year revenue and earnings growth for so long, and Cisco has already reached a revenue base ($18 billion) that makes it extremely difficulty, if not impossible, to maintain such rate much longer.

On a more positive note, the week's bad news didn't sully the pedestrian issues nearly as much as they did the regal ones. The Dow Jones Industrial Average (INDU) closed Friday down 39.22 points, or 0.35 percent, to 11,220.65. For the week, the INDU lost 18 points, posting its first weekly loss since July 28. Nevertheless, during the week, the average actually traded as high as 11,400, a level it hasn't seen since April.

As for the broader and smaller markets, the S&P 500 Index (SPX) fell 8.01, or 0.50 percent, to 1,494.50 on Friday. For the week, the index lost 26 points, or 1.71 percent. The small-cap Russell 2000 (RUT) dropped 7.13, or 1.31 percent, to 535.69, its first close below its 10-day moving average since August 10.

Last week marked the first time since July 28 that any of the major market indices posted a weekly loss.

In sector news, the PHLX Semiconductor Index (SOX) tanked nearly 5 percent on Friday thanks to Intel et. al. KLA-Tencor (KLAC), the world's largest maker of chip-inspection tools, dropped $5.38 to $55.75. Analog Devices (ADI), a maker of high-speed communications chips, sank $7.75 to $88.75. And Teradyne (TER), the largest maker of chip-testing equipment, fell $4.50 to $57.38. For the week, the SOX dropped more than 100 points, or nearly 9 percent of its value.

If misery loves company, then the semis weren't lonely thanks to the telecom and networking sectors. On Friday, Nortel Networks (NT) fell $4.25 to $72.25, Sycamore Networks (SMCR) $6.63 to $116.25 and Juniper Networks slumped $17.25 to $197.63.

But the biggest loser was WorldCom (WCOM), which lost $0.63 to $29.94 on Friday, ending a week-long 11 percent slide following negative comments regarding its purchase of Intermedia Communications (ICIX). WorldCom recently announced it would buy the communications and Internet concern for $39 per share in a convoluted deal that would give WorldCom what it really wants, Intermedia's stake in Digex (DIGX). The deal impressed no one, as well it shouldn't. Analysts and investors are tiring of WorldCom's incessant dealmaking. The fact is the company no longer has the currency to do accretive deals; it's stock has dropped 50 percent over the past year. Time to focus on operations, guys.

Finally, the oil patch lost ground on Friday after October crude fell $1.76 to $33.63 after reaching a 10-year high on Thursday. The Saudi Arabia oil minister said OPEC would do its part to bring oil prices down to its targeted range between $22 and $28 a barrel. In response, Halliburton lost (HAL) lost $1.38 to $51.06 and Schlumberger (SLB) lost $1.19 to $82.50.

In stock news, Yahoo! (YHOO) continued to fall over Internet advertising concerns, closing off $2.06 to $104.88 on Friday. For the past five months the king-of-all-Internet-portals had been trading in a range of $120 to $150. Then on September 1, the company broke $120 support and has been drifting lower ever since. If Yahoo is having advertising concerns, one can only wonder what kind of concerns Lycos (LCOS) and CMGI (CMGI) must be having.

In earnings news (or the lack thereof), TRW (TRW)fell $1.44 to $43.81 on Friday after the company reported third-quarter earnings will be $0.19 to $0.24 per share lower than expected because of production cuts by Ford (F).

Also forecasting lousy earnings was SpeedFam (SFAM), which fell $2.25 to $13.81. The maker of semiconductor polishing tools said it expects an operating loss of $0.27 per share in its fiscal first quarter. First Call had expected a profit of $0.12 cents per share.

Another earnings loser was National Discount Brokers (NDB), which sank $8.00 to $27.81 after surprising investors by saying it expects to post a $0.06 to $0.09 per share loss for the first quarter ended August 31, instead of an expected profit of $0.09 per share.

Meanwhile, First Data (FDC) was sliced $2.56 to $41.00 after Morgan Stanley Dean Witter downgraded the processor of credit card transactions to Outperform from Strong Buy.

In economic news, the only significant (and I use the word loosely) piece of data to hit the wires on Friday was that U.S. consumer credit slowed its rise to $9.4 billion in July, which is off sharply from a revised $14.7 billion rise in June. In other words, consumers continue to accumulate credit card debt, but at a slower rate.

For this week, the economic data is a little more substantive. On Wednesday, the U.S. current account balance (trade deficit) will be released and is expected to remain near its record- breaking lows. The market consensus is calling for the current account to show a deficit of $108 billion for the second quarter, higher than its $102.3 billion posting in the first quarter. Don't sweat the number. Contrary to many economic opinions, the trade deficit is a non-issue.

On Thursday, Wall Street will again be mesmerized by the jobless claims report to see if the recent upward trend continues. In August, the weekly jobless figure averaged slightly above 300,000, indicating that job growth may be slowing.

Also on Thursday, the Producer Price Index (PPI) is expected to creep up thanks to a strengthening manufacturing base and rising capacity utilization rates. The PPI is expected to have risen to a 0.1 percent annual rate in August, up from its flat 0.0 percent posting in July.

Then on Friday, the closely watched Consumer Price Index (CPI) will be released. The market consensus is for the CPI to be unchanged at 0.2 percent for August. Furthermore, the core CPI (CPI less food and energy) is also expected to post unchanged in August at 0.2 percent.

The earnings reports are also more substantive this week. On Monday, we get CMGI and Oracle (ORCL). On Thursday, we get Red Hat (RHAT) and Verity (VRTY). Look for CMGI to post a loss of $2.12, Oracle a gain of $0.13, Red Hat a loss of $0.02 and Verity a gain of $0.16.

As for trading this week, I think the markets still look vulnerable. The COMPX met strong resistance at 4,300 due to investor concerns over the economy and slowing earnings growth. Exacerbating worries is the fact the COMPX fell through 4,000 support. If the index falls further this week (through 3,900), it could be on its way to forming a double- top. However, if the COMPX is able to garner support at its current levels, we could be looking at only a small cup-and- handle formation.

My gut feeling, though, is that the COMPX is going to have a hard time holding at the 3,900 to 4,000 level. The MACD is weakening and could turn negative. What's more, if the pace of negative earnings warnings accelerates, particularly among larger market-cap stocks, the COMPX could be in for a world of hurt. The index's 15 largest stocks account for half its market weighting, which means a lot of clout is concentrated in only a few issues, so there is little room for error. What's even more scary, though, is that the average P/E ratio for this group is 100 times its forward 12-month earnings.

At this point, I have more faith in the older economy issues. The INDU has done a good job of holding support at 11,200. If it can continue to hold at this level, I can envision it making another run at 11,300, or even 11,400, later in the week. However, should the INDU break through 11,200, which is its lower regression support line, it would form a bearish diamond, which could send it lower to its previous support of 11,000. However, working in the INDU's favor is strength in its on balance volume, which has been decidedly positive over the past month.

Unfortunately, that ugly word divergence crept back into the lexicon last week. Once again, we are seeing the COMPX and the INDU move in opposite directions. I don't see that happening for long, though, if the COMPX continues to falter, I think the INDU will reverse course and falter, too. On the other hand, if the COMPX can reverse course, that could help to lift the INDU higher. The truth is these two major market barometers aren't as independent of one another as many investors and traders think. After all, it's the old economy companies that are buying the new economy companies' products, so how can one economy prosper without the other?

One final thought: Many market watchers believe that as the first week after the Labor Day weekend goes, so goes the market for the remainder of the year. Let's hope that's not the case, or we could be in for a rough three-and-a-half months.

S.P. Brown
Editor