For Whom the Dell Tolls

Anyone thinking that September's bearish trend was behind us was sorely mistaken. In its first week of trading, October has picked up September's slack (and then some) by sending the major market indices to their first five-week losing streak in three-and-a-half years.

The culprit for last week's exodus (and the four previous week's to that) has been a gaggle of earnings and revenue warnings headlined by that one former high-flying, paradigm- shifting tech company. The week before last it was the king of the desktop computers no one uses, Apple Computer, hogging the ink. Last week it was the king of corporate desktop PC makers, Dell Computer (DELL).

On Wednesday, Dell bared its bottom to the world and confessed that all is not well in Round Rock, Texas. Specifically, the company said its third-quarter sales could be about 3 percent below what it expected due to weak demand in Europe. Dell said that if the softness persists into the fourth quarter, full-year revenue would be about $32 billion, an increase of about $7 billion, or 27 percent, from sales for fiscal year 2000, which is short of the 30 percent growth the company had been guiding analysts.

Upon hearing the news, investors and traders took to Dell's stock like lions to a downed wildebeest on Thursday and Friday and mauled it for a $3 loss, sending it down to a new 52-week low of $24.94. Since reaching a high of $59 per share in March, Dell has lost more than half its market value, which undoubtedly means its days of being the S&P 500's number one performer are probably over.

Of course, Dell's problems were fully manifest in the Nasdaq Composite Index (COMPX). On Friday, the tech-heavy index lapsed another 111.09 points, or 3.20 percent, to close at 3,361.01 - its worst close since May 26 and its biggest loss since July 28. As it now stands, the COMPX is down 8.5 percent for the week, down 20 percent since September 1 and down 17.4 percent for the year. More importantly, the index is trading below its 20-month moving average, which is a trendline that has faithfully supported the index on a monthly closing basis since August 1998.

Unfortunately, tech investors seeking sanctuary couldn't find it in the older economy issues on Friday. The Dow Jones Industrial Average (INDU) tumbled as much as 206 points before paring its losses, closing down 128.38 points, or 1.20 percent, to 10,596.54 - its worst close since July 31. Since September 1, the INDU has lost 5.7 percent of its value, while year-to-date it has lost 7.8 percent.

More losers could be found in the broader and smaller markets. The S&P 500 (SPX) logged its fifth consecutive losing week, closing off 27.29, or 1.90 percent, to 1,408.99 on Friday - its lowest close since May 25. For the week, the broad-based index is also off 1.9 percent. Since the beginning of last month, the SPX is off 7.3 percent, and year-to-date it's off over 3 percent.

The Russell 2000 Index (RUT) wasn't immune from the sell-off, either. The small-cap index lost 11.65 points, or 2.32 percent, to close at 491.02 - its worst finish since July 28. For the week, the RUT lost more than 30-points.

As you would expect, market breadth was terrible on Friday, with decliners routing advancers by a 20 to 9 margin on the NYSE and by a 29 to 11 margin on the Nasdaq. Almost 1.15 billion shares traded on the Big Board, 18 percent above the three-month daily average, while 1.86 billion shares were exchanged on the Nasdaq.

In sector news, the brokerage stocks stole a page from the tech stocks' playbook. The AMEX Securities Broker/Dealers Index (XBD) tanked 5.5 percent to 615.49, a level it hasn't seen since late August, on rumors that Morgan Stanley Dean Witter (MWD) suffered massive losses on high-yield debt floated by European telecoms. MS Dean Witter vehemently denied the rumors but the damaged was already done. The company's stock sank $7.75 to $84.25 for the day. Falling in sympathy were Merrill Lynch (MER), which lost $5.13 to $61.19, and Bear Stearns (BSC), which dropped $5.06 to $58.38.

Internet stocks also got whacked again on Friday, with bellwether Yahoo (YHOO) plunging another $3.44 to close at a new 52-week low of $81.25 (It's hard to believe this thing was scraping the sky at $240 in early January.) Yahoo will release its latest quarterly results this Tuesday, with First Call estimating earnings-per-share of $0.12. Another notable Internet loser was Priceline.com (PCLN), which fell $0.25 to $5.56 on Friday, meaning investors named a new price for the stock that was less than half the previous Friday's.

Another front-end Internet company taking it on the chin of late has been Internet incubator CMGI (CMGI), which slipped $0.63 to $20.88 after clarifying its cash position for analysts and investors. According to CMGI, it's burning greenbacks at a rate of $63 million a month, but it has $654 million in cash and $1.6 billion in marketable securities. Moreover, the company said it expects its burn rate to decrease substantially over the next six months (in other words, they'll be broke later rather than sooner.)

In other stock news, WorldCom (WCOM) continued its fall from grace, losing another $0.75 to $25.19. The stock price couldn't have been helped by the fact company CEO Bernie Ebbers was forced to dump 27 million WorldCom shares to cover a margin call triggered by WorldCom's recent slide. If it's any consolation to WorldCom shareholders, at least Bernie was betting on his own company.

On the earnings front (and I use the term figuratively), Semiconductor equipment maker Veeco (VECO) dumped $34.97 to $67.56 after cutting its profit forecast by almost half and announcing its president had quit. The company sited weaker sales for the earnings shortfall (funny how the two are tied together).

Concord Communications (CCRD) tanked $12.38 to $9.00 after the maker of programs that detect flaws in computer networks reported third-quarter earnings will be $0.04 to $0.06 a share, far short of the $0.17 a share proffered by First Call. The company attributed the shortfall on slower spending by U.S. telecommunications carriers.

Finally, Razorfish (RAZF) got sliced $3.75 to close at $5.00. The Web-site designer said it expects third-quarter earnings will be in the $0.01 to $0.04 a share range compared to the $0.08 projected by First Call. The company blamed a larger- than-expected slowdown in its European business for the shortfall.

If it seems that the number of companies pre-announcing negative earnings is higher than it has been in the past, it's not your imagination. The number of negative pre- announcements currently stands at 351, up 25 percent from the same time last year.

In economic news on Friday, non-farm payrolls increased by 252,000, which means the jobless rate fell to 3.9 percent, a new 30-year low. According to those folks who grind out a living estimating this stuff, payrolls were supposed to increase by 235,000, or 4.1 percent. However, much of the increase was attributed to the settling of the Verizon (VZ) strike. Unfortunately, the bullish employment news (bullish if you're looking for a job only) means the Federal Reserve resumes its position at the head table. Most economist and Fed watchers had thought the sizzling labor market might finally be cooling, as the unemployment rate drifted slightly higher in recent months in response to the Fed's six interest- rate hikes over the past 15 months. So if you were hoping for an interest rate cut in the coming months, forget it. With the employment rate again hovering below 4 percent, there is virtually no chance that the Fed will lower the Fed Funds rate this year. In fact, the federal funds futures rate is averaging 6.50 percent for January, which means the market is expecting no move in the fed funds rate over the next four months.

In other economic news, oil prices retreated back toward $30 per barrel this week, meaning the price of crude has dropped 18 percent since posting a 10-year high of $37.80 per barrel last month. Meanwhile, the euro fell to $0.8681 on Friday after trading as high as $0.88 the prior week. No surprise here, I knew the European, American and Japanese central bank attempts to prop up the beleaguered currency would be futile. Try as they might, governments just can't manufacture confidence where there rightfully isn't any. So look for the euro to continue to wreak havoc on multinational corporations' financial statements.

This week's economic fare is light. On Wednesday, wholesale inventory numbers will be released for August. The market consensus is for wholesale inventories to have risen 0.6 percent for the month, up from 0.3 percent in July. On Thursday, we get our weekly batch of jobless claims for the prior week. Then on Friday, we get the week's major economic data release in the Producer Price Index (PPI). The consensus is for the PPI to have risen 0.4 percent for September, up from 0.2 percent the prior month, thanks to high price of oil. However, the core PPI (PPI sans food and energy) is expected to remain unchanged at 0.1 percent for the month. Don't expect this insubstantial stuff to push the market one-way or the other.

On the earnings front, investors will finally begin to get a look at what oil, the sagging euro and interest rates have wrought. The quarterly earnings season will get underway on Tuesday when cell-phone peddler Motorola (MOT) and Internet blue-chip Yahoo! (YHOO) report. First Call is expecting $0.26 per share and $0.12 per share, respectively. On Wednesday, Intel (INTC) nemesis Advanced Micro Devices (AMD) is expected to post $0.62 per share. Genentech (DNA) will also report on Wednesday; look for earnings of $0.31 per share. Then on Thursday, the generals will take center stage. Expect General Motors (GM) to post earnings of $1.56 per share and General Electric to post $0.32 per share.

It's no secret that the markets have lost momentum in recent months, as investors have come to realize that slowing growth could be even more insidious than higher interest rates, which means a fear of interest rate hikes has been supplanted with the fear that earnings growth is slowing. Still, I think we may finally get a long-awaited rally this week. Of course, if you look at the charts you would probably disagree. After all, the COMPX had a completely horrid week, dumping over 300 points and breaking through its double-bottom at the 62 percent Fibonicci retracement from its July high. Many analysts are saying that 3,200, and possibly 3,000, are in the cards.

The INDU chart looks a little more encouraging, but not much. The sell-off in the older economy issues wasn't as strong as the sell-off in the newer high-tech issues and it appears that the INDU should be able to hold 10,500 (if not, 10,200 could be the next level of support).

With that dreariness stated, I believe that with most of the negative pre-announcements out of the way, the market now has a sufficient wall of worry to climb, which it always needs to climb to new heights, or, in our case, to climb out of a ditch. What's more, with the passing of third-quarter earnings warnings, more companies will likely hit the market's estimates (even if they are lower). In fact, with expectations lowered by the onslaught of earnings warnings, the market may actually be able to gain some ground once the actual earnings are reported.

So, don't be surprised if the market finally gets a pop this week, if only for the short term. After Friday's routing, it's a pop we could all use.

S.P. Brown
Editor

2 Types of Traders - Which One Are You?

There are really only two types of traders. We call them Winners and Losers. Now don't get us wrong, no trader wins 100% of the time, however, consistent winners learn to cut their losses while allowing their profits to run. The key to consistently winning is applied knowledge. The place to obtain this knowledge is at the October Options Expo. This event will take place in Denver, Colorado, from October 27 through the 30th. Seating is limited.

To sign up click here: http://www.optioninvestor.com/workshop

A Taste of What You Will Learn:

Looking for ways to spot early reversal patterns? Candlestick charting may be the answer for you. Here you will learn the most important candlestick formations, how to use them, and why. Learn how to use candlesticks with western technicals from the foremost expert on Japanese Candlesticks, author Mr. Steve Nison.

Learn to use the Arms Index (TRIN) effectively for short-term trading from the Index's inventor, Mr. Dick Arms. Mr. Arms is the author of several books on trading, including the renowned "Trading Without Fear." Mr. Arms will be sharing his newest charting system called "EQUIVOLUME". This is the first new charting system since the 1930's! You won't want to miss being one of the first to learn about this new technique.

Mr. Jim Crimmons will be helping you learn how to manage your taxes as a trader and how to get Trader's Status when filing. If you face nightmares with your current tax situation, and want an easier and more effective system for tracking your trades, you don't want to miss this class.

Mr. Jim Brown, President and founder of OptionInvestor.com will be teaching "How to Prepare to Trade the Market", along with other useful trading strategies. This will include information on how best to prepare and find your new plays. Then you will go to battle the next morning, as we make LIVE trades using the very candidates you helped us find. There is no better way to learn how to trade than to TRADE WITH THE PROS!

This is just a taste of the event. You will spend four days with over a dozen professional traders. This is not just a 9 to 5 seminar. We are going from early morning to late night. This is serious training for serious traders. You won't need to go anywhere else, as you will be staying in one of the nicest hotels in Denver, The Inverness Hotel and Golf Club. Not only will we be feeding your mind for almost 15 hours a day; we will also feed your body, with delicious meals and breaks five times a day. What an opportunity to spend four days in luxury, learning from the pros, while being fed in so many ways.

You may be asking, "How much will this Power-Packed Options Expo Cost Me?" This is a great question, however, the question you should really ask is, how much will it cost you if you don't attend? Have little mistakes or a lack of specialized education in the options arena cost you any money lately? Or could you have reaped greater profit if you only had the right tools? How much would successful trading techniques have saved you last Spring during the NASDAQ sell-off?

Learn to protect yourself and profit in volatile markets. The only difference between the pros and amateurs is EDUCATION, ACTION and EXPERIENCE. We are providing the EDUCATION and EXPERIENCE, so that when you take the ACTION, you will have a winning combination.

To register click here:
http://www.optioninvestor.com/workshop

Check out an outline of events here:
Http://www.optioninvestor.com/workshop/outline