The Quarterly Trend

The fourth quarter was ushered in today and some interesting trends were possibly revealed. Now that the "window dressing" that we saw at the end of last week is over, institutional investors are shedding some stocks and picking up others that they feel will be the wisest adjustments to their portfolios. The fourth quarter is more critical than most because it is the last opportunity to beef up returns that will be scrutinized in January, which is a time when investors choose where to place their cash and which under-performing mutual funds to sell.

The early returns are in and there is clearly continued fallout from the Apple (AAPL) mashing we saw on Friday, as leading box makers and Internet stocks were dumped from portfolios.

However, one technology sector attempted a comeback today, and that was the Internet backbone and networking stocks, which moved a little higher on the news that Nortel Networks (NT) should be able to meet or exceed earnings expectations. NT managed to rally $2.44. The announcement was a welcomed change from the slew of negative prereleases. Although shares of Cisco Systems (CSCO) gained $0.25 and Lucent (LU) picked up $2.31, the rally did not extend to previous favorite Juniper Networks (JNPR), which was pummeled $12.31.

The NASDAQ (COMPX) started the day on a positive note, as traders came out of the weekend in a good mood. However, the NASDAQ coughed up its early gains to finish the day with another triple digit loss, this time 103.92 points, and closed at 3,568.90, a four month low. Volume was a solid at 1.78 billion shares traded and breadth was a little negative as losers outpaced gainers 27 to 14.

The NASDAQ most active list was dominated by falling super cap stocks. Dell Computer (DELL) lost $1.56 and closed below $30.00 for the first time in recent memory. Intel (INTC) slipped another $1.44 to $40.13. The bottom-fishers were nowhere to be found, as Apple (AAPL) fell $1.50 to $24.25. Apple now has a P/E of just under 11 which is a level more commonly seen among heavy manufacturing firms.

Microsoft (MSFT) was yet another large cap stock that lost more of its value, as it fell $1.19 to $59.13. Former trader favorite JDS Uniphase (JDSU) continued its rollover to the tune of $4.75 and closed at $89.94. Even B2B stocks, which were relatively strong last week, could not escape today's negative sentiment. They were led generally lower by the $16.20 loss in the shares of Ariba (ARBA), which closed at $127.06.

There were a few stocks that bucked the trend today. Professional Detailing (PDII) was up a whopping $23.00 to $80.00 after the Company was given the exclusive US marketing, sales and distribution rights for Glaxo Wellcome's (GLX) antibiotic, Ceftin. Check Point Software (CHKP) was another notable winner as it picked up $11.00 to $168.50. Adobe Systems (ADBE) was one technology stock that avoided the selling, as it gained $7.75 to close at $163.00.

The DOW (INDU) outperformed the NASDAQ today and posted a modest gain of 49.21 and closed at the nice round number of 10,700 and change. Volume was uninspiring with just a shade over one billion shares traded on the NYSE. Breadth saw a narrow defeat of gainers as there were 13 winners for every 17 losers. There were 82 new highs which nicely outpaced new lows which numbered 56.

The DOW itself was bolstered by a nice move in IBM, which gained $5.31 to $117.81, and financial components JP Morgan (JPM), which also gained more than $5.00 and closed at $168.50, and Citigroup (C), which moved up $1.31 to $55.38. Boeing (BA) was the big loser that kept the DOW from adding to its advance, as a downgrade following the loss of a big order from Singapore Airlines knocked the stock down $4.38 to $58.63.

Outside of the DOW, Lehman Brothers (LEH) had a very nice day, as its share price increased $5.75 to $153.50 and Navistar (NAV) was surprisingly strong, as it gained $6.56 to $36.50 due to takeover speculation.

There were some losers on the NYSE worth noting, including biotechnology stocks, Genentech (DNA) fell $5.69 to $180.00 and Celera Genomics (CRA) closed down $4.19 to $95.44.

The major market indices were decidedly mixed. The NASDAQ 100 (NDX) had a very ugly day and lost 113 points to 3458. However, the S&P 500 (SPX) only lost 0.25 points and closed at 1436.25, while the S&P 100 (OEX) actually gained 3.42 points and enjoyed a closing price of 763.26. The Russell 2000 (RUT) fell 9.7 points to 511.67, as small caps had a generally dreary day.

Bank stocks (BKX) soared 16.08 points to 903.82 to lead the major sector indices. Brokerage stocks (XBD) were a close second, as they gained 6.32 to 663.82. Oil surged back over $32.00 due to Middle East peace concerns. These factors helped the Oil and Gas stocks (XOI) rally 8.29 to 534.97.

The treasury pits were fairly weak, as the 10-year bond lost 3/32 to yield 5.825 percent and the 30-year Treasury bond lost 18/32 to yield 5.92 percent.

The biggest news of the day may have been, stop me if you have heard this one before, an earnings warning from a leading technology company. Xerox (XRX) may have set the tone for the early trading tomorrow, as this major business machine company beat up what shareholders it still has by announcing it will not only miss the current expectations of a 12 cents profit in the third quarter but will actually report a loss in the 15 to 20 cent range. In after hours trading Xerox was trading down another S2.50 to $12.44.

Dutch corporation ASM Lithography (ASML) announced a key acquisition today when it agreed to buy rival Silicon Valley Group (SVGI) for $1.6 billion in stock. The deal will create the world's largest microlithography equipment company. ASML lost $2.44 today and closed at $29.88 while SVGI picked up a healthy $7.38 to $33.69.

Also on the positive side today was Electronic Data Systems (EDS), which moved higher following its placement on Goldman Sachs' list of "US stocks recommended for purchase". EDS finished up $2.31 and closed at $43.81.

The NASDAQ definitely looks like it wants to test 3,500. The recent drop has certainly been severe, and I think we are probably oversold right now. This theory is currently confirmed by the RSI, which is at the same level it was during May's and August's lows. One concern is the slow slip sliding nature of this correction. The NASDAQ is clearly being driven by some negative inertia that may be hard to stop. This inertia is clearly visible when you look at the MACD. However the most compelling argument for believing that the NASDAQ is near a bottom is the fact that almost all the bad news is probably out. Expectations are so low that when earnings are finally released, any mild positive could easily result in some market stabilization. Granted, this does not mean that we are likely to see a major reversal right away, but the worst could be behind us with perhaps a little more slipping. A solid bounce at support of 3500 could be a good time to start picking up some of your favorite core holdings for what should be a brighter November and December.

Granted, the Apple (APPL) and Intel (INTC) warnings were decidedly negative, but we have seen this before. Just when it looks like technology is dead and the whole world feels that we are entering a major technology recession, smart money starts buying discounted shares as it concentrates on the potential recovery 3 to 6 months down the road. In addition, trading technology stocks has become increasingly sector related. Just because box makers and Internet stocks are getting slammed that does not mean that some other sectors cannot soar.

The DOW is decidedly stronger than the NASDAQ. The DOW itself is firmly entrenched in a nice trading range between 10,500 (actual support is last week's low of 10,439) and 11,000. The RSI is bouncing nicely after it signaled an oversold condition last week. The DOW could easily stay within the previously mentioned trading range throughout the month of October. Be careful of a close well below 10,500, which could be a precursor of some more downside. A close above 11,000 may indicate that the worst is behind us and the end of the year rally is ready to begin.

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

Jim Booth
Research Analyst

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