Markets Get a Bad Case of the Blues

Well, it's safe to say that support at 10,000 is no more. The Dow Jones Industrial Average (INDU) obliterated this psychologically-significant (allegedly) support level within the first 15 minutes of trading today, plunging 438 points to an intra-day low of 9,651.46 before CNBC's Maria Bartiromo could even clear her throat.

The Blue-Chip Average's nifty impersonation of Wrong-Way Corrigan was instigated by none other than Big Blue itself. International Business Machines (IBM) had everyone heading for cover, as it opened trading $13.25 lower from where it ended yesterday. Not surprising, the culprit for this mass exodus was an earnings reports. After the market's close on Tuesday, IBM reported third-quarter earnings of $1.08 per share, which was in-line with the First Call consensus estimate. However, the company went on to state that revenue only grew 3 percent for the quarter, while analysts had been expecting 7 percent. IBM executives said top-line growth would have grown 6 percent had it not been for that confounded euro.

So much for excuses. After bottoming at $90.25, IBM advanced modestly to end the session down $17.56 to $95.44, erasing roughly $31 billion of its market value.

Also feeling blue on the INDU was blue-blood J.P. Morgan (JPM). The House of Morgan had its namesake whirling in his grave today, as the company tumbled nearly $20 to $118 at the open after posting third-quarter earnings of $2.77 a share, beating the First Call estimate of $2.63. Adding to the selling pressure was parent-to-be Chase Manhattan (CMB), which dropped $1.06 to $36.88 after reporting third-quarter earnings fell more than 24 percent on losses from its investments in start-up companies. Unlike IBM, though, J.P. Morgan was able to recover most of its losses from its initial fall. For the day, the company finished down only $3.38 to $134.25.

After the initial shock sank in, the INDU was able to begin the arduous task of crawling out of its hole, which it did admirably. In fact, by late afternoon, it appeared as if the old-economy barometer might actually close in the black. But it was not to be. After reaching an intra-day high of 10,085.99, the INDU tumbled 110 points to finish off 114.69, or 1.14 percent, to 9,975.02 - its first close below 10,000 since March 14.

The new-economy exchange was unable to avoid the INDU's initial carnage. The Nasdaq Composite Index (COMPX) gapped down 107 points at the open, and then dumped another 80 points from there to trade down to its intra-day low of 3,026.11 before 10:00 AM EDT. By noon, though, the COMPX was oscillating between positive and negative territory, trading as high as 3,257 in the late afternoon. However, in the last hour of trading, the COMPX sold off to close at 3,171.56, down 42.40 points, or 1.32 percent, for the day.

As would be expected in such a volatile session, market breadth was terrible. Decliners routed advancers by a 19 to 10 margin on the NYSE and by a 26 to 15 margin on the Nasdaq. Volume was stout, which isn't exactly terrific news on a down day. More than 1.4 billion shares traded on the NYSE, the fourth-most ever, while 2.52 billion shares traded on the Nasdaq, the third-busiest day ever.

The saving grace for many investors was Sun Microsystems (SUNW), which proved today that all is not lost in the high- tech computing sector. The worlds largest maker of Internet servers reported earnings of $0.30 per share, easily eclipsing the First Call estimate for $0.26. Moreover, the earnings gain was produced by improved operations and not financial statement machinations. The company reported that sales rose 42 percent.

Trading in Sun's stock was volatile, though (like the rest of the market). The company inadvertently posted its earnings on its Web-site before releasing it to the public, so trading was halted. But the damage had already been done. Sun's stock jumped nearly $10 before it was halted. However, after the stock returned to trading, it dropped nearly that much. All- in-all, Sun had a $17 intra-day swing before settling at the close at $110.19, down $1.19 for the day.

Besides doing a number on IBM and J.P. Morgan, earnings also did number on a host of former high-tech high-flyers. Copper Mountain Networks (CMTN), which makes equipment used to provide high-speed Internet service, tanked $17.03, or 63 percent, to $9.84 after reporting its fourth-quarter revenue and earnings will fall due to customers no longer spending as much for its equipment. As recently as July 17, Copper had traded as high as $125. We posted a small profit, shorting the company in mid-September. Needless to say, if we had known the stock was going to tank a month later, we wouldn't have had our trailing stops so tight (Then gain, If I would have known what last week's Colorado lottery numbers would have been, I wouldn't be here right now.)

In the same vein as Copper Mountain, RF Micro Devices (RFMD) sank $8.75, or 38 percent, to $14.25. The maker of cell-phone semiconductors reported after the market's close yesterday that it expects its expects fiscal third-quarter earnings to fall short of forecasts on slowing demand. RF Micro was another "must have" tech company earlier this year. In March, the company's stock traded at $95.

Also circling the stratosphere in March was Covad Communications (CVOD). However, today the company's stock plunged $5.03, or 59 percent, to $3.56 after the provider of digital subscriber line Internet service said its third- quarter loss widened thanks to few of its business partners inability to pay their bills.

Folks, I've warned repeatedly in this column about the perils of investing in soaring high-techs. I've given a heads-up on Citrix (CTXS), Rambus (RMBS) and Puma Technology (PUMA) when they were all trading over $100 a share and considered can't lose issues. Recently, I've given a heads-up on Ciena (CIEN), Corning (GLW) and JDS Uniphase (JDSU).

In other earnings news, two of the three Triplets reported over the last 24 hours. Chipmaking giant Intel (INTC) clocked in late Tuesday with third-quarter earnings of $0.41 per share, $0.03 ahead of the First Call estimate. What's more, revenue rose to $8.7 billion, topping downward-revised estimates of $8.6 billion in sales. Intel finished the session up $2.00 to $38.19.

Beleaguered software giant Microsoft (MSFT) gained $1.31 to $51.75 on the day. After the close, the world's number one software maker reported earnings of $0.46 per share, beating the First Call estimate by $0.05. Lest we get too excited, Microsoft is still trading at a 57 percent discount to its all time high of $119.94 set back in December.

If you're keeping score, here's the earnings tally to date. According to First Call, more than one-third of the S&P 500 (SPX) companies have reported quarterly earnings, which have grown an average 17.4 percent over the year-ago period. Analysts expect third-quarter earnings growth of 15.6 percent when all the index's members have reported, down from the 17.2 percent they forecast at the beginning of September. Keep in mind, though, that earnings grew 21.6 percent in the second quarter.

On the economic front, the Consumer Price Index (CPI) rose 0.5 percent for September, up sharply from a 0.1 percent decline in August, and analysts' expectations of 0.4 percent. Usually, the market pays attention to the CPI, but not this week. The overpowering catalyst by far has been earnings.

In other news, the euro fell to its lowest level ever against the dollar today, closing at $0.8386. I must confess to engaging in a little schadenfreude (enjoyment obtained from the trouble of others) with the euros problems. Instead of lowering taxes and regulations to keep pace with the U.S., the Euroland bureaucrats instead issue a new one-world currency, which is analogous to using a Band-aid to treat a shotgun wound.

Now that today's fun and games are behind us, traders are already looking to Thursday. Setting the pace early could be Apple Computer (AAPL). The maker of that "other" computer reported earnings late Wednesday that fell short of already lowered expectations. The company posted fiscal fourth- quarter earnings of $0.31 per share, falling short of the First Call estimate by a penny.

If traders treat the Apple mea culpa with kid gloves, the COMPX could possibly trade higher to catch support at 3,200, which is the 50 percent retracement from the March 2000 when starting at the October 1998 low. If it goes the other way, though, we could easily break support at the April low of 3,042 and be heading for the 62 percent retracement at 2,750.

As for the INDU, it's tough to gage where it could trade down to since busting through 10,000. It should catch support near March's low 9,800. If it falls through this level, though, there isn't any more logical support until the January 1999 lows of 9,200.

All I can say is it should again be interesting tomorrow.

S.P. Brown
Editor

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