Shhhhh, Don't Wake the Bears

For as long as I can remember, I've always figured Wednesday's would end on the down side regardless of how the futures looked in the morning. Today, when I first checked, they were deeply red, so it looked like it would be just another day in this "Back to School Sale" on Wall Street otherwise known as the post-Labor Day Rally. But, surprisingly, it wasn't that bad.

Is there a chance we may be finding a bottom, even if it is a sand bottom? Bearishness seems to be breaking out all over, although the Bullish consensus is still about 50%. Even Jim Cramer of TSC came out of the closet this morning and admitted he has bearish thoughts.

For being relatively unchanged (everything is relative) the market churned a lot of stock. Many stocks and sectors that were left for dead, actually showed signs of life today. The big question is will there be follow-through, or will it lead to a bear-trap rally?

The Dow Jones Industrial Average (INDU) closed down just over 51.05 points, or 0.45 percent, to 11,182.18, with 1 billion shares being traded on the NYSE. Drops in the banks fueled the decline as JP Morgan (JPM) eased after the announcement it was being acquired by Chase Manhattan (CMB). Intel again tanked the Dow and the NASDAQ Composite Index (COMPX) as another analyst lowered the rating for this chipmaker. Intel ended down $3.69 to $61.25.

Active NYSE stocks included Chase Manhattan, which fell just under $2 to $50.69 once the JPM deal came out of the closet. Meanwhile, Nortel Networks (NT) rebounded today closing up almost $2 to $66.94, as the fiber optic sector may have found a bottom. Lucent (LU) also closed up to $37.44, even though that stock set a new low today. AT&T (T) closed up over a point on almost 2 times average daily volume (ADV), as rumors that CEO Mike Armstrong was leaving.

Over at the COMPX, it was a better picture. Stocks started deep in the hole this morning and worked their way out for only the second up day since Labor Day. The index ended up 44.38 points to close at 3,893.89 on over 1.6 billion shares traded. Cisco Systems (CSCO) led the charge, closing up $2.44 to $61.31 on almost twice the ADV. Yesterday pundits made much ado about the stock breaking 60. This morning, Juniper Networks (JNPR) CEO and Cisco's major competitor said that with business the way it is, he wouldn't be selling Cisco stock. Juniper closed up $8.88 to $198.63 on about 180% ADV.

Other fiber stocks like JDSU also rallied recovering over $1.56 to $104.75 on heavy volume.

Knight Trading (NITE) rose almost $7 to $36.06 on 23x ADV, as it was seen catching the bouquet after the JPM-CMB wedding.

Meanwhile, BMC Software (BMCS) got creamed in afternoon trading, falling nearly $4.00, when a rumor circulated that it would miss earnings. The sleuths on CNBC called BMCS and whoever answered the phone said the rumor wasn't true and it were on track to meet its already lowered estimate. The stock rebounded to close down $0.69 to $22.44.

Rambus (RMBS) had a nice day gaining $7.69 to $84.50 after the company announced another deal with NEC.

Among the sector indexes, the Dow Jones Transport Average (TRAN) left the terminal, as the airlines began to taxi for takeoff with the hint of lower oil prices. The major airlines, United (UAL), American (AMR), Delta (DAL) and Northwest (NWB) all climbed more than $1.

The oil gusher ended this morning, as OPEC said it could go up to 2 million barrels per day of additional output to stabilize the price of oil within the $ 25-28 band. Seems they were able to find an additional 1.2 million barrels per day of capacity since Sunday, as UK Prime Minister Tony Blair said he would not cut taxes to help lower the price of fuel in that Country.

The chart of the NASDAQ 100 Index (NDX) below reveals the very strong resistance line about 4,100. Also obvious is the higher lows since May. If this rising trend line holds we are at or near the low for this cycle and may be headed higher. Adding the lines reflects a wedge forming. Where we go from here will determine whether we hold the current support about this level. If not, we could be headed for a retest of the August low.

In the Treasury arena, interest rates declined slightly as Treasuries moved up ahead of impending economic data. The 10- year T-note added 10/32 to yield 5.74 percent while the 30- year T-bond rose 4/32 to yield 5.73 percent. Traders believe the data will be market friendly and show that the three bears will leave Goldilocks sleep a little longer in the bed that's just right.

Speaking of economic data, the only data released today was the announcement that the current account deficit (of imports) rose to another record last quarter, but the cost of imports rose only .2% last month. The oil component rose .6% in August but was more than offset by a 1.6% decline in July. The cost of imports will continue to remain low as the US economy remains strong and interest rates remain relatively high.

The Euro, a key to translation values, is at an all-time low meaning that now is the time to visit Europe, especially if airfares fall. Companies are limited by competition to the maximum they can charge for products overseas by the relative value of the local currency. When they repatriate that profit back to the US they also suffer when the value is low. Major businesses deal with this problem routinely hedge through futures; however, few expected the Euro to drop so low.

Later this week we have the PPI, CPI and other more significant numbers due out, but since the Fed is out of the picture, they probably won't be that significant. More important will be the earnings coming out tomorrow for Oracle (ORCL) and Adobe (ADBE). Recently it was revealed that Oracle CEO Larry Ellison would forgo pay in exchange for stock options. While this is a magnanimous move for the stock price, I doubt that the world's richest, or second richest man will miss a rent payment.

As profit warnings are given high profile, there really has not been a ground swell of contrary indications. In fact, most analysts expect profits to be up substantially for the quarter and there is expectation that they will continue through future quarters.

Volatility may be absent the rest of the week as positions get consolidated. Stocks with large call positions will not be moving up and those with large put positions will probably not be going down. Now is a good time to plan your next move based on where we go from here.

Always plan your trip and keep your powder dry.

Maris Eshleman
Research Analyst