A Day Trader's Dream

You've got to love this market if flipping stocks is your idea fun. If it's not, trading this market has been torture. It seems just when the Nasdaq Composite Index (COMPX) is set to rally, it goes into convulsions instead.

Last week was a classic example. The COMPX opened the week at 3,500 and remained close to that number through the first two days of trading. But on Wednesday, it went into a fit after many of its fiber optic components were gutted. Late Tuesday, prime fiber optics customer Nortel Networks (NT) reported slowing revenue growth. After the Canadian telecom giant's mea culpa, the COMPX spent the next day-and-a-half falling to 3,100 before rallying the latter half of Thursday to close near 3,270. The fiber optics laden index then closed Friday at 3,278.36, up 6.18 points, or 0.19 percent, for the day, but not before making a 130-point intra-day circulatory price swing to get there.

Like I said, the culprit for last week's COMPX volatility was the high-flying fiber optic sector. JDSU Uniphase (JDSU), Ciena (CIEN) and Corning (GLW) all tumbled hard on Wednesday, losing 20 percent or more of their value. I said in Wednesday's market commentary (and October 1st's) that the sector was ripe for a sell-off, and sell-off it did. JDSU opened the week at $104.56 and closed it at $77.25. Ciena opened at $149.00 and closed at $104.38, while Corning opened at $102.75 and closed at $76.00. Together, this triumvirate lost $61 billion in market value.

Moreover, I don't believe the selling pressure in the sector has been fully relieved. Yes, I realize that JDSU reported world-beating earnings and revenue growth on Friday, which spurred the sector to reclaim some of Wednesday's losses. But the fact is all three of the major fiber optic concerns are still sporting triple-digit price-to-earnings (P/E) ratios. I've reasoned in the past that if Microsoft (MSFT), Intel (INTC), Dell (DELL) and Oracle (ORCL) aren't immune from market-matching P/Es, then no company is immune (so buy on dips at your own risk).

Over in the nursing home, the ride for the week was more sedate, and on Friday it was downright pleasant. The Dow Jones Industrial Average (INDU) blew ahead 210.50 points, or 2.03 percent, to end the week at 10,590.62. The blue-chip average was invigorated by a government report that stated that Gross Domestic Product (GDP) grew at a 2.7 percent annual rate in the third quarter, nearly a full percentage point less than many economists had expected. More importantly, though, inflation also grew at a slower-than-expected rate.

On this news, many INDU financials moved higher. J.P. Morgan (JPM) surged $12.81 to $158.50, Citigroup (C) advanced $1.25 to $50.25 and American Express (AXP) climbed $1.38 to $55.81.

Also helping the old-economy cause on Friday were a few long- in-the-tooth tech companies. Microsoft (MSFT), which has lost 42 percent of its value this year, added $3.25 to $67.69; IBM (IBM), which has dropped 13 percent this year, rose $0.94 to $93.69; and chip making king Intel, which has sunk 38 percent over the past two months, moved $1.69 higher to $46.38.

In the broader market, the S&P 500 (SPX) added 15.14 points, or 1.11 percent, to 1,379.58.

For the week, the Nasdaq lost 5.9 percent and the S&P 500 lost 1.2 percent, while the Dow Jones Industrials gained 3.6 percent in its biggest gain since June 2. Last week was the first week since June 16 that the three major indices didn't all move in the same direction. (Maybe it's time for the press to dust off last spring's favorite verb, diverge, once again. Lord knows they've beaten the verb "capitulate" to death over the past few weeks.)

In stock news on Friday, earnings reporters continued to make headline. Unfortunately, most of the bylines weren't well received. Biotech giant Amgen (AMGN) fell $9.19 to $59.31 after announcing third-quarter earnings of $0.29 per share, beating First Call's consensus estimate by a penny. However, Amgen added that the growth of its Epogen and Neupogen drugs will be lower than expected and guided 2000 earnings lower by $0.02.

Meanwhile, American Power Conversion (APCC) fell $8.56 to $12.75 after reporting a $0.30 profit, $0.02 less than 1999. Adding insult to injury, the company was then abruptly downgraded to "attractive" from "buy" at SunTrust Equitable Securities and to "market perform" from "buy" at Bank of America Securities.

In other stock news, B2B Internet commerce provider Ariba (ARBA) fell $12.31 to $120.44. After reporting analysts- beating earnings earlier in the week, Ariba then reported it will be the first B2B e-commerce company added to the Nasdaq 100 Index (NDX). Don't be surprised if Ariba experiences more selling pressure over the coming months. Despite the good news, this thing still trades at 669 times this year's expected earnings.

If your keeping score on the earnings front, more than 80 percent of the S&P 500 companies have reported third-quarter earnings, which have risen an average 19.6 percent from the same year-ago period, according to First Call. What's more, technology earnings growth was cut to 18 percent from 29 percent for the fourth quarter and to 19 percent from 28 percent in the first quarter of 2001.

Thankfully, the flood of earnings news will start to ease this week. By the end of the week, 87 percent of S&P 500 companies and 26 of the 30 INDU components will have reported. Keep an eye on Pharmacia (PHA), Proctor & Gamble (PG), SmithKline Beecham (SBH), Aetna (AET), Verizon (VZ), Unilever (UN or UL, depending on whether you're looking at the Dutch or British units) and Qualcomm (QCOM). As usual, guidance from company management will be as important as the actual results.

On the economic front, this week's offerings shouldn't have much sway on market participants. On Monday, personal income and spending figures will be reported for September. The market consensus is for personal income to have risen to 0.6 percent in September, up from 0.4 percent in August, while spending is predicted to remain unchanged at 0.6 percent in September from the prior month's posting.

On Tuesday, look for the Consumer Confidence Index (CCI) and the Chicago Purchasing Managers Index (CPM). The CCI is expected to fall to an index reading of 140 for October, off from 141.9 in September. The CPM, on the other hand, is expected to be little changed at 51 for October compared to 51.4 for the prior month.

As usual, the week's most significant economic data set isn't scheduled for release until Friday when the government's employment report is released. The unemployment rate is expected to have risen slightly from its 29-year low of 3.9 percent in September to 4 percent for October, while average hourly earnings are forecasted to have risen by 0.3 percent for the month of October, up from 0.2 percent in the prior month.

Now that last week is history, the million-dollar question (with all due respect to Regis) continues to be are we ready to advance from October's Nasdaq bottom? I think we are. One-by-one the high-flying tech sectors are being brought back to earth, with the fiber optic sector being the latest sector to be called home. Though painful to those investors and traders who bought at the top, this is good news for the rest of us because more of the speculative fervor has been removed from the market.

As for trading in the COMPX, I think the index will gain support at 3,280, or the 50 percent retracement from the October high. After all, it's been trying to do just that over the past two trading sessions. If the COMPX can gain support here, the next resistance level will be the 38 percent retracement at 3,340. If 3,340 is breeched, I see no reason technically why the COMPX can't make a go for 3,500. The fact is On-Balance Volume (OBV) is off its highs, the MACD is turning positive and the Relative Strength Index (RSI) is rising from oversold levels -- all bullish signs.

As for trading in the INDU, though the average has been the stronger of the two major market measures over the past two weeks, I'm not so sure it will retain its edge this week. The INDU is running into near-term resistance at 10,600, which is the 50-dma. However, should the average break 10,600, there isn't any technical resistance until 10,800. So, in a nutshell, we could be stopped short-term at 10,600 for the week, or we could see the INDU tack on another 200 points to finish its third consecutive week in the black. Proctor & Gamble's earnings report on Tuesday could have a say in the matter.

Long-term, I'm more bullish on both market barometers. For the past few months, traders have largely focused on earnings and the general trend towards a slowing economy, which has me believing that a case can be made that the rash of bad news over the past two months has been fully discounted in equity prices. Who isn't aware of the euros woes, high oil prices, the Middle East conflict and the high-tech sell-off? With that said, I wouldn't go out and mortgage the house to buy stocks. There are two near-term variables that could possibly derail a long-term rally. The first one could be Cisco Systems (CSCO). Last Sunday, I quipped that the router king could sink the market if it reported less-than-expected earnings or revenue growth. Now I find that rumors surfaced last week that the company might be downgraded by a major brokerage. We'll have to wait and see. Anyway, keep you eyes and ears open for Cisco's earnings report on November 6.

The second variable is the general election on November 7. In reality, it really doesn't matter if Mr. Malapropism or Mr. Make Believe gets the Presidency, as long the opposing party gets the House of Representatives. We want gridlock. If one party gains both the House and the Presidency, that could enable it to impose its will on the economy, and we don't want either party to do that, particularly the more socialist- oriented Democrats.

Because of these two unknowns, don't be surprised if the market remains range-bound and volatile over the next fortnight. Keep that in mind when placing your trades. I know we are, which is why we are keeping our trailing stops as tight as ever.